A decade ago, when die collapse of Enron1 and scandals at Tyco2 and WorldCom3 shook Wall Street, Congress reacted by enacting the now much-maligned4 Sarbanes-Oxley Act (SOX).5 Among SOX's more prominent features was the first federal enactment providing whisdeblower protection for insiders with knowledge of financial fraud.6 SOX criminalized retaliation against whisdeblowers,7 creating a new administrative remedy for aggrieved tipsters under the auspices of die Occupational Safety and Healdi Administration (OSHA).8
Ten years later, when the collapse of America's shadow- banking system9 led Wall Street to receive an unprecedented federal bailout, Congress once again10 reacted with a legislative hydra,11 the DoddFrank Wall Street Reform and Consumer Protection Act (DoddFrank).12 As before, whisdeblowers took center stage. In DoddFrank, however, whisdeblowers not only receive protection from termination or adverse employment action but can also lay claim to financial bounties for bringing information to the Securities and Exchange Commission (SEC) that leads to successful securities enforcement actions.13
With the recent release of the SECs final rule 2 IF14 to govern the application of Dodd-Frank § 922,15 which embraces whistleblower bounties for securities fraud tipsters,16 it is appropriate to reflect on the nature and meaning of this provision. Law professors had called for whisdeblower bounties for financial fraud tipsters in the decade diat followed the enactment of SOX. Pamela Bucy's 2002 article, Private Justice,17 made the case for private litigation of securities fraud disputes, as well as citizen environmental suits.18
I argued in 2007 in Beyond Protection19 that the SOX framework - which provides security against retaliation but little positive incentive to encourage whistleblowing - was inadequate motivation for those with access to information about serious corporate fraud. I argued that payments could be made out of the "Fair Funds" collected by the SEC to provide restitution for injured investors.20 In a follow-up piece in 2009, False Claims, Not Securities Fraud,21 I criticized die lukewarm embrace of whisdeblower bounties in the Obama Administration's Investor Protection Act, which became the precursor of Dodd-Frank. Unfortunately, the initial proposed language left a high degree of discretion in the hands of the SEC. Historically, the Commission had rarely exercised its discretion to pay tipsters in the insider trading context, where bounties had long been audiorized.22 In a paper written before the enactment of Dodd-Frank, Tomas Arnold argued for a mandatory whisdeblower bounty scheme for financial fraud tipsters providing original information that was a "substantial factor" in leading to a corporate restatement of earnings.23
Dodd-Frank's new whisdeblower provision represents a victory for those who had called for whisdeblower bounties in die securities fraud context. Unfortunately, Dodd-Frank's embrace of this policy proposal may prove to be, like SOX before it, a missed opportunity. Although Dodd-Frank drew some of its inspiration from the False Claims Act (FCA)24 - die "gold-standard"25 of whisdeblower protection and bounty rewards - it fell short in one critical respect. While whistleblowers were provided with a process for seeking rewards, Dodd-Frank failed to embrace the crucial qui tarn26 provisions of the FCA that allow whistleblowers to litigate cases independently from federal action. Perhaps because of the power of the Wall Street lobby,27 which regularly puts the "Military- Industrial Complex" to shame,28 whisdeblowers under Dodd-Frank will remain spectators in most stages of the enforcement actions triggered by their revelations.
This Article addresses the new whisdeblower provisions along three dimensions. First, does Dodd-Frank embrace the ideal version of whisdeblower bounties? Second, to what extent can die new statute be expected to change behavior in corporate America and alter the securities enforcement landscape? …