The soon-to-be-signed financial reform package creates a new whistleblower program with potentially huge cash rewards for individuals who provide information about securities law violations to the U.S. Securities and Exchange Commission.
Some corporate defense lawyers are calling it a "bounty" reward program because it covers violations of the Foreign Corrupt Practices Act, which lately has produced hundreds of millions of dollars in corporate penalties and settlements.
"That's really significant," said Don Zarin, partner in the Washington office of Holland & Knight and head of the firm's Foreign Corrupt Practices Act team. "There's been a dramatic increase in penalties by the SEC in the foreign corrupt practices area. It basically requires disgorgement of profits and that has resulted in some huge penalties -- some over $300 million."
Under the so-called Dodd-Frank Act, the SEC will pay whistleblowers cash rewards of between 10 percent and 30 percent of any monetary sanctions in excess of $1 million that the government, because of whistleblowers' assistance, recovers through either civil or criminal proceedings. The "bounty" program also extends to whistleblower disclosures of violations to the U.S. Commodity Futures Trading Commission.
In order to qualify, whistleblowers must provide the SEC with "original information" that is "derived from the independent knowledge or analysis of a whistleblower." The information cannot be "known to the Commission from any other source" and cannot be "exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media."
"I would say probably more than half of [SEC] enforcement actions in this area are over the $1 million-threshold," added Zarin. "This will really raise the bar on companies."
Employees who normally may not concern themselves with the FCPA will have "their ear to the ground and will be anxious to spot violations and report them to collect the rewards," said FCPA specialist Richard Cassin of Cassin Law in Singapore.
"It will have to increase the number of complaints that come in about FCPA violations even though most public companies now are self reporting," he said. "The advantages to reporting seem to be pretty obvious and the potential disadvantages of failing to report are enormous."
But even companies with robust compliance programs face dangerous waters, according to Cassin, Zarin and others. The SEC generally has been holding public companies strictly liable for the activities of their foreign subsidiaries, they explained.
"You could have a perfect compliance program and still have no legal defense," said Cassin. "We kind of depend on prosecutorial discretion. The Department of Justice (which shares enforcement authority with the SEC) will come down less hard, but still, when companies have employees who go rogue, companies are strictly liable. I don t like it because I think it's a disincentive to maintain a good, robust compliance program and to self report violations."
However, employment and whistleblower lawyers say the SEC program and other whistleblower protections in the financial reform bill are critical.
"What we saw from the Madoff Ponzi schemes is that the SEC was often asleep at the wheel and had a propensity to ignore information provided by whistleblowers who often did so at substantial risk to their job security and to their careers," said Jason Zuckerman, principal in Washington, D.C.'s The Employment Law Group. "This new monetary reward program should encourage employees to blow the whistle and put more pressure on the SEC to conduct real investigations that would lead to appropriate accountability."
Zuckerman said the bill also closes loopholes in the anti-retaliation provisions in the Sarbanes-Oxley Act of 2002 and the False Claims Act. Some administrative law judges and courts, he explained, had interpreted those provisions to apply only to the parent entity and not to its subsidiaries. "That was a huge loophole that has been closed," he said.
The legislation also gives whistleblowers a private cause of action for damages stemming from retaliation.
The SEC has had a whistleblower program since 1989 but has paid out less than $160,000 to only five whistleblowers, according to the Senate report accompanying the Dodd-Frank legislation. That program applied only to insider trading cases and limited whistleblower awards to a maximum of 10 percent of any monetary sanctions recovered by the government.
