The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which President Obama signed into law on July 21, 2010, has been heralded as offering several significant changes in Wall Street regulation. However, one of its least publicized provisions—the so-called whistleblower “bounty”—may prove to be among its most impactful.
Companies both large and small face potential impacts from Dodd-Frank’s whistleblower provisions, which incentivize individuals to bring possible violations of securities and commodities laws to the attention of the SEC or Commodities Futures Trading Commission (CFTC). In the event those individuals satisfy Dodd-Frank’s “original source” rule and their information assists in an enforcement action brought by the SEC or CFTC that results in at least $1 million in recovery, they will be entitled to receive between 10 and 30 percent of any recovery over and above that threshold.
Dodd-Frank joins several other federal laws protecting and in some instances incentivizing whistleblowers, including the Sarbanes-Oxley Act, see 8 U.S.C. § 1514A and 15 U.S.C. § 7241 (mandating confidential reporting procedures, prohibiting retaliation against whistleblowers and entitling those subjected to retaliation to reinstatement, back pay and legal fees), the Securities Exchange Act, see 15 U.S.C. §78u-1(e) (providing the SEC discretion to give whistleblowers financial rewards of up to 10 percent of recovery in insider trading cases), and the False Claims Act, see 31 U.S.C. § 3729 (offering 15 to 30 percent of the recovery to whistleblowers who report fraud on the government). Like Sarbanes-Oxley, Dodd-Frank provides a private right of action for retaliation, but with the ability to recover double back-pay in addition to reinstatement and legal fees. Its wider scope and more generous recovery provisions make its use likely to be far more prevalent than that of the underutilized Securities Exchange Act reward provision (five individuals recovering just over $159,000 over the last 20 years).
Dodd-Frank’s whistleblower provisions are most comparable to that of the False Claims Act, with which it has a number of similarities, including similar original source rules and recovery allocation procedures. There are also key differences. For example, the False Claims Act does not have a recovery threshold like Dodd-Frank’s $1 million requirement and provides a private right of action (qui tam cases) that is absent from Dodd-Frank. The Acts also differ in who performs allocations (the court or parties under the False Claims Act, versus the SEC or CFTC under Dodd-Frank). Perhaps most importantly, Dodd-Frank potentially applies to a more expansive number of claims. This could include high profile hot button areas such as the Foreign Corrupt Practices Act (FCPA), which has seen dramatic growth in recent years both in the number of enforcement actions pursued and the size of the settlements reached. The prospect of sharing in FCPA-related recoveries topping the tens or hundreds of millions of dollars will likely be an attractive lure for would-be whistleblowers.
Rules implementing Dodd-Frank are expected by April 2011, and should further flesh out its implications. In the meantime, the plaintiff’s bar is already reporting a substantial uptick in calls from individuals feeling out potential claims. Using the recent growth of qui tam litigation as a guide, it can reasonably be anticipated that Dodd-Frank will soon create a well-traveled avenue for whistleblower allegations triggering scrutiny from federal law enforcement.