SEC Whistleblower Program
Under the SEC Whistleblower Program, the SEC will issue awards to whistleblowers who provide original information that leads to enforcement actions with total monetary sanctions (penalties, disgorgement, and interest) in excess of $1 million. In exchange for the valuable information, a whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected.
In determining an award percentage, the SEC considers the particular facts and circumstances of each case. For example, positive factors that may increase an award percentage include the significance of the information, the level of assistance provided by the whistleblower and the whistleblower’s attorney, and the law enforcement interests at stake. On the other hand, negative factors that may decrease an award percentage include unreasonable delay in reporting the violation to the SEC and the culpability or involvement of the whistleblower in the violation.
Under the SEC Whistleblower Reward Program, whistleblowers can submit tips anonymously to the SEC through an attorney and be eligible for an award for exposing any material violation of the federal securities laws.<ref>Risk and Compliance Magazine</ref>
The SEC Whistleblower Program continued its remarkable run of success in FY 2020. According to the SEC Whistleblower Office’s 2020 Annual Report to Congress, the office received more than 6,900 tips in the fiscal year. This is the highest number of tips the office has received in one year. Most whistleblower tips related to corporate disclosures and financials (25%), offering fraud (16%) and market manipulation (14%). Other notable areas of tips included insider trading, trading and pricing schemes, foreign bribery and other FCPA violations, unregistered securities offerings and fraud in connection with initial coin offerings (ICOs) and cryptocurrencies. Since 2011, the SEC Whistleblower Office has received more than 40,200 tips that have enabled the SEC to recover more than $3.5 billion in monetary sanctions from wrongdoers.
Consistent with prior years, the states that yielded the highest number of tips in FY 2020 were California, New York, Florida, Texas, and Pennsylvania. Other states that reported a high number of tips were Arizona, Georgia, Massachusetts, Michigan, North Carolina, Ohio, New Jersey, Virginia and Washington. The SEC Whistleblower Office also received tips from 78 foreign countries in FY 2020. The highest number of tips were from whistleblowers in Canada, the United Kingdom and the People’s Republic of China.
Whistleblowers need not be U.S. citizens to be eligible for SEC whistleblower awards. According to the 2017 Corruption Perceptions Index, a majority of countries are making little or no progress in ending corruption. This finding is consistent with PwC’s 2018 fraud survey, which reported the highest fraud levels in organizations in the past 20 years, and the ACFE’s 2021 fraud survey, which reported that 51% of organizations have uncovered more fraud since the pandemic and 71% of anti-fraud professionals expect the level of fraud to increase over the next year. As the SEC continues to promote worldwide public awareness of the SEC Whistleblower Program, we expect to see an increase in whistleblower tips and awards in the coming years.
The report also indicates that the SEC Whistleblower Program is gaining momentum. In particular, the SEC Office of the Whistleblower, which first opened its doors in August 2011, has issued a majority of the whistleblower awards in the past several years:
- In FY 2015, the SEC issued $37 million in awards to whistleblowers.
- In FY 2016, the SEC issued $57 million in awards to whistleblowers.
- In FY 2017, the SEC issued $50 million in awards to whistleblowers.
- In FY 2018, the SEC issued $168 million in awards to whistleblowers.
- In FY 2019, the SEC issued $60 million in awards to whistleblowers.
- In FY 2020, the SEC issued $175 million in awards to whistleblowers.
Notably, FY 2021 is shaping up to be the best year in the SEC Whistleblower Program’s history. On October 22, 2020, the SEC issued the largest whistleblower award in the program’s history of $114 million. In addition, according to the SEC’s 2020 Agency Report, the SEC recognized a $255 million contingent liability for potential whistleblower awards to be paid in FY 2021.
SEC Office of the Whistleblower
In 2011, the SEC Office of the Whistleblower was created pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to run the SEC Whistleblower Reward Program. The program offers monetary incentives to individuals who report information about violations of the federal securities laws to the SEC. In its short history, the SEC Whistleblower Reward Program has been extraordinarily successful in enabling the SEC root out securities fraud and protect investors. To date, the SEC Office of the Whistleblower has issued more than $500 million in awards to whistleblowers.
