Blow the Whistle on Your Employer – How It Works Under Dodd-Frank and the SEC’s Rule Proposal
On November 3, 2020, the Securities and Exchange Commission (“SEC”) issued a Rule Proposal for implementing a whistleblower program under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).
By way of background, prior to Dodd-Frank, employees were encouraged to “blow the whistle” on their employers by reporting fraud to the SEC but did not have very much financial incentive to do so. The SEC’s whistleblower program was limited to insider trading cases and the awards given were often small and discretionary.
However, Dodd-Frank is a game changer. Dodd-Frank broadens the SEC’s whistleblower program to include all kinds of federal securities violations, including accounting fraud. Most important, however, is the promise of large and mandatory bounties – up to 30% of the recovery – for those who furnish the SEC with useful and original information, subject to certain conditions.
Under Dodd-Frank, a potential whistleblower must voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million. If these conditions are met, then the whistleblower will be awarded 10% to 30% of the total recovery. Dodd-Frank also prohibits retaliation by employers against whistleblowers. What do these conditions really entail? Well, the SEC’s Rule Proposal addressed that in great detail. The Proposal is over 150 pages, but the SEC’s website provides a Fact Sheet with a good synopsis:
- In general, a whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information before the government, a self-regulatory organization or the Public Company Accounting Oversight Board asks for it.
… with original information …
- Original information must be based upon the whistleblower’s independent knowledge or independent analysis, not already known to the Commission and not derived exclusively from certain public sources.
… that leads to the successful enforcement by the SEC of a federal court or administrative action …
- A whistleblower’s information can be deemed to have led to successful enforcement in two circumstances: (1) if the information results in a new examination or investigation being opened and significantly contributes to the success of a resulting enforcement action, or (2) if the conduct was already under investigation when the information was submitted, but the information is essential to the success of the action and would not have otherwise been obtained.
… in which the SEC obtains monetary sanctions totaling more than $1 million. No further explanation is provided on the SEC’s Fact Sheet; however, this should be self-explanatory.
In addition, I looked at the SEC Rule Proposal to understand how attorneys can help their clients navigate through the whistleblower program – from investigating a potential whistleblower claim to applying to the SEC for an award. Here’s what I discovered:
Dodd-Frank allows potential whistleblowers to report fraud anonymously if they retain counsel to report the securities fraud on their behalf. The SEC’s Rule Proposal contemplates that attorneys may not only help the whistleblower complete the SEC’s required forms for reporting fraud, but may assist in the investigation of their claims.
Under Dodd-Frank, original information provided by a whistleblower can derive from “independent knowledge” and from “independent analysis.” The SEC’s Rule Proposal broadly defines “independent analysis” to mean the whistleblower’s own analysis, whether done alone or in combination with others. “Analysis” would mean the whistleblower’s “examination and evaluation of information that may be generally available, but which reveals information that is not generally known or available to the public.” This definition recognizes that there are circumstances where individuals can review publicly available information, and through their additional evaluation and analysis, can provide vital assistance to the SEC in understanding complex schemes and identifying securities violations.
Thus, under the SEC Rule Proposal, an attorney would be able to help a potential whistleblower develop and investigate the facts provided by the whistleblower by examining their legal import and determining whether any of the facts have either been disclosed publicly or intentionally concealed. The attorneys can also assist the whistleblower in completing the SEC’s required forms. Presumably, the stronger and more coherent the “tip” furnished to the SEC, the greater the likelihood that the SEC (or a collaborating federal agency) will bring an enforcement action. An attorney’s involvement could make a potential whistleblower’s submission stand out in the mountain of complaints and tips that the SEC has begun and will continue to receive under this new and expansive whistleblower program.
Finally, the SEC also expects that in the vast majority of cases in which a whistleblower is represented by an attorney, the whistleblower will enter into a contingency fee arrangement with the attorney, providing that counsel will be paid for the representation through a fixed percentage of any recovery by the whistleblower under the whistleblower program. Thus, the SEC Rule Proposal explains that most whistleblowers will not incur any direct expenses for attorneys’ fees for the completion of the SEC’s required forms.
I’m optimistic about the whistleblower program although I do think it will be difficult for the SEC’s limited staff and resources to weed out the useful and the less useful tips.