On July 21, 2010, the President signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Act”). Among other things, the Act establishes a whistleblower program that enables the Securities and Exchange Commission (SEC) to pay a substantial award, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistleblowers who voluntarily provide the SEC original information about a violation of the federal securities laws that leads to the successful enforcement or related action resulting in monetary sanctions exceeding $1 million.
On May 25, 2011, the SEC adopted the final rules to implement the Dodd-Frank whistleblower program. These rules explain the procedures whistleblowers must follow to be eligible and to file a claim for an award.
Pursuant to the conditions of the regulations, whistleblowers are entitled to 10%-30% of the SEC’s monetary recovery in successful actions. Awards are to paid out of the statutorily-created Investor Protection Fund, which currently has a balance in excess of $450 million.
The most contentious issue raised during the rule’s comment period was whether the financial incentive for employees to complain to the SEC would undermine companies’ internal compliance and reporting programs. A plethora of companies urged the SEC to require whistleblowers to report to the company first before reporting the misconduct to the SEC in order to be a eligible for the award. In its final rules, the SEC did not adopt a mandatory internal reporting requirement. However, the SEC struck a balance of concerns from both sides and added incentives for employees to comply with internal procedures.
Examples of reportable fraud under Dodd-Frank include:
• Manipulation of a security’s price or volume
• Fraudulent or unregistered sale of a security
• Ponzi schemes
• Insider trading
• False or misleading statements about a company or its finances
• Abusive naked short selling
• Theft or misappropriation
• Fraud involving municipal securities or public pension plans
In order for a whistleblower to be considered for an award under the whistleblower program while remaining anonymous, the Act requires that the whistleblower submit their information through an attorney.
In addition to the benefit of anonymity, there are many other significant benefits to having an experienced attorney represent the whistleblower. An attorney experienced in dealing with the SEC and securities law issues can be helpful to the whistleblower in helping present the case to the regulators at the inception and helping the regulators build their case. Further, the SEC has the sole discretion in determining the percentage of the recovery the whistleblower is entitled to receive between 10% to 30% (as long as the recovery exceeds $1,000,000). An attorney experienced in securities matters can help negotiate the best deal possible for the whistleblower.
The Act expressly prohibits retaliation by employers against individuals who become whistleblowers under SEC rules, even if they do not recover a whistleblower award, and provides them with a private cause of action in the event that they are discharged or discriminated against by their employers in violation of the Act.
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