SEC Whistleblower Rules
Under the rules of the program, the SEC Office of the Whistleblower is required to issue awards to eligible whistleblowers who provide original information that leads to successful enforcement actions with total monetary sanctions in excess of $1 million. In exchange for the specific and credible tips, whistleblowers will receive an award of between 10% and 30% of the total monetary sanctions collected. The SEC considers positive and negative factors when determining an award percentage.
The program allows individuals to submit information anonymously to the SEC Office of the Whistleblower if represented by an attorney. Whistleblowers are also afforded substantial protection against retaliation.
Regardless of citizenship, under the SEC Whistleblower Program, whistleblowers are eligible for monetary awards when they provide original information to the SEC about violations of federal securities laws.
Since the inception of the whistleblower program, tips have come from whistleblowers in 119 countries outside of the United States. In 2018 alone, the SEC received tips from whistleblowers in 72 foreign countries. The SEC Whistleblower Office received the highest number of tips from whistleblowers in the: United Kingdom, Canada, and Australia.
To date, the SEC Whistleblower Office has issued approximately $1 billion in awards to whistleblowers. The largest SEC whistleblower awards to date are $50 million, $39 million, and $37 million. For more information about the SEC Whistleblower Program, see the eBook Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award.
Criteria for Determining the Amount of a Whistleblower Award
Many factors affect the amount of a whistleblower award. The SEC may increase the amount of an award based on the following factors:
- The significance of the tip to the success of any proceeding brought against wrongdoers. A tip’s significance depends on, for example:
- the nature of the reported information, including whether the information’s reliability and completeness allowed the SEC to conserve resources; and
- the degree to which the information supported one or more successful claims brought by the SEC or related actions brought by other regulatory or law-enforcement authorities.
- The extent of the assistance that you and your legal representative provided in the SEC action or related action. Considerations include:
- whether you provided ongoing, extensive, and timely cooperation and assistance (including when the whistleblower or their attorney provides industry-specific knowledge and expertise);
- the timeliness of your initial report to the SEC or to your employer;
- the resources conserved because of your assistance;
- whether you appropriately encouraged or authorized others, who might otherwise not have participated in the investigation or related action, to assist SEC staff;
- your efforts to remediate the harm caused by the violations; and
- any unique hardships you experienced as a result of blowing the whistle.
- The SEC’s law-enforcement interest in deterring the specific violation. Consider factors such as:
- how much an award enhances the SEC’s ability to enforce the federal securities laws and protect investors;
- the degree to which an award encourages the submission of high-quality information;
- whether the specific violation is an SEC priority; and
- the dangers of the specific violation to investors.
- Whether, and the extent to which, you participated in your company’s internal compliance and reporting systems. Think about:
- whether you reported internally before, or at the same time as, you reported to the SEC; and
- whether you assisted any internal investigation concerning the violation.
Conversely, the SEC may reduce the amount of an award based on these considerations:
- If you participated in, or were culpable for, the securities-law violation(s) you reported. Consider the following:
- your role in the violation;
- your education, training, experience, and position of responsibility at the time the violation occurred;
- whether you acted knowingly and intentionally;
- whether you financially benefitted from the violation;
- whether you committed a violation in the past;
- the egregiousness of the underlying violation; and
- whether you knowingly interfered with the SEC’s investigation of the violation.
- If you unreasonably delayed reporting the violation(s) to the SEC. This determination is based on:
- whether you failed to take reasonable steps to report or prevent the violation from occurring or continuing;
- whether you were aware of the violation but reported to the SEC only after learning of an investigation into the misconduct; and
- whether there was a legitimate reason for you to delay reporting the violation.
