The “Bounty” and Strengthened Whistleblower Protection Provisions of the Dodd-Frank Reform Act

John F. Reha[1]

Congress passed the new Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) during the summer of 2010; President Obama signed the bill into law on July 21, 2010.[2]  The whistleblower provisions of Dodd-Frank may be found at 15 U.S.C. § 78u-6 (§ 21F of the Securities Exchange Act of 1934).  These provisions have the potential of engrafting a new, robust whistleblower factor upon securities regulation and enforcement, and further may assist the SEC in marshalling its increasingly scarce enforcement assets to those cases upon which the SEC already has received information of a potential securities violation.

Whistleblower provisions already exist under the Sarbanes-Oxley Act (“SOX”),[3] but only for insider trading cases, and awards for whistleblowers are capped at 10% of the monetary sanctions resulting from SEC proceedings.  These portions of SOX were virtually unused, likely because such provisions were insufficient to truly protect a whistleblower and the financial incentives for coming forward were not sufficiently lucrative to cause persons having knowledge of securities fraud (who usually also have a large paycheck) to volunteer information. 

Under Dodd-Frank, bounties are now available for whistleblowers in numerous financial fraud cases.  Unlike SOX, Dodd-Frank applies to any form of securities violation.  Further, significant prohibitions against employer retaliation are included in Dodd-Frank. 

The Bounty.  The Dodd-Frank bounty is from 10% to 30% of the “monetary sanctions” in any SEC enforcement proceeding resulting from “original information” provided by the whistleblower,[4] provided such sanctions are in excess of $1,000,000.[5]  The SEC proceeding may be brought under any federal securities law.[6]  As an example of the potential bounty that might be paid, if a qualified whistleblower provides information to the SEC that  results in an SEC enforcement action generating $100,000,000 of monetary sanctions, the whistleblower’s bounty will be between $10,000,000 and $30,000,000, as determined by the SEC.  The SEC is to discern the amount of the bounty on the significance of the whistleblower’s information, the degree of assistance the whistleblower provides, the inherent interest of the SEC in deterrence of securities violations, and any other information the SEC believes relevant.[7]  To be entitled to the bounty, the whistleblower must be the source of “original information” given to the SEC,[8] which must be “derived from the [whistleblower’s] independent knowledge or analysis,”[9] and such information must be the precipitating cause of the SEC proceeding resulting in the levy of “monetary sanctions” in excess of $1,000,000.[10]  Certain parties that are already required to perform investigatory functions, such as auditors and regulators, are automatically disqualified from participating in the bounty program.[11]

Anti-Retaliation Provisions.  Dodd-Frank also provides protection for qualified employee whistleblowers.  Congress was concerned that whistleblowers who were also employees of the firm orchestrating a fraud would be met with abuse, harassment, demotion, termination or other employment discrimination in retaliation for coming forward.  Under Dodd-Frank, qualified whistleblower employees are protected from such retaliation.[12]  In the event of termination, the protected whistleblower employee is entitled to reinstatement, double back-pay, and costs of litigation.[13]

Whether to Bring Enforcement Action Entirely within SEC Discretion.  Dodd-Frank provides no private right of action.  Only the SEC may prosecute an action under Dodd-Frank (although actions for securities fraud and the like by investors upon information that may be learned as a result of a Dodd-Frank whistleblower’s information are not barred).  Whether to pursue a claim upon the “original information” provided by the tipster is completely within the purview of the SEC.  No means exists under Dodd-Frank for payment of a bounty except upon a resulting SEC enforcement action.

Confidentiality.  Dodd-Frank includes provisions that are designed to maintain whistleblower confidentiality.[14]  As noted below, however, the SEC is currently attempting to enact implementing regulations, and how and to what extent whistleblower confidentiality will truly be preserved as a result of such regulations is unknown at this time.

SEC Rules.  The SEC has been authorized by Congress to enact rules to implement the effectiveness of Dodd-Frank,[15] which the SEC is to promulgate within 270 days of enactment of Dodd-Frank (i.e. by April 21, 2011).[16]  Draft rules were published in early November 2010.[17] It is expected that final rules will be promulgated soon.  Draft Rule 21F includes significant confidentiality provisions, as well as provisions which negate typical non-disclosure provisions in employee confidentiality agreements for “original information” under Dodd-Frank.  Such provisions also provide, however, that whistleblower protection is not to be afforded to any person who obtains “original information” through a violation of state criminal law.[18]  This certainly appears to create a problem for potential informants in the numerous states that make simple unauthorized access of a computer a criminal offense, since the most likely place for storage of records to support a securities fraud allegation from inside the organization itself is, of course, the collection of computer files of the perpetrators.  The final rules will reveal the SEC’s degree of enthusiasm for the whistleblower program.  It is anticipated that intense lobbying will be directed at the SEC as it continues the process of enacting the implementing regulations.

 


[1] John Reha is the founder of The Reha Law Firm, LLC, in Littleton, Colorado. He is a graduate of Luther College and The University of Iowa College of Law and has been practicing complex commercial litigation for over twenty-five years. He has litigated numerous complex matters, including securities claims, in various courts and has authored many articles on issues involving unfair competition. He was named to Colorado Super Lawyers for 2011. 

[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[3] 18 U.S.C. § 1514A (2002).

[4] 15 U.S.C. § 78u-6(b)(1).

[5] Id. at (a)(1).

[6] Id.

[7] Id. at (c)(1).

[8] Id. at (b)(1).

[9] Id. at (a)(3)(A).

[10] Id. at (b)(1) & (a)(1) (defining “covered judicial or administrative action” as “any judicial or administrative action brought by the Commission . . . that results in monetary sanctions exceeding $1,000,000”).

[11] Id. at (c)(2)(A), (C).

[12] Id. at (h)(1)(A).

[13] Id. at (h)(1)(C).

[14] Id. at (h)(2).

[15] Id. at (j).

[16] 15 U.S.C. § 78u-7(a).

[17] Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, 17 C.F.R. pts. 240, 249 (2010).

[18] 15 U.S.C. § 78u-6(c)(2)(B).