May 2016

The U.S. Commodity Futures Trading Commission (“CFTC”) recently announced its largest ever whistleblower award, providing over $10 million to an unnamed individual whose information facilitated a successful CFTC enforcement action regarding violations of the Commodity Exchange Act (“CEA”).

The CFTC’s whistleblower program derives from section 748 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).  Under Dodd-Frank, the CFTC pays monetary awards to eligible whistleblowers who voluntarily provide original information about violations of the CEA leading to a successful enforcement action with monetary sanctions exceeding $1,000,000.  Examples of violations include price manipulation, circulating false information to the marketplace, Ponzi schemes, or foreign exchange fraud.

Whistleblowers may receive 10 – 30 percent of the total monetary sanctions collected, which notably does not include amounts due to harmed investors under their claims.  The basis for the award can also encompass a related action brought by another governmental entity where that action is based on original information submitted to and pursued by the CFTC.

Dodd-Frank prohibits employers from retaliation against whistleblowers for reporting violations of the CEA to the CFTC.  Employers may not discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against a whistleblower because of any lawful act.

This current award represents a big step forward in the CFTC’s use of its whistleblower incentive program, whose only two prior awards were $240,000 and $290,000 in 2014 and 2015 respectively.  Its increased use is likely related to the success of the IRS whistleblower program and the SEC whistleblower program, as publicity surrounding their multi-million dollar payouts has led to a massive increase in the number of tips those agencies are receiving.

This environment makes the effective implementation of a company’s own whistleblowing program ever more critical.  Such a program encourages employees to raise their concerns internally, helping firms to identify potential violations and take action before problems spiral out of control.  The stories of many whistleblowing employees demonstrate that they only went outside the company when their internal efforts to effect change proved fruitless. Therefore, companies should make it as easy as possible for employees to register complaints without fear of retaliation.  For more guidance on what should be part of a company’s hotline and whistleblower process, see Best Practices in Whistleblower Systems.  Importantly:

  1. An independent outside-sourced whistleblower system makes it easier for employees to feel secure in addressing their concerns.
  2. The external whistleblower programs should not rely solely on website-only forms that provide little (if any) feedback to the complainant, or “hotlines” using untrained personnel reading scripts.  Neither forms nor scripts are sufficiently flexible to appropriately address complex financial issues.  Further, they may cause complainants to believe their concerns are not being treated with sufficient care and seriousness.

Self-reported CEA violations generally result in less severe enforcement consequences.  It is therefore important for companies to provide timely disclosure of identified violations.  Otherwise, whistleblowers might get impatient and involve regulatory agencies on their own.

Fulcrum Inquiry is a forensic accounting firm that performs fraud and accounting investigations. We use this experience in operating whistleblower collection mechanisms that improve governance processes for public and private businesses, as well as nonprofit organizations.