- If you interfered with your company’s internal compliance and reporting systems. Consider whether you knowingly:
- interfered with your company’s reporting systems to prevent or delay detection of the violation; or
- made materially false statements, or provided false documents, to hinder your company’s ability to detect, investigate, or remediate the violation
Securities Law Violations that Qualify for an SEC Whistleblower Award
- Accounting fraud
- Investment fraud
- Ponzi schemes
- Foreign bribery and FCPA violations
- Cryptocurrency fraud
- Promissory note fraud
- EB-5 investment Fraud
- Fraudulent Securities Offerings
- Improper Revenue Recognition
- Inadequate Internal Controls
- Deceptive Non-GAAP Financials
- Manipulation of a Security’s Price or Volume
- Insider Trading
- Hedge Fund Fraud
- Unregistered Broker-dealers
- Investment Adviser Fraud
- Anti-money laundering violations
- False or Misleading Statements About a Company or Investment
- Violations of Auditor Independence Rules
- Misleading or Incomplete Cybersecurity Disclosures
Submitting a Tip Anonymously to the SEC Office of the Whistleblower
Under the SEC Whistleblower Program, the SEC will issue awards to whistleblowers who provide original information that leads to enforcement actions with total monetary sanctions in excess of $1 million. Since 2012, the SEC has issued nearly $1 billion in awards to whistleblowers. Unlike other whistleblower-reward programs, the SEC’s program allows whistleblowers to submit tips anonymously if they are represented by an attorney.
Many SEC whistleblowers are uncertain about what exactly anonymous whistleblowing means. Indeed, for many whistleblowers, it is imperative that their identity remain confidential throughout the entire SEC whistleblower process.
Prior to submitting a tip to the SEC, whistleblowers should assess the risks entailed in whistleblowing and options to mitigate those risks.
Anyone can submit a tip anonymously if you have an attorney represent you in connection with both: (1) your submission of information; and (2) your claim for an award. According to an SEC Whistleblower Office’s Annual Report to Congress, almost a quarter of the award recipients reported anonymously to the SEC Office of the Whistleblower through an attorney.
Attorney Submission of an Anonymous Tip to the SEC
The Form TCR (Tip, Complaint, or Referral) is the form SEC whistleblowers and their attorneys use to submit tips to the SEC Office of the Whistleblower. When a whistleblower submits a tip anonymously through an attorney, the whistleblower is not required to put his or her name on the form. Rather, the whistleblower’s attorney will provide their contact information and will be the SEC’s point of contact for the submission. In addition, the attorney will be required to, among other things, certify that they:
- Reviewed the whistleblower’s submission for completeness and accuracy;
- Verified the whistleblower’s identity by viewing his or her valid unexpired government-issued identification (e.g., driver’s license, passport);
- Obtained the whistleblower’s consent to disclose his or her name to the SEC if there are concerns that the whistleblower may have knowingly and willingly made false statements or used false documents in the submission; and
- Retain an original copy of the TCR, with Section F signed by the whistleblower.
Section F of Form TCR is the whistleblower’s declaration that the submission is “true, correct and complete to the best of my knowledge, information and belief.” Importantly, whistleblowers sign this declaration under the penalty of perjury. Whistleblowers should consult with their attorney if they have any concerns about the declaration.
Potential Exposure in an Anonymous Submission
The documents or information contained in a whistleblower’s submissions could potentially expose a whistleblower’s identity. As such, whistleblowers and their attorneys should first assess whether the benefit of providing the evidence outweighs the risk of exposing the whistleblower’s identity. If a whistleblower chooses to provide the evidence, the whistleblower should explicitly identify it in Section D, Part 11 of the Form TCR and explain how the evidence could reveal the whistleblower’s identity if disclosed to a third party. Notably, even when a whistleblower submits potentially compromising evidence, the SEC is required to shield the whistleblower’s identity. Specifically, Section 21F(h)(2) of the Exchange Act requires, with certain exceptions, that the SEC “shall not disclose any information, including information provided by a whistleblower to the [SEC], which could reasonably be expected to reveal the identity of a whistleblower.” Thus, even when the SEC obtains evidence that could expose a whistleblower’s identity, the SEC is required to go out of its way to protect the identity of the whistleblower.
