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Should you be a whistleblower?

This blog covers the following topics:

  • Regulatory compliance governing public companies

  • Whistleblowers may be awarded money

  • How to be a whistleblower

  • Developments with digital assets

  • Cyber enforcement actions


Former Facebook data scientist Frances Haugen made international news this week when she publicly disclosed the contents of thousands of pages of confidential, internal documents of Facebook and shared them with lawmakers, regulators and the press. According to a series of reports called the Facebook Files published by The Wall Street Journal, "Facebook Inc. knows, in acute detail, that its platforms are riddles with flaws that cause harm, often in ways only the company fully understands." [1] While it's possible that Haugen's actions were driven by her concern for those allegedly harmed by Facebook's platform, we cannot ignore the potential monetary payout Haugen may enjoy by blowing the whistle on Facebook and the additional fame it has brought her.

Regulatory compliance governing public companies

For the sake of context, in 2012, Facebook filed a registration statement on Form S1 with the Securities and Exchange Commission (SEC) to register their common stock in a public offering. Upon approval from the SEC declaring the registration statement "effective," Facebook listed their common stock on the NASDAQ stock exchange under the ticker symbol FB. Public traded companies like Facebook are subject to extensive reporting requirements under the Exchange Act of 1934. [2] In particular, SEC rules require these companies to file periodic reports that include detailed financial information, and information about triggering events like entering into material contracts, the acquisition or disposition of assets, changes in the company's accounting firm, etc. The extensive disclosure rules governing public companies are generally found within Regulation S-K and Regulation S-X of the Code of Federal Regulations, but what's important to understand is that the company is required to provide accurate and updated information to investors which must include relevant risk factors. See 17 CFR § 229.105. Although this statutory language is broad and ambiguous, there is ample SEC staff interpretations and case law that provide guidance on what are the kinds of risk factors that must be disclosed to the public. Failure to adequately comply with SEC disclosure requirements may result in prosecution, sanctions, fines, and penalties. Although less common, the SEC will also refer some cases to the Department of Justice (DOJ) for criminal charges.

Whistleblowers may be awarded money

The SEC's stated mission is to protect investors, maintain fair, orderly, and efficient markets, and to faciliate capital formation for companies. [3] Without their oversight, coprorate America would have little incentive to be transparent or truthful with the public about what's happening inside their operations. In fact, it was the lack of oversight that played a large part in the nation's economic collapse of the 1930s. Post WWI, approximately 50 billion in new securities were floated in the U.S., more than half proving worthless due to fraud fueled by high-pressure salesmanship. [4] This led to the collapse of the markeplace in 1929, and the subsequent impoverishment of huge portions of the populace.

Because the SEC operates with limited resources, the SEC Whistleblower Program was created by Congress under the Dodd-Frank Wall Street Reform and Consumer Protection Act and its amended rules to encourage people to voluntarily report violations of securities regulations to the SEC. [5] This program also protects employees from retaliation by employers. For this reason, Facebook cannot take any action against Haugen for her disclosure. Moreover, Haugen may be entitled to an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and other government authorities.

How to be a whistleblower

If you suspect or have evidence that a company has violated securities laws, then you may report it to the SEC Whistleblower Office (WBO) even if you are not an employee of the company, and even if you are not an American. The company on which you are reporting can be publicly traded, or it can be a private company as well. You are not required to first make an internal report of the illegal activity before you report it to the SEC because all companies, public and private, have a duty to know and comply with the rules governing their behavior. To be eligible for an award, the information you report must be "original". See Rule 21F-4(b)(4). You can submit your report using the WBO questionnaire online, or by completing Form-TCR and mailing or faxing it in to the WBO. Tips submitted anonymously require you to have legal representation inclusive of attorney certification. Generally speaking, the more specific, credible, and timely a tip, the more likely it is to be forwarded for further investigation and enforcement.

Some examples of conduct the SEC is interested in pursuing include:

  • Ponzi schemes, pyramid schemes, or high-yield investment programs

  • Theft or misappropriation of investor funds or securities

  • Manipulation of a security's price or volume

  • Insider trading

  • Fraudulent or unregistered securities offering, including payments made to unregistered finders or brokers

  • False or misleading statements about a company (including false or misleading SEC reports or financial statements)

  • Abusive short-selling

  • Bribery of, or improper payments to, foreign officials

  • Fraudulent conduct associated with municipal securities transactions or public pension plans

  • Initial coin offerings and cryptocurrencies

  • Other fraudulent activity involving securities

"Enforcement actions from whistleblower tips have resulted in more than $4.8 billion in financial remedies."

