THE bell rings to open and close each day of Wall Street trading. But corporate ears now are on the listen for a different sound—the trill of whistles blown by employees bringing allegations of fraud to the SEC. The Dodd-Frank financial reform act introduces large monetary incentives for whistleblowers and shields them from retaliation Is a surge of whistleblowing claims in the offing? Many who say yes point to experience under the False Claims Act, which rewards whistleblowers who identify fraud against the US government, and which has subjected the healthcare industry to immense litigation.
Dodd-Frank is different, however. To encourage insiders to report financial fraud, Dodd-Frank requires the SEC to reward those who provide original information to the SEC that leads to monetary sanctions exceeding $1m. Qualified whistleblowers are to receive 10 to 30 per cent of the total amount collected. But once a whistleblower comes forward, Dodd-Frank places the SEC securely behind the wheel in pursuing enforcement, and then determining the whistleblower’s eligibility for an award. By relegating whistleblowers to the back seat once the SEC is notified, Dodd-Frank may yet increase the flow of whistleblowing allegations received by the SEC, but still prevent the flood of litigation that so many fear.
First, Dodd-Frank does not allow whistleblowers to sue on their own if the SEC decides not to pursue a securities fraud claim. Only the SEC decides whether further action is warranted, and if it passes on litigation, there is nothing the whistleblower can do – and no award to collect. Under the False Claims Act, in contrast, a whistleblower can file a suit herself if the government chooses not to, and still collect 15-to-30 percent of the total recovery. But Dodd-Frank shields companies from allegations that the government has discounted, and may filter out would-be whistleblowers (and their counsel) who contact the government only as a first step to a lucrative private lawsuit.
Second, even if the SEC sues and wins, a whistleblower award is available only if the monetary sanctions exceed $1m. The False Claims Act has no such provision. While penalties and restitution in SEC actions typically exceed $1m, this floor deters would-be whistleblowers with little to complain about.
Third, even if the SEC collects more than $1m, it has discretion to decide whether to make a whistleblower award, how much, and to whom. The SEC is to consider the significance of the whistleblower’s information, the degree of assistance provided, and the SEC’s interest in deterring securities law violations by making awards to whistleblowers. If the SEC decides to reward one or more whistleblowers, the total award must be between 10 and 30 percent of the total monetary sanctions. Dissatisfied whistleblowers have limited appeal rights, and must prove that the SEC’s refusal to reward them was arbitrary and capricious.
The SEC’s authority in prosecuting and paying out on whistleblower claims should temper abuse by whistleblowers looking to cash in. But if the SEC deems claims worthy of further investigation, Dodd-Frank also encourages the SEC to work with foreign regulators like the Serious Fraud Office and to sue for misconduct outside the US. First, Dodd-Frank allows the SEC to share privileged information with foreign regulators without loss of confidentiality. Second, the SEC now can compel a foreign accounting firm to produce its audit work papers if the foreign firm does an audit or other service on which a registered public accounting firm relies. Third, Dodd-Frank allows the SEC to prosecute federal securities fraud violations outside the US if there also is conduct in the US in furtherance of the violations, or if the violations have a substantial foreseeable effect in the US.
So are investment banks and public companies worldwide facing a deluge of whistleblower claims? Consistent with its focus on reforming the financial sector through government enforcement, Dodd-Frank places the tap squarely in the hands of the SEC.