Whistleblower Windfall
By: DULCE J. FOSTER
August 2010
The Dodd-Frank Wall Street Reform & Consumer Protection Act (Dodd-Frank Act), Pub. L. 111-203, H.R. 4173, signed into law on July 21, creates powerful new incentives for whistleblowers to voluntarily disclose information to the Securities & Exchange Commission (SEC) that might lead to the successful prosecution of securities law violations, including violations of the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, et seq. (FCPA).
Until recently, the Federal False Claims Act (FCA), 31 U.S.C. §§ 3729 et seq., was the most effective weapon available to whistleblowers and lawyers seeking to cash in on allegations of corporate misconduct. However, the FCA—despite recent congressional amendments and sometimes stretched judicial interpretations giving it an ever-expanding reach—is limited in scope. To assert a case under the FCA, a whistleblower has to prove a false or fraudulent claim for payment that is directly or indirectly derived from federal funds. Offenses that do not involve the federal treasury—such as insider trading, or the bribery of foreign officials in violation of the FCPA—are not actionable under the FCA. The Dodd-Frank Act gives whistleblowers, and the cottage industry of plaintiff’s lawyers that has grown up around them, a new way to reap substantial rewards for reporting such offenses.
Key components of the whistleblower provisions of the Act include:
- To obtain a reward, a whistleblower must provide information to the SEC that leads to a judicial or administrative action resulting in monetary sanctions exceeding $1,000,000.
- Whistleblowers are entitled to between 10 and 30 percent of the recovered sanctions. The SEC has discretion to determine the amount of the award within these limits, based on a variety of factors, including the significance of the information and assistance provided by the whistleblower.
- As of now, only the SEC may bring the judicial or administrative action leading to the sanctions. This limitation substantially distinguishes the Dodd-Frank Act from the FCA, which allows whistleblowers to file their own complaints, and even litigate claims independently if the United States chooses not to intervene in the whistleblower’s lawsuit. However, this distinction may disappear over time. The Dodd-Frank Act charges the SEC with conducting a study of the new law, to include an evaluation of whether Congress should grant whistleblowers a private right of action against securities law violators.
- The Act establishes new anti-retaliation claims for whistleblowers who allege discrimination for disclosing information to the SEC or otherwise cooperating with its investigation. A whistleblower who prevails is entitled to reinstatement in his or her position, twice the amount of back-pay owed, and compensation for litigation costs, including attorney’s fees.
- To obtain a reward, a whistleblower must provide “original information” that is: derived from his or her independent knowledge or analysis; is not already known to the SEC; and is not exclusively derived from a judicial or administrative hearing, government report, audit, or investigation, or from the news media.
- A whistleblower may not recover a reward if he or she is convicted of a crime related to the violation, or if he or she worked for a law enforcement agency, government regulator or accounting oversight board at the time the information was acquired.
- The Act requires the SEC to establish a separate office to administer and enforce its provisions.
- The Act requires the SEC to issue regulations implementing its provisions within 270 days from the date of its enactment.
Before the Dodd-Frank Act, the SEC maintained a bounty program that provided recoveries to whistleblowers who reported insider trading. Nevertheless, this program did not cover other SEC violations (such as violations of the FCPA), and did not provide guaranteed minimum rewards. The Dodd-Frank Act whistleblower provisions are both more broad in scope and more likely to bring whistleblowers to the government’s doorstep.
These new incentives present significant challenges for all companies that do business overseas. Dissatisfied employees drawn by the lure of huge windfalls will be motivated to report concerns that, prior to the new law, might have been resolved internally. Even if the reported issues are entirely without merit, a whistleblower’s report to the SEC could trigger a costly and time-consuming investigation, mandatory public filing requirements, negative publicity, and loss of share value. For these reasons it is critical for companies to create a pervasive culture of compliance, and to provide employees with systems (such as anonymous compliance hotlines) for reporting their concerns internally without fear of retaliation.
If and when an FCPA violation comes to light, a company evaluating whether to voluntarily report it to the government will have to weigh the increased risk presented by the law that a whistleblower might, or already has, reported it. A cautious company will want to fully investigate reported concerns before disclosing them to the government, but such an investigation will need to be cloaked in confidentiality to limit the risk that a whistleblower might learn about it and report it first. The company would need to be careful about how it instructs those who are involved in the investigation on the need for such confidentiality. Any perception that the company is trying to prevent employees from talking to the SEC might trigger the statute’s anti-retaliatory whistleblower protections.
These are just a few of the many challenges created by the new law. While it is too soon to gauge the ultimate impact, it is safe to say that the whistleblower provisions will significantly change the way companies manage their compliance efforts, particularly those targeted at identifying, investigating, and reporting FCPA and other concerns under the securities laws.