However, there are limits on the SEC’s ability to shield a whistleblower’s identity and in certain circumstances the SEC must disclose it to outside persons or entities. For example, in an administrative or court proceeding, the SEC may be required to produce documents or other information which could reveal a whistleblower’s identity. In addition, as part of the SEC’s ongoing investigatory responsibilities, the SEC may use information the whistleblower has provided during the course of its investigation. In appropriate circumstances, the SEC may also provide information, subject to confidentiality requirements, to other governmental or regulatory entities.
Prior to submitting information to the SEC, whistleblowers should consult with an experienced SEC whistleblower law firm to determine the appropriate steps to take to maximize the likelihood that their identity is protected throughout the process.
Disadvantages to Submitting a Tip Anonymously
Anonymous whistleblowing offers many obvious benefits, such as protecting whistleblowers from retaliation or harm to their career. But there can be some minor disadvantages.
When Submitting the Form TCR
Disclosing fraud to the SEC anonymously may limit the type of evidence that can be provided to the SEC. For example, a whistleblower may be concerned that certain documents or information that prove the fraud may also reveal their identity. Whistleblowers must weigh the risk of exposing their identity to the SEC (as mentioned, the SEC is required by law to keep the information confidential) with the risk that the SEC will not act on their tip. Since 2011, the SEC Whistleblower Office has received more than 40,200 tips from whistleblowers. In fiscal year 2020 alone, the office received over 6,900 whistleblower tips. As the SEC has limited investigative resources, typically it will pursue a tip only where it receives specific, timely, and credible information about federal securities laws violations. In certain circumstances, a detailed and credible tip could potentially reveal the whistleblower’s identity to the SEC.
For example, a disclosure from a senior-level corporate insider, such as an executive, can lend credibility to the tip because senior company officials often know who at the company has authorized or facilitated a fraud scheme. But providing details about a whistleblower’s background or position within a company could expose the whistleblower’s identity. Again, the whistleblower should seek advice to weigh the risk of exposing their identity to the SEC against risk that the SEC will not act on their tip.
When the SEC Investigates a Whistleblower's Tip
If a whistleblower and the whistleblower’s attorney draft a tip that grabs the SEC’s attention, the SEC will often request to have a telephone interview with the whistleblower (who can remain anonymous or deny the request) or the whistleblower’s attorney to gain a better understanding of the federal securities laws violations. Furthermore, the SEC may request additional documents or information to confirm the alleged violations. If the SEC is persuaded by the interviews and information, it will assign the tip to one of its 11 Regional Offices, an Enforcement Specialized Unit, or an Enforcement Associate Director Group located in the SEC’s Headquarters.
Whistleblowers can be very helpful during this back-and-forth with the SEC, especially whistleblowers who have intimate knowledge and documentation of the violations. Notably, the SEC may increase a whistleblower’s award based on the assistance provided by a whistleblower. But responding to a request from the SEC for additional information could inadvertently reveal information that exposes the whistleblower’s identity.
Disclosing the Identity of the Whistleblower
Whistleblowers will only have to disclose their identity to the SEC at the end of the whistleblowing process when applying for an award. (Note: The SEC will not disclose the whistleblower’s identity publicly, even at the time of announcing an award, e.g., see the SEC Office of the Whistleblower’s Final Orders for award determinations.) In the application for an award, known as the Form WB-APP, the whistleblower must disclose his or her identity to the SEC so that the Commission can determine whether the whistleblower is “eligible” for an award under the program. Certain whistleblowers, such as key compliance personnel, are not eligible for awards, unless an exception applies.
In summary, the SEC Whistleblower Program offers whistleblowers the opportunity to disclose information anonymously and there are safeguards in place throughout the process to protect whistleblower confidentiality. But in certain circumstances, revealing a whistleblower’s identity to the SEC can increase the likelihood that the SEC will pursue the tip.
Confidentiality Applies to Other Government Agencies
If the SEC shares the whistleblower’s submission with another agency, such as informing the Department of Justice of a Foreign Corrupt Practices Act (FCPA) violation, Section 21F(h)(2)(D)(ii)(I) of the Exchange Act provides that the other agency “shall maintain such information as confidential” subject to the same confidentiality requirements that apply to the Commission under Section 21F(h)(2)(A).
