If you can imagine Wall Street as an Old West Dodge City and the U. S. Securities & Exchange Commission as the local marshal, “wanted” signs are being figuratively nailed up for U. S. public companies and a new class of whistleblower “bounty hunters” will be lining up in hopes of million dollar rewards. Section 922 of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act[i] (the “Act”) amends the Securities and Exchange Act of 1934 to require the SEC to pay big monetary rewards to whistleblowers who voluntarily disclose original information about securities law violations by public companies. These rewards can range from 10 percent to 30 percent of monetary penalties exceeding $1 million recovered by the SEC from the company violating U.S. federal securities laws, after taking into account factors such as the significance of the whistleblower’s information.
Although this SEC bounty program existed prior to the passage of the Act, it previously applied only to reports of insider trading. Now the bounty program will apply to whistleblower reports with respect to all securities law violations. Whistleblowers in financial fraud and Foreign Corrupt Practices Act cases, which tend to generate very large civil penalties, now are eligible for awards under the Act’s new bounty program. As an example of the potentially high dollar rewards that could be involved, on July 23, 2010, the SEC awarded a $1 million bounty to a whistleblower providing information that resulted in the collection of $10 million in civil penalties in the SEC’s insider-trading case against Pequot Capital Management, Inc. and other related parties[ii]. The class of potential whistleblowers also has been expanded. Whistleblowers now can include not only employees and officers of the offending company, but also business competitors, consultants, vendors and services providers.
In addition to significant new dollar incentives, employee whistleblowers under the expanded bounty program also are accorded significant new protections under the Act. Under the Act, employers cannot demote, suspend, discharge, threaten, harass or discriminate against whistleblowers, even if the whistleblower complaint is later found to be without merit. In addition, the Act now permits whistleblowers to commence a private action against their employers if they are terminated in retaliation for notifying the SEC of the securities law violation. In addition to reinstatement, the whistleblower employee is entitled to 200% of back pay lost, plus litigation costs and attorney’s fees. Further, a whistleblower now can remain anonymous by making the report to the SEC through legal counsel, with the identity of the whistleblower being required to be disclosed only if a reward is to be paid to the whistleblower. A whistleblower also is entitled to appeal the SEC’s decision on whether or not to grant a reward to the appropriate U.S. Federal Court of Appeals.
In light of the incentives and protections being granted to whistleblowers by the Act, it is likely that the volume of whistleblower reports may increase significantly in coming years. This apparently was the intention of the U.S. Congress. The Act provides that the SEC must establish a special office to administer and enforce the Act’s whistleblower provisions and report back annually to Congress on the office’s activities and its response to all whistleblower complaints. In addition, the SEC Inspector General is required to report to Congress on whether the SEC has adequately promoted and publicized the whistleblower program.
Independent of the passage of the Act, the SEC has now made permanent its one year trial program whereby the SEC commissioners delegated their subpoena power to the SEC enforcement director, who thereafter sub-delegated subpoena authority to a number of his deputies[iii]. This may increase the likelihood of SEC inquiries initiated by a whistleblower complaint more quickly evolving into much higher profile investigations. With the issuance of a subpoena under a formal order of investigation, subjects of the SEC probe can be forced to testify under oath in addition to furnishing requested documents. As Samuel Johnson once said, “nothing focuses the mind like a hanging”. Public companies may want to take the “wanted” posters seriously and focus on modifying their policies and procedures in light of their increased risk of being the subject of whistleblower reports to the SEC from employees or third parties as a result of the new bounty program created by the Act.
[i] See http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf.
[ii] See http://www.gibsondunn.com/Publications/Pages/SECAwards1MillionDollarBounty-InsiderTradingAction.aspx.
[iii] See http://www.washingtonpost.com/wp-dyn/content/article/2010/08/11/AR2010081106274.html?nav=emailpage.