The new financial reform bill contains whistleblower provisions that could change how corporations identify potential wrongdoing, interact with their employees and decide whether to report potential violations to the government.
With the passage of the new financial reform law—the most sweeping financial reform since the New Deal—there is little doubt that certain members of Congress and the president are whistling a happy tune. Yet, while pundits and politicians discuss the bill’s more prominent features, such as regulation of the over-the-counter derivatives market, increased U.S. Securities Exchange Commission (SEC) regulation over credit rating agencies and limits on bank ownership of hedge funds and private-equity funds, many have overlooked the law’s addition of new whistleblower provisions.
In effect, these provisions deputize private citizens as government agents in the ongoing campaign to root out violations of federal law. Perhaps more than any other provisions in the law, the whistleblower provisions will have a profound and persistent effect on the way corporations design and implement compliance programs, conduct internal investigations, interact with their employees and make decisions about whether and when to disclose potential violations of the law to government agencies.
To put the significance of these new provisions into perspective, consider the following:
- For the first time, whistleblowers who provide “original information” leading to a successful enforcement action under the securities and commodities laws can receive up to 30 percent of the total recovery greater than $1 million, including penalties, disgorgement and interest.
- Additionally, whistleblowers are entitled to a reward from any “related action” stemming from the original information provided by the whistleblower, such as judicial actions brought by agencies other than the one receiving the initial report, actions brought by state regulatory or law-enforcement authorities and even actions brought by foreign law enforcement.
- The bill creates—also for the first time—a provision allowing whistleblowers to come forward concerning violations of the Commodity Exchange Act. This provision brings into play potential commodity futures trading violations by hedge funds and others, which the Commodity Futures Trading Commission (CFTC) oversees.
- The bill greatly bolsters an existing SEC program designed to reward whistleblowers in insider trading cases by enabling them to receive a reward for providing information to the government relating to the violation of any and all other federal securities laws, including the Securities Exchange Act of 1934, the Securities Act of 1933 and the Foreign Corrupt Practices Act. Since 1998 the SEC’s insider trading bounty program has paid only four rewards, totaling a paltry $67,570; in its 20-year history the program has only paid approximately $160,000. By mandating an award of up to 30 percent for whistleblowers and greatly expanding the kinds of violations that can result in whistleblower recovery, the SEC is likely to see an enormous increase in whistleblower activity.
When combined with recent efforts to step up enforcement, these new provisions significantly alter the incentives for potential whistleblowers, making it more likely that those on the fence will race to government, rather than report to their employer. Take the Foreign Corrupt Practices Act as an example. In the past few years, both the SEC and the U.S. Department of Justice (DOJ) have dramatically increased their enforcement of this statute, resulting in a recent number of groundbreaking settlements, including an $800 million payment by Siemens; a more than $575 million sanction and disgorgement against Kellogg Brown & Root and a $185 million payment by Daimler. With recoveries like this, a potential 30 percent share is akin to winning the lottery for a whistleblower. Under such circumstances, even a loyal employee may find it difficult to turn down such a potential jackpot.
This is just the latest in a series of efforts by the government to increase its presence in the financial sector and ferret out financial fraud. The IRS already has implemented a program—to great success—in which it provided whistleblowers a reward of up to 30 percent of any amounts the IRS collects (including tax, interest and penalties) based on information the whistleblower provided. The government has also had continued success in bringing qui tam relator actions under the False Claims Act. According to the DOJ, in 2008 alone, the United States recovered more than $1.3 billion in settlements and judgments in False Claims Act cases. Of this amount, $1 billion of the total—more than 75 percent—stemmed from cases involving a qui tam relator. Given the government’s past success with programs of this nature, it is likely that the new whistleblower provisions of the financial reform law will result in new investigations and increased settlements for government agencies, like the SEC, CFTC and DOJ.
If that were not enough, the new legislation also contains anti-retaliation safeguards for employees who have blown the whistle on their employers to the government:
- The legislation establishes a cause of action for employees who have suffered retaliation for lawfully providing information to the SEC or CFTC in accordance with the whistleblower reward provisions, or for lawfully assisting in any investigation or judicial or administrative action of the SEC or CFTC based upon or related to the information the whistleblower provided.
- The bill creates an even more powerful cause of action for financial services industry employees who suffer retaliation for disclosing to the government fraudulent or unlawful conduct, testifying in a related proceeding regarding the unlawful activity, initiating a proceeding, or objecting to or refusing to participate in an activity thought to be unlawful. Under this new action, a whistleblower facing retaliatory conduct by an employer for his or her protected activity can prevail merely by showing a preponderance of evidence that the protected activity was a contributing factor in the retaliation.
- The bill also closes a loophole in the whistleblower protection provision contained in the Sarbanes-Oxley Act, 18 U.S.C. § 1514A, by granting a retaliation cause of action to employees of subsidiaries of publicly traded companies, provided the financial information for those subsidiaries “is included in the consolidated financial statements of [the publicly] traded company.” Previously, some courts had declined to find liable those publicly traded companies that mainly employed their work force through non-public subsidiary companies and had few actual employees.
Now that the balance has shifted in favor of whistleblowers, the calculus for companies facing compliance issues is certain to change in a number of ways. First, the speed at which companies must implement and complete internal investigations will increase dramatically. Quite simply, with the real threat that any one of its employees could at a moment’s notice run to the government, a company cannot afford to wait to ascertain whether it has violated the law.
This new abbreviated timing directly affects the course companies must take once they determine that they have violated the law. With less time to assess whether a violation actually has occurred, companies that once thought they were as clean as a whistle now might be more likely to self-report even the smallest possible infraction, in the hopes of stemming a larger, more invasive government investigation of the company’s conduct brought upon by a whistleblower’s inside information. Finally, companies must revisit their relationship with their employees, by revising and updating compliance programs, placing a renewed emphasis on implementing effective compliance hotlines and responding quickly to any allegations of wrongdoing.
For the next several weeks, those who passed the financial reform bill will continue to talk about its better known provisions. Yet, for the next several decades, it may be the whistleblower provisions—more than any others—that will effect how corporations identify potential wrongdoing, interact with their employees and decide when and whether to report potential violations to the government. Given the breadth of these new provisions, it is important to assemble the proper legal team to ensure regulatory compliance and to update and implement a meaningful and dependable internal compliance program. This way, if an employee ultimately decides to provide information to the government, a company can ensure that the sound it hears blowing is not the final whistle.
For discussion of other SEC enforcement-related provisions in the financial reform bill, see “SEC Enforcement Given New Tools Under Dodd-Frank Bill.“