10-Step Summary of the SEC Whistleblower Process
Below is a 10-step summary of the SEC whistleblower process. Please note this is a general overview that does not address a multitude of considerations that whistleblowers and their attorneys should consider during the process. Whistleblowers should contact an experienced SEC whistleblower attorney for a detailed, fact-specific analysis of the process as it relates to their claim and potential whistleblower award.
|1. Submit a Tip to the SEC||To qualify for an award under the SEC Whistleblower Program, the SEC requires eligible whistleblowers and/or their attorneys (whistleblowers may file anonymously if represented by an attorney) to submit tips regarding violations of the federal securities law in one of two ways:
Since 2011, the SEC Office of the Whistleblower has received more than 40,200 tips. In FY 2020 alone, the SEC received more than 6,900 tips. As the SEC has limited resources to review all submissions, it is imperative that SEC whistleblowers and their attorneys frame their tips in a way that will be more likely to get the SEC’s attention. According to the SEC’s FY 2020 Annual Report to Congress:
In general, whistleblower tips that are specific, credible, and timely, and which are accompanied by corroborating documentary evidence, are more likely to be forwarded to investigative staff for further analysis or investigation. For instance, if the tip identifies individuals involved in the scheme, provides examples of particular fraudulent transactions, or points to non-public materials evidencing the fraud, the tip is more likely to be assigned to Enforcement staff for investigation. Tips that make blanket assertions or general inferences based on market events are less likely to be forwarded to or investigated by Enforcement staff.
In addition, and as a practical matter, whistleblowers are more likely to have their tips reviewed and acted on if they have an experienced SEC whistleblower lawyer advocating for them. For more information on submitting a TCR to the SEC, see this helpful article: 5 Tips for SEC Whistleblowers and Lessons Learned from SEC Whistleblower Awards.
|2. Tip Analysis/Investigation||The SEC’s Office of Market Intelligence (OMI) evaluates incoming whistleblower tips, focusing on TCRs that contain specific, credible, and timely information. If OMI determines that a TCR warrants further investigation, OMI will assign the tip to one of the SEC’s regional offices, a specialty unit, or to an Enforcement group in the SEC’s Home Office. TCRs that relate to an existing investigation are forwarded to the staff working on the matter.
At this stage in the SEC whistleblower process, the SEC will frequently request to interview whistleblowers and/or their attorneys to, among other things, clarify aspects of the TCR, discuss evidence, and identify potential witnesses. After interviews, whistleblowers and their attorneys will often provide the SEC with additional information and materials to support and bolster their initial TCR.
As a matter of policy, the SEC conducts its investigations on a confidential basis. The purpose of this is to:
Accordingly, there may be very limited information that the SEC can share with you or your attorney regarding what action, if any, the SEC has taken in response to your TCR.
|3. SEC Enforcement Action||As of FY 2020, the SEC was tracking more than 1,100 matters in which a whistleblower’s TCR caused a Matter Under Inquiry (MUI) or investigation to open, or has been forwarded to Enforcement staff for review and consideration in connection with an ongoing investigation. Some of these matters may result in successful enforcement actions with total monetary sanctions in excess of the $1 million threshold.|
|4. Noticed of Covered Actions Posted||At the end of each month, the Office of the Whistleblower posts Notices of Covered Action for each SEC action where a final judgment or order resulted in monetary sanctions exceeding $1 million. Whistleblowers who submitted TCRs that led to the successful enforcement actions are eligible to apply for awards at this time.|
|5. Submit an Application for an Award||Once a Notice of Covered Action is posted, whistleblowers have 90 calendar days to apply for an award by submitting a completed Form WB-APP to the SEC Office of the Whistleblower. In the Form WB-APP, whistleblowers and their attorneys are required to, among other things, explain why they are entitled to an award in connection with their TCR. Experienced SEC whistleblower attorneys will also provide a detailed analysis of the significant factors that the SEC considers when determining whether to increase or decrease the percentage of a whistleblower’s awards.|
|6. Preliminary Award Determinations Issued||After a whistleblower applies for an award, the SEC Office of the Whistleblower’s Claims Review Staff will review the application in accordance with the rules of the program and make a preliminary award determination. This determination will recommend whether to issue an award and the proposed award amount. The Claims Review Staff may base this determination on:
As detailed in a recent WSJ article, it currently takes the SEC more than 2 years to make this preliminary determination. However, the SEC has adopted rule amendments in September 2020 that will significantly speed up this process in the future.
