Whistleblower pleads guilty to bribery, denied whistleblower award

Bribe exchange

When is a “whistleblower” not a “whistleblower” qualifying for a bounty ordinarily available under government whistleblower programs? A recent court decision in the United States has drawn some lines.

In a decision dated November 15, 2022, the U.S. Second Circuit affirmed [PDF] a decision of the Securities and Exchange Commission (SEC) which found a whistleblower ineligible for an award on the basis that he had been convicted for a criminal offence “related to” the information he provided. In this unique case, the whistleblower was found guilty of an offence related to the international bribery scheme about which he provided information to the SEC. Though this information led to successful enforcement actions, the whistleblower did not receive an award as a result of his own offences.

The Court acknowledged that the whistleblower had provided information to the SEC leading to successful enforcement actions in connection with the bribery scheme. The whistleblower was not a target of the enforcement for which he provided information. However, it was uncontested that the whistleblower had subsequently pleaded guilty to bribery charges involving the same country, industry, and some of the same individuals as the international bribery scheme. The whistleblower applied for a whistleblower award only after a court had accepted the whistleblower’s guilty plea to bribery charges.

Whistleblower programs

Ordinarily, under the SEC program, a whistleblower who provides the SEC with information that leads to successful enforcement action can receive between 10% and 30% of monetary sanctions paid by the offenders, where the sanctions total at least $1 million. In this instance, however, the SEC denied the whistleblower’s award claim based on 15 U.S.C. § 78u-6(c)(2)(B) [PDF], which prohibits awards “to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action”.

On appeal, the Court was unconvinced by the whistleblower’s argument that his own bribery was insufficiently “related to” the international bribery scheme. The Court found that the whistleblower’s bribery involved the same source of the bribery payments, government officials in the same country, and the same industry as the scheme for which he had provided information. The Court also found that the whistleblower had been “convicted”, interpreting the provision to mean that the whistleblower’s accepted guilty plea was sufficient to meet this requirement. A finalized sentence was not required for a finding that he had been convicted.

The Ontario Securities Commision’s whistleblower program similarly precludes an individual from receiving a whistleblower award when they have been convicted of a criminal offence in relation to the subject matter for which they submitted information (OSC Policy 15-601 [PDF] s. 15(1)(l)).

As we have previously discussed, the OSC’s whistleblower program launched in July 2016. A whistleblower may be eligible for a financial award if they provide information leading to enforcement action against a securities law violator. The OSC limits awards to between 5% and 15% of the total sanction imposed. In addition to financial awards, whistleblowers are legally protected against reprisal and retaliation for reporting securities law violations.

Culpable whistleblowers

Where whistleblowers are culpable for securities law violations but fall short of being convicted, they may be eligible for an award from the SEC or OSC.

The SEC has previously issued awards to whistleblowers culpable for the securities law violations which they reported, awarding 20% of the monetary sanction recovered from offenders. Although this is less than the maximum 30% permitted for awards, 20% can nonetheless represent a significant sum.

Notably, in Ontario, OSC Policy 15-601 [PDF] s. 17 mirrors the SEC provision, allowing for culpable whistleblowers to receive an award for information leading to successful enforcement action. The individual’s culpability is a factor that may decrease the amount of the award but does not necessarily preclude them from an award entirely. 

Potential implications

The Second Circuit’s decision provides important insight into the line between culpability and conviction, where the latter bars a whistleblower from receiving an award. However, more guidance is needed to prevent the disqualification of convicted whistleblowers from eroding the beneficial incentives for culpable individuals to report.

More specifically, if an individual is somehow complicit in securities law misconduct, there is an element of uncertainty as to whether they would be convicted and therefore precluded from a whistleblower award. If an individual is aware of securities law violations but is likely to be convicted for their involvement, there may be limited incentive for them to report the violation as they are likely to be denied a whistleblower award and may personally face fines or penalty.

This case is particularly interesting because the convicted whistleblower may have been worse off as a result of reporting misconduct to the SEC. If he had not done so, his own offences may never have been discovered.  Now, he has been convicted of an offence without the benefit of receiving a whistleblower award. Therefore, the provisions disqualifying convicted whistleblowers from awards and cases that enforce such provisions, such as this one, may have the undesirable consequence of discouraging certain individuals from reporting misconduct for fear of conviction. This may be at odds with the goals of whistleblowing regimes.

In light of the complex incentives underlying a whistleblowing regime, it will be interesting to see if Canadian regulators and adjudicators take a different approach north of the border should a similar situation arise.