Whistleblowing can be very lucrative for the whistleblower. According to its annual report to congress, whistleblowers in 2020 included "current and former employees of companies who had first-hand knowledge of unlawful conduct; outsiders who provided detailed analysis of wrongdoing; foreign nationals who shone a light on hard to detect fraud happening abroad but impacting U.S. investors and the marketplace; and investors who lost money at the hands of fraudsters." [6] Moreover, recording-breaking awards were paid in 2020, approximating $175 million to 39 individuals. [7]

Yet, not all whistleblowers enjoy the same benefits. For example, when Edward Snowden disclosed that the national security agency was conducting surveillance on Americans, he is alleged to have threatened the safety and integrity of the nation's security. For this reason, before you blow the whistle, it's important that you first confirm you are authorized to do so, and that the government will provide you with protection from prosecution.

Developments with digital assets

Companies are increasingly offering digital assets to raise capital or to particpate in investment opportunites. This can come in many forms, including the more familiar initial coin offering now renamed digital securities offering, inital token offering, an initial exchange offering, or initial farm offering. Regardless of the label, if it involves an investment of value into a common enterprise with the expectation of profits derived from the efforts of others, then it is a securities offering. Unregistered securities violate the rules, and anyone who sees this activity can report it to the SEC Whistleblower's Office and potentially reap rewards.

In addition to the above infamous Howey Test for identifying investment contracts as securities, there is the less familiar Reves Test that determines when a promissory note is a security. Although promissory notes are included in the statutory definition of a security under Section 3(a)(1) of the Exchange Act of 1934, the SEC specifically excludes notes with a term of less than nine months whose proceeds are used for a current transaction. By analyzing a series of decisions issued by lower courts concerning earlier cases, the U.S. Supreme Court in Reves v. Ernst & Young, 494 U.S. 56 (1990) adopted the "family resemblance" test to determine whether a note is a security in disguise. Although there is a list of seven kinds of notes the court decided are not securities, the general factors used to determine whether a note is a security is whether:

  • The seller's motivation is to raise money and the buyer intends to earn profits

  • The note is broadly or publicly offered for investment purposes

  • The buyers reasonably expect the securities and anti-fraud laws to apply

  • Another regulatory framework applies that reduces risk, e.g. FDIC or ERISA.

Consequently, any offering of digital assets that looks like a security under either the Howey Test or the Reves Test, but that does not meet the regulatory requirements of the SEC, can be a viable subject for whistleblowing. While some of these offerings may be honest investment opportunities, the overwhelming majority are frauds. They may also present substantial and unique risks for loss or manipulation, leaving the investor with little option for recovery afterwards. As explained in a previous post HERE, adding a utility to that which is a security does not deprive it of its status as a security.

Cyber Enforcement Actions

If you are a business raising money through the offering of digital assets, don't expect to avoid enforcement by hiding in the crowd or by launching your digital asset using some function built into a decentralized exchange (#DEX). The SEC is a formidable enforcement agency that actively pursues unlawful digital asset/initial coin offerings as demonstrated in its cyber enforcement actions page. Included here are summaries and hyperlinks to SEC enforcement actions against BitConnect, Poloniex, DeFi Money Market, Coinseed, Ripple, and lesser known businesses on the unfortunate receiving end of SEC attention. Not only does the SEC pursue businesses that sell coins in violation of securities regulations, but they also prusue market participants involved in these schemes, including promoters. If you want to learn more about how the SEC investigates the offering of digital assets, check the Spotlight on Initial Coin Offerings webpage that addresses ICOs from the perspective of investors and market professionals. Also included is information on when an exchange needs to be registered. If a platform offers trading of digital assets that are securities and operates as an "exchange," then the platform must register with the SEC, or operate under an unlawful exemption from registration.


[1] The Facebook Files, WSJ (2021), (last visited Oct 8, 2021).

[2] | Going Public, (2021), (last visited Oct 8, 2021).

[3] What We Do, (2021), (last visited Oct 8, 2021).

[4] A.A. Sommer, Jr. Securities Primary Law Sourcebook, Vol B., 17 CFR § 240.13a-13.

[5] | Office of the Whistleblower, (2021), (last visited Oct 8, 2021).

[6] 2020 Annual Report, (2021), pg. 1, (last visited Oct 8, 2021).

[7] Id. at 2.

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