|7. Contesting a Preliminary Determination||After the Claims Review Staff makes its preliminary determination, it will send the whistleblower a written notification of the determination and an explanation of the whistleblower’s rights in the awards claims process. At this point, the whistleblower will have 30 calendar days to:
If the whistleblower decides to contest a preliminary determination, he or she must appeal the determination within 60 calendar days of the later of: (i) the date of the preliminary award determination, or (ii) the date when the SEC Whistleblower Office made materials available for review.
|8. Final Orders Issued/Resolution of Appeals||If a whistleblower appeals the SEC’s preliminary determination, the Claims Review Staff will consider the whistleblower’s response, along with any supporting documentation provided, and will make its proposed final determination.
After issuing a proposed final determination, any Commissioner can review the proposed final determination within 30 days. If no Commissioner requests a review within the 30-day period, then the proposed final determination will because the final order of the Commission.
If a whistleblower chooses not to appeal a preliminary determination, or fails to appeal in a timely manner, the preliminary determination will become the SEC’s final order (except where the preliminary determination recommends granting an award, in which case it will become a proposed final determination subject to the the above-mentioned 30-day Commissioner approval).
Notably, a whistleblower’s failure to contest a preliminary determination will constitute a failure to exhaust administrative remedies, and the whistleblower will be prohibited from appealing the determination to a United States Court of Appeals.
|9. Awards Issued from Investor Protection Fund||Once the SEC issues a final order granting an award, all payments are made out of an investor protection fund, which was established pursuant to Section 21F(g) of the Dodd-Frank Act to fund the payment of awards to whistleblowers. The investor protection fund is financed entirely through monetary sanctions paid to the SEC by securities law violators, and no money is taken or withheld from harmed investors to pay whistleblower awards. See 15 U.S.C. § 78u-6(g)(1)-(4). See some of the SEC whistleblower cases that have resulted in multi-million dollar awards.|
|10. Appealing the SEC’s Final Orders||If the SEC denies an award to a whistleblower, the whistleblower may file an appeal in an appropriate United States Court of Appeals (either the United States Court of Appeals for the District of Columbia Circuit, or to the circuit where the aggrieved person resides or has his or her principal place of business) within 30 days of the decision being issued.
If the SEC issues an award to the whistleblower of between 10 to 30 percent of the monetary actions collected in the action, the whistleblower may not appeal the award determination if the award was made in accordance with subsection (b). See 21F-13.
Employment Protections Available for SEC Whistleblowers
The Dodd-Frank Act, which created the SEC Whistleblower Program, prohibits retaliation against whistleblowers for raising concerns about potential securities law violations. Remedies for a prevailing whistleblower include reinstatement, double back pay, litigation costs, expert witness fees, and attorneys’ fees.
Retaliation for whistleblowing to the SEC is also proscribed by the whistleblower protection provision of the Sarbanes-Oxley Act (“SOX”). The remedies are similar to those under Dodd-Frank, but SOX also includes special damages, such as emotional distress, impairment of reputation, and other noneconomic harm resulting from retaliation. Click here for information about additional options to combat retaliation against SEC whistleblowers.
