Two Individuals Distorted the SEC Office of the Whistleblower Report – and Not Just This Year

Those of us in compliance and whistleblower programs have been eagerly awaiting the release of the SEC Office of the Whistleblower (OWB) report, and on November 21st, we were able to view the highly anticipated recap (dated November 15th). This annual report highlights work of the OWB done in support of its mission to protect investors and stop securities violations.

Let’s get right to the point: for FY 2024, the SEC reported receiving a record shattering number of reports: 24,980. You may be thinking – that’s an incredibly high number of reports and a significant increase over FY 2023. You’d be correct, but the real chyron for this story came immediately after the report number:

“We note that while this was an increase in the total number of tips received from FY 2023, over 14,000 of the FY 2024 tips were attributable to two individuals.”

To repeat, that is over 14,000 tips from TWO individuals in one year. And in what is likely an embarrassing acknowledgement on the part of the OWB, a literal footnote in the report added the same two individuals also accounted for nearly 7,000 of the 18,354 reports received in FY 2023.

The good news is this revelation is an opportunity to recalibrate our thinking on the state of external reporting. While high, it isn’t growing at the rates we feared and driving employees away from internal reporting systems.

Let’s unpack the bombshell – two individuals with an outsized impact

There’s no escaping the magnitude of how these two individuals impacted the data and as a result, our assumptions about external whistleblowing.

Using the approximations provided in the report, for FY 2023, these individuals accounted for about 38% or the reports to the OWB; for FY 2024, that number skyrocketed to a whopping 56%. We always knew there was room for abuse in the system but the same two people submitting what equates to roughly 28 reports per day, every day of the year (for two years!) is one element we, and for sure the SEC, didn’t see coming.

So, let’s do some napkin math to re-adjust our understanding of reports made to the OWB excluding our two outliers.

*The number of reports submitted by the two individuals are not exact, this is referencing what the SEC provided.

Given this revelation, it is also worth discussing the quantity of reports by allegation type. For both FY 2023 and FY 2024, there were an outsized number of reports in the “manipulation” and “offering fraud.” These amounts are disproportionate to the rest of the allegation types and could have been impacted by the two individuals. The 2024 report notes that regarding the allegation types, “This breakdown includes tips from the two individuals referenced above and reflects the categories selected by whistleblowers.” However, there is no additional information provided in the OWB report about the specific categories in which the individuals were making their reports.

While we can’t divine the motivations of these reporters, one can’t help but ask, what is driving this behavior? Readers of this likely know the program offers monetary awards to individuals who report potential violations to the SEC through the whistleblower program. Perhaps this is also a moment of reflection on whether regulators paying so much money for information is incentivizing some to game the very systems meant to protect shareholders from costly fraud and corruption schemes?

Bottom line for the compliance community, though – while 2021, the height of COVID-19 impact, saw a significant spike in reporting to the SEC, the level of reporting to the program is steady to slightly declining and perhaps is heading back toward pre-COVID levels. Honestly, this makes more sense as reporting related to frauds on COVID-19 relief money should be coming down.

What were the OWB payouts and areas of focus?

Despite the challenges with the count, the OWB still paid out a lot of money. In FY 2024, the SEC reports they awarded a total of $255 million to 47 whistleblowers. This includes the fifth largest award of the Office’s history of $98 million to two individuals. There were no awards like the staggering $279 million to one individual paid the prior year.

Some of the noted enforcement actions include a healthcare company paying out nearly $1.4 million, a software company paying over $690,000, and a fashion company shelling out $400,000 in civil penalties.

Of special note, the report clearly calls out the ongoing and consistent efforts the Commission is taking to crack down on organizations preventing current and former employees from communication with the SEC. The report highlights 11 enforcement actions against entities who impeded whistleblowers including using restrictive agreements. One case led to an $18 million penalty – the highest to date.

What does this all mean for internal reporting?

Let’s be clear, nearly 11,000 reports to the SEC are nothing to sneeze at, but this new information is cause to adjust our thinking a bit more positively about the health of internal reporting systems and their interplay with external reporting options. After all, what looked like a sharp increase is signaling a decline in tips year over year if we remove the outlier reports. So, some of the alarm bells that were raised might have indeed been a false alarm. Perhaps this is a lesson to be wary of dramatic changes in data absent more in-depth information or external causes we can identify.

In addition, there is evidence to support internal reporting is very much going strong. Last year (calendar year 2023), NAVEX received a record number of reports, coming in at 1.86 million. And for calendar year 2024, NAVEX is on track to exceed 2023’s reporting amount. All signs point to many internal reporting systems being generally healthy and trusted.

It also means it would be a very good plan to once again to check your organization for any agreements or policies that could be construed as impeding whistleblowers from communicating with regulators.

At the end of the day – and it has just been one day to sit with this data – we still have plenty more to learn. There are sure to be plenty of questions raised about how or why this report activity wasn’t discussed last year and why it skyrocketed this year. Others are, understandably, very curious about the who, what and why behind what is at best, astounding commitment, and at worst, attempts to defraud the SEC Office of the Whistleblower.

Either way, time will tell, and the upcoming analysis will be both telling and compelling to those of us watching.