The U.S. Securities and Exchange Commission (SEC) announced it has handed out its largest whistleblower award to date. The award was given to three whistleblowers who helped the SEC bring a successful case against Merrill Lynch and Bank of America Corp. In all, $50 million will be split by two unnamed whistleblowers while $33 million will go to a third. Their names have been kept confidential to protect their anonymity. The award highlights the important role whistleblowers play in helping the SEC fight securities and financial fraud.
SEC Whistleblowers’ Award Linked to 2016 Merrill Lynch Settlement
On June 23, 2016, the SEC announced that Merrill Lynch agreed to pay $415 million and admit that it committed wrongdoing regarding the misuse of customer cash to increase the firm’s profits. Merrill Lynch also admitted that it failed to safeguard customer securities from creditors’ claims.
Following an investigation into Merrill Lynch’s actions, the SEC determined that the bank violated the Customer Protection Rule by using billions of dollars in customer funds each week to finance its own trades instead of keeping customer funds in a reserve account. Furthermore, the agency found that Merrill Lynch failed to hold fully-paid for customer securities in lien-free accounts so they would be protected from creditors’ claims if the bank collapsed. Both failures could have exposed Merrill Lynch customers to massive losses if the bank failed while engaged in such activities.
The alleged fraud occurred between 2009 to 2012.
“The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement at the time the settlement was announced. “Merrill Lynch violated these rules, including during the heart of the financial crisis, and the significant relief imposed today reflects the severity of its failures.”
Merrill Lynch also faced sanctions for violating Exchange Act Rule 21F-17 by using severance agreements to prevent employees from providing any information to the SEC.
Included in the settlement was $57 million in disgorgement and interest and a penalty of $358 million. The financial firm also publicly acknowledged it violated federal securities laws.
In addition to the 2016 settlement, the SEC announced it was undertaking a two-part initiative designed to find financial firms that violated the Customer Protection Rule. The first part of that initiative was to encourage broker-dealers to report potential violations to the SEC in exchange for favorable settlement terms and cooperation credit. The second part involved risk-based examinations of broker-dealers to determine whether they complied with the Customer protection rule.
Merrill Lynch Whistleblower Award Shared by Three Anonymous Informants
The three whistleblowers who share in the award were all insiders at Merrill Lynch. The SEC has not named them, nor has the agency said whether they still work for Merrill, which is now owned by Bank of America Corp. Two of the whistleblowers will share in $50 million, while the third Merrill Lynch whistleblower will receive $33 million. A spokesperson for the whistleblowers said a substantial part of the award would be donated to charity.
“These awards demonstrate that whistleblowers can provide the SEC with incredibly significant information that enables us to pursue and remedy serious violations that might otherwise go unnoticed,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower. “We hope that these awards encourage others with specific, high-quality information regarding securities laws violations to step forward and report it to the SEC.”
Whistleblowers Vital to SEC Enforcement
Whistleblowers are vital to helping the SEC ensure financial firms follow regulations. Since it handed out its first award in 2012, 53 SEC whistleblowers have been awarded more than $262 million. Awards range from anywhere from 10 to 30 percent of the money collected when the SEC collects more than $1 million. To take part in an award, however, the whistleblower must provide the SEC with “original, timely, and credible information” and that information must lead to a successful enforcement action.
In addition to the possibility of receiving a reward, SEC whistleblowers are protected by confidentiality, meaning the SEC will not disclose any information that could result in the whistleblower’s identity being revealed. Finally, whistleblowers are protected from retaliation on the part of their employer, including termination, suspension or harassment.