Largest SEC Whistleblower Awards
Since 2012, the SEC has issued more than $1 billion in SEC whistleblower awards, which includes several awards to our clients. In 2020 alone, the SEC issued five of the top SEC whistleblower awards, totaling more than $241 million. The largest SEC whistleblower awards to date are:
- $114 million SEC whistleblower award (October 22, 2020)
- $110 million SEC whistleblower award (September 15, 2021)
- $50 million SEC whistleblower award (April 15, 2021)
- $50 million SEC whistleblower award (June 4, 2020)
- $50 million SEC whistleblower award (March 19, 2018)
- $39 million SEC whistleblower award (September 6, 2018)
- $37 million SEC whistleblower award (March 26, 2019)
- $33 million SEC whistleblower award (March 19, 2018)
- $30 million SEC whistleblower award (September 22, 2014)
- $28 million SEC whistleblower award (May 19, 2021)
- $28 million SEC whistleblower award (November 3, 2020)
- $27 million SEC whistleblower award (May 17, 2021)
- $27 million SEC whistleblower award (April 16, 2020)
- $23 million SEC whistleblower award (June 2, 2021)
- $22 million SEC whistleblower award (May 10, 2021)
- $22 million SEC whistleblower award (September 30, 2020)
Under the SEC whistleblower-reward program, the SEC is required to issue awards to eligible whistleblowers who provide original information that leads to successful SEC enforcement actions with total monetary sanctions exceeding $1 million. A whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected.
International Schemes and SEC Enforcement Actions
The SEC’s reach against fraudsters extends internationally. The antifraud provisions of the federal securities laws apply extraterritorially:
- When the wrongful conduct occurred in the United States; or
- When the conduct outside the United States had a substantial effect in the United States or upon United States citizens.
This is known as the “conduct-and-effects” test. Courts have applied this test for over 40 years notwithstanding the fact that the federal securities acts of 1933 and 1934 did not address the extraterritorial reach of the antifraud provisions of those statutes. On June 24, 2010, the Supreme Court of the United States held in Morrison v. Nat’l Australia Bank Ltd. that the lower courts were wrong to apply the conduct-and-effects test. Then, less than a month after the Morrison decision, Congress enacted the Dodd-Frank Act, which amended the jurisdictional provisions of the federal securities acts to clearly indicate that the anti-fraud provisions apply extraterritorially when the statutory conduct-and-effects test is met.
The Conduct-and-Effects Test
Through the Dodd-Frank Act, Congress amended the federal securities laws to include the conduct-and-effects test:
The district courts of the United States and the United States courts of any Territory shall have jurisdiction of an action or proceeding brought or instituted by the Commission or the United States alleging a violation of section 77q(a) of this title [Section 17(a) of the 1933 Securities Act] involving:
- conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or
- conduct occurring outside the United States that has a foreseeable substantial effect within the United States. See 15 U.S.C. § 77v(c).
SEC Enforcement Action Against International Ponzi Scheme
On January 24, 2019, in SEC v. Scoville, the United States Court of Appeals for the Tenth Circuit held (see opinion below) that Congress, in enacting the Dodd-Frank Act’s amendments to the jurisdictional provisions of the securities laws, “undoubtedly intended that the substantive antifraud provisions should apply extraterritorially when the statutory conduct-and-effects test is satisfied.” The Tenth Circuit proceeded to apply the test to a $207 million international Ponzi scheme, which had 90% of its customers outside the United States. The Ponzi scheme involved the sales of investment contracts by Traffic Monsoon, LLC, whose sole owner and member is Charles Scoville. The Tenth Circuit found that the Defendant’s actions satisfied the conduct-and-effects test because:
- The Defendant’s company was located in the United States.
- Through his company, the Defendant created and promoted the investments over the internet while residing in the United States.
- The servers housing the company’s website were physically located in the United States.
The Tenth Circuit is the first Circuit Court to address the scope of the SEC’s extraterritorial enforcement authority under the Dodd-Frank Act. The opinion highlights the SEC’s expansive international reach against fraudsters. For additional analysis of the Tenth Circuit’s opinion, see a recent article in the Harvard Law School Forum on Corporate Governance and Financial Regulation, A New Era of Extraterritorial SEC Enforcement Actions. In November 2019, the U.S. Supreme Court declined to review the case.