Post by miamianne67 on Feb 22, 2023 15:41:49 GMT
Mintz
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Cory S. FlashnerAdam L. SisitskyEdmund P. Daley
USA February 17 2023
Whistleblowers are often thought of as public company insiders who report alleged wrongdoing like insider trading, market manipulation, submitting false or misleading company disclosures or other securities and commodities law violations. The emergence of the digital asset industry, and the expanding number of crypto companies using public-facing blockchains, has changed this paradigm. Now anyone with the time, skill, and inclination can audit every transaction on a public blockchain, and the concept of the “traditional” whistleblower has greatly expanded in this relatively unregulated space.
The Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) have not only embraced this change but have specifically identified crypto whistleblowers as an important part of their regulatory and enforcement regimes. Efforts to crowdsource leads on potential crypto wrongdoing seem to be working, as crypto-related whistleblower tips reached an all-time high in 2022 and were among the top categories of tips received. This trend will likely continue in 2023, as members of this largely self-policing ecosystem decide to cash in on their investigatory prowess in the midst of heightened regulatory focus on crypto.
I. The SEC and CFTC Whistleblower Programs
The SEC and CFTC whistleblower programs were established in 2010 by Congress through the enactment of the Dodd-Frank Act. These post-2008 financial crisis programs were intended to incentivize people to report possible violations of securities and commodities laws by compensating individuals who provided tips that led to successful enforcement actions. Along with the potential for monetary compensation, the SEC and CFTC whistleblower programs also provide certain privacy, confidentiality, and anti-retaliation protections for tipsters.
A “whistleblower” is a person (not a company) who voluntarily provides “original information” about a potential violation of the law that has occurred, is ongoing, or is about to occur. Whistleblowers can qualify for compensation where the information provided is “original,” which means the information is: (i) derived from independent knowledge or analysis; (ii) not already known to the Commission; and (iii) not exclusively derived from another source such as a judicial hearing, government report, or from the news media.
Whistleblowers who provide “independent analysis” of publicly available information may also be eligible for compensation. This requires more than simply pointing out the obvious – the independent analysis must reveal possible violations that are not readily apparent from public materials. For example, a tip based on an analysis of multiple public sources can qualify as independent analysis where that information would not be readily identified by a member of the public without specialized knowledge, unusual effort, or substantial cost.
To be eligible for compensation under the SEC and CFTC whistleblower programs, the whistleblower’s tip must lead to a successful enforcement action that results in the recovery of sanctions exceeding $1 million. In those cases, the tipster is entitled to an award of 10-30% of the sanctions collected by the SEC/CFTC. The amount of the final award is subject to the regulators’ discretion and largely depends on the significance of the information provided, the level of assistance provided, the extent to which the whistleblower was culpable for the violations at issue, and the amount of money recovered.
A whistleblower may also be eligible for compensation resulting from related actions. That being said, potential whistleblowers are not able to “double-dip” by recovering from the both the SEC and CFTC whistleblower programs based on the same tip. See 17 C.F.R. § 165.11(b) (CFTC Rule provides that no award is allowed “if the claimant has already been granted an award by the SEC”); 17 C.F.R. § 240.21F-3 (setting out restrictions on multiple recoveries in related actions).
Finally, the SEC and CFTC provide confidentiality and anti-retaliation protections for those who submit information to the commissions. Companies that retaliate against whistleblowers can become the subject of separate, independent enforcement actions (and fines) as well as lawsuits by whistleblowers who have a private right of action enabling them to potentially recoup back pay, damages, litigation costs, expert witness fees, reasonable attorneys’ fees and reinstatement of employment.
II. Crypto Sleuths May Be Eligible For Whistleblower Compensation
Whether the SEC or the CFTC will emerge as the lead digital asset regulator is an unsettled question. Along with claiming jurisdiction over fraudulent conduct in the digital asset market, both regulators have openly solicited tips from whistleblowers concerning potential crypto wrongdoing. Indeed, the SEC and CFTC have stated that crypto-related violations are exactly the type of misconduct they are interested in learning about.
For example, the SEC specifically includes “Initial Coin Offerings and Cryptocurrencies” in its list of examples of the types of conduct the SEC is interested to receive whistleblower tips. The SEC has also made public calls for continued cooperation and whistleblower opportunities in the context of announcing its most recent enforcement actions.
For its part, the CFTC issued a Whistleblower Alert “Be on the Lookout for Virtual Currency Fraud” informing the public about how individuals can be eligible for financial rewards and protections “while helping stop fraud and manipulation relating to virtual currencies.” Significantly, the CFTC’s Alert explains that virtual currencies are commodities under the Commodity Exchange Act (CEA) and when virtual currencies are “used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce, CFTC enforcement of the CEA comes into play.”
These whistleblower programs make clear that the regulators are looking for leads to jump-start their enforcement actions. Whether those tips are based on suspected market manipulation, insider trading, Ponzi schemes, money laundering, or other potential wrongdoing, the SEC and CFTC are interested. From the perspective of the source of whistleblower tips, the digital asset space is different from traditional finance because those with the time, skill, and resources can monitor and analyze public blockchain transitions to identify potential fraud. While transactions on a blockchain might be public, analyzing that data to uncover potential wrongdoing would almost certainly amount to compensable “independent analysis” under the SEC and CFTC programs. Although a whistleblower’s information is kept confidential, it has been reported that a number of crypto-related insider trading investigations started with tips from crypto sleuths monitoring public blockchain activity. Whether those blockchain tipsters have tried to cash-in on their cooperation is unclear.
III. Crypto Whistleblower Tips Are On The Rise
While the SEC and CFTC jostle for the role as the primary crypto regulator, it is clear the regulators’ whistleblower programs have been extremely effective in generating crypto-related tips. Because the SEC and CFTC keep the identities of whistleblowers confidential, it is not known whether these complaints have resulted in successful enforcement actions, but the data shows these programs are indeed attracting tips.
In 2022, the SEC reported receiving its largest number of whistleblower tips – more than 12,300. Complaints concerning initial coin offerings/cryptocurrencies were the third most common category of complaint made to the SEC behind manipulation and offerings fraud. The 2022 numbers show a rise not only in overall tips, but the percentage of crypto-related tips year-over-year:
2022: 12,322 total – 1,719 (14%) Crypto or ICO related
2021: 12,210 total – 762 (6.2%) Crypto or ICO related
2020: 6,911 total tips – 345 (5%) Crypto or ICO related
In total, the SEC whistleblower program awarded approximately $229 million in awards in 2022, which was the SEC’s second largest year for dollars awarded. How much of the money was paid out specifically to crypto tipsters is unclear.
The CFTC’s 2022 report revealed a similar trend, with increases in the overall number of whistleblower tips and crypto-related tips. In 2022, the CFTC received 1506 tips, which was a 50% increase for 2021. Significantly, the majority of tips the CFTC received in 2022 “involved fraudulent misappropriation and fraudulent solicitation involving crypto/digital assets (e.g. pump-and-dumps, fraudulent representations of opportunities, or refusals to honor withdrawal requests).”
The digital asset industry continues to deal with near-constant industry turmoil, high profile scandals, and regulators that are eager to crack down on perceived unlawful activity in this space. Accordingly, 2023 is expected to be another record breaking year for crypto whistleblowers, and the SEC and CFTC will certainly be interested in hearing from blockchain sleuths and those who can spot potential wrongdoing.
Mintz - Cory S. Flashner, Adam L. Sisitsky and Edmund P. Daley