A Supreme Court ruling limiting the fines the Securities and Exchange Commission can impose on defendants to repay victims of fraud may lead to lower payouts to whistleblowers.
Earlier this week the Supreme Court upheld the SEC’s right to disgorgement of funds that resulted from fraud, in an 8-1 ruling, but limited the scope of funds that the SEC could pursue.
Previously, the SEC could order companies and individual defendants to repay the entire revenue earned from engaging in fraud or corruption, but the Supreme Court ruling determined that the SEC is only entitled to the profit the defendants made and must take into account business operating expenses. The court also emphasized the use of disgorgement funds as repayment for victims.
By limiting the amount of funds available for seizure, some disgorgement amounts may even be zero if the company made no profits off illegal practices. Most whistleblower awards come from the disgorgement seized, and with the shrinkage, whistleblower awards might become smaller and might disincentivize whistleblowers from coming forward.
Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.
The ruling, however, was a sigh of relief for the SEC, as disgorgement was found to be “equitable relief,” according to the opinion penned by Justice Sonia Sotomayor. Though the scope was heavily limited, the outcome of the case could have completely struck down the practice of disgorgement, which would have been a heavy blow to the SEC and its whistleblower program.
The decision comes as whistleblower awards are setting record amounts and tips are surging, partly because the publicity of the large awards may incentivize whistleblowers to come forward. The new, narrower definition of disgorgement indicated that the Supreme Court believes in a limited scope and a focus of paying back the victims rather than as large awards to whistleblowers. 
Stephanie Liu is assistant editor at Internal Audit 360°