One small provision tucked into the Dodd-Frank Wall Street Reform and Consumer Protection Act may have very significant and costly consequences for corporations. Though it hasn’t received as much public attention and discussion as higher profile provisions of the Act, the Act includes a whistleblower provision that rewards individuals who assist the Securities and Exchange Commission (SEC) in uncovering securities violations, including violations of the Foreign Corrupt Practices Act (FCPA). Whistleblowers who provide information regarding any type of violation of Federal securities laws that would lead to an SEC enforcement action of greater than a million dollars are entitled to recovery. For a whistleblower, the payoff is an award of at least 10 percent and up to 30 percent of the fines collected worldwide as a result of violations of FCPA based upon a number of criteria, including the significance of the information provided, the degree of assistance provided, the “programmatic interest” of the SEC in deterring violations of the securities laws by making awards and such additional relevant factors as the SEC may establish by rule or regulation. Such a remuneration would mean that in cases that result in a $100 million payoff, the whistleblower receives at least $10 million and perhaps as much as $30 million. There is the potential now for whistleblowers to be enticed by lucrative fees they will receive for providing information to the government.
Excluded from participation in the program is any whistleblower who, at the time the whistleblower acquired the original information submitted to the SEC, was a member, officer, or employee of a specifically indicated regulatory agency, the Department of Justice, a self-regulating organization, the Public Company Accounting Oversight Board, or a law enforcement agency. Further, a whistleblower is not eligible to be compensated under certain defined circumstances.
The new legislation has broad implications across the financial and corporate sectors and gives increased power and reach to the SEC. The SEC and the Department of Justice in the past few years have been active in the area of Foreign Corrupt Practices Act matters. As of the signing of the bill, the SEC has greater ability to extract information from employees of corporations and others involved with those employees. Congress believes, based on prior enforcement actions, that some of the best evidence and information the SEC can use in enforcement action is from those knowledgeable employees tucked inside a company.
In major accounting fraud cases such as WorldCom and AIG, the total sanctions in those enforcement actions were in the hundreds of millions of dollars. In cases such as this, the corporate insider whistleblower would have a very large reward at the end of the process. The types of cases and the potential recoveries involved have actually greatly expended and increased as a result of the Dodd-Frank Act whistleblower provisions.
Since there are over 500 public companies and over 1,500 financial sector companies headquartered in Texas, this new movement by the SEC may mean such businesses need to re-evaluate and improve their internal compliance structure to prevent any violations of federal and state securities laws.
Whistleblowers are allowed to anonymously provide information through counsel, but must identify themselves prior to receiving any award.
It should be noted that this Dodd-Frank Act also creates a private right of action for whistleblowers against employers who discharge, suspend, threaten, harass, or discriminate against a whistleblower, and makes favorable changes regarding whistleblower laws under the Sarbanes Oxley Act Section 1514a, such as extending the limitation period and providing for a jury trial in federal court.
