SEC Report Confirms Substantial Dodd-Frank Whistle-blowing Activity, Illustrating Need for Employers to be Proactive — and CarefulOn November 26, 2012 by Schnader in schnaderworks.com
On November 15, the U.S. Securities & Exchange Commission released its 2012 Annual Report on the Dodd-Frank Whistleblower Program mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The bottom line is neither surprising nor comforting to covered employers: a steady stream of “whistleblower tips” alleging securities law violations, each seeking a monetary award, are being filed at a rate of hundreds each month.
The controversial Dodd-Frank Act was passed by an angry Congress in the wake of revelations about alleged Wall Street practices after the 2008-2009 economic meltdown. Among Dodd-Frank’s more contentious provisions was its addition of Section 21F to the Securities and Exchange Act of 1934 which is entitled “Securities Whistleblower Incentives and Protection”, and is commonly referred to as the SEC’s “bounty program.” While the bounty program contains some limited eligibility restrictions, it indeed provides for payment of a substantial monetary reward to eligible persons who (i) voluntarily provide (ii) original information (iii) which leads to successful SEC enforcement actions that (iv) result in penalties and other monetary sanctions of more than $1 million. Rewards must be from 10 percent to 30 percent of the amount of the sanction, so a minimum of $100,000 to $300,000 awaits the successful whistleblower under Dodd-Frank. A special “Office of the Whistleblower” was established by the SEC within the Division of Enforcement to implement and coordinate the program, including creation of a whistleblower hotline.
The SEC reports that in Fiscal 2012, which ended September 30, the fledgling program received 3,001 formal written whistleblower “tips” seeking consideration for an award, (excluding tips reporting alleged violations received from persons who are ineligible to receive a bounty.) Tips must be submitted in writing on a Form TCR to be considered for a bounty. Tips seeking bounties reportedly were received from all 50 states, the District of Columbia, Puerto Rico and 49 foreign nations. Roughly 20 percent of the tips asserted corporate or financial disclosure violations, with fraud related to stock offerings and securities manipulation each accounting for another 15 percent of the total. The SEC reported issuing 143 enforcement judgments and orders during fiscal year 2012 that potentially qualify as eligible for a whistleblower award of from 10 percent to 30 percent of the seven-figure recovery by the SEC. It is likely that most of these involve tips filed before 2012 as most tips filed in 2012 would not yet result in a judgment or order.
Business interests argued vigorously that the implementing regulations should require a whistleblower to report an alleged violation to his or her employer before an award-eligible tip could be filed under the bounty program. Even though a Dodd-Frank whistleblower is protected from retaliation and would be able to file a claim to obtain back pay, penalties and perhaps most important, quick reinstatement, the SEC refused to include such a requirement in its final rules (there are some modest financial incentives in the final rule to encourage whistleblowers to report first internally and give the employer a chance to investigate and self-report where it finds the violation to have substance). Nevertheless, covered employers have a clear interest in encouraging their employees to first report a perceived Exchange Act violation internally. Unfortunately, the potential for receiving a six or seven figure award by bringing the possible securities law violation directly to the Government likely is more than sufficient to induce at least some employees to do exactly that.
The challenge presented to covered employers under Dodd-Frank – or under any law offering a bounty to turn in one’s employer – is two-fold:
- How to encourage employees to report alleged violations of the Exchange Act without running afoul of retaliation prohibitions by offering encouragement that might be viewed as too ardent.
- How to avoid compounding the exposure posed by a whistleblower by engaging, or appearing to engage, in retaliation.
Suggestions on how to meet these challenges posed by Dodd-Frank and other bounty laws will address in future posts.