The End of the Internal Compliance World as We Know It, or an Enhancement of the Effectiveness of Securities Law Enforcement? Bounty Hunting under the Dodd-Frank Act's Whistleblower Provisions

Article excerpt

ABSTRACT

In the wake of Bernard Madoff's $65 billion Ponzi scheme and the recent economic crisis stemming largely from loosely regulated subprime lending and mortgage-backed securities, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010, signaling loudly and clearly that change is coming to Wall Street. But Wall Street is not the only one receiving a message. Buried deep within the 2,319 pages of the Dodd-Frank Act, companies can find Section 922, the whistleblower provision, which provides a bounty for whistleblowers who report securities violations to the Securities and Exchange Commission.

These bounty provisions and the subsequent rules implementing them have been criticized by many as ineffective and unnecessarily intrusive on established internal compliance programs. In light of these criticisms, this Article analyzes the Dodd-Frank bounty program and its likely effect on corporate internal compliance programs, relying largely upon literature and studies in the areas of behavioral economics, organizational behavior and business ethics relating to whistleblowing. The authors argue that rather than undermining internal compliance programs, the Dodd-Frank bounty program will serve as a much-needed check on poorly administered internal compliance programs that are not adequately policing fraud and unethical behavior.

INTRODUCTION

In the wake of Bernard Madoff s $65 billion Ponzi scheme and the recent economic crisis stemming largely from loosely regulated subprime lending and mortgage-backed securities, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") on July 21, 2010, signaling loudly and clearly that change is coming to Wall Street.1 But Wall Street is not the only one receiving a message. Buried deep within the 2,319 pages of the DoddFrank Act, companies can find Section 922, the whistleblower provision.2 This provision rewards individuals who assist the Securities and Exchange Commission ("SEC") in uncovering any securities violations.3 Section 922 requires the SEC to pay whistleblowers a cash bounty ranging from ten to thirty percent of any "monetary sanctions,"4 including settlements, in excess of $1 million that the government recovers through civil or criminal proceedings as a result of the whistleblower' s assistance.5

Given the enormous size of recent settlements and fines for violations of securities laws, the potential payouts under these whistleblower provisions can be quite lucrative. One such area of securities law that has recently seen some staggering settlements and fines is the Foreign Corrupt Practices Act ("FCPA"), an act that prohibits bribes to foreign government officials.6 In 2010, for example, FCPA enforcement activity rose to such a high level that fear of FCPA liability became ubiquitous in the business community due to record levels of enforcement actions, industry-wide investigations, prosecutions of individuals and international anti-corruption cooperation.7 The dynamic duo, the SEC and Department of Justice ("DOJ"), dwarfed the level of enforcement activity from any prior year in the FCPA's thirtythree year history.8 Additionally, because of criticism from a perceived lack of enforcement in the period preceding the recent financial crisis, the SEC has become more aggressive in pursuing enforcement actions for traditional securities law violations as well.9 Against this background, Dodd-Frank's guaranteed financial incentives coupled with its fortified anti-retaliation provisions will likely turn the heat up for both multinational and domestic companies. This potential for a large financial reward has created in the minds of many compliance professionals a fear of widespread and opportunistic whistleblowing.

These whistleblower provisions and the subsequent rules implementing them10 have been criticized by many as ineffective and unnecessarily intrusive on established internal compliance programs. …