Whistleblowers Need Encouragement, Not Roadblocks: The Dodd-Frank Act Expanded Existing Whistleblower Programs, Providing Cash Rewards for Significant Information Given to the SEC. despite These Efforts to Stimulate Whistleblowing, Companies Are Putting Limits on How Much (or How Little) Their Employees Can Report Fraud
Verschoor, Curtis C., Strategic Finance
It's well understood that a whistleblower is the most important source of evidence in detecting fraud and other misdeeds and convicting the criminal or enforcing a civil statute. The whistle-blower program at the U.S. Securities & Exchange Commission (SEC) has allowed many individuals to report securities laws violations. But companies and their counsel are reportedly impeding would-be whistleblowers in violation of the law. In addition, the Internal Revenue Service (IRS) and U.S. Commodity Futures Trading Commission (CFTC) whistleblower initiatives appear to require streamlining to improve their effectiveness.
The Dodd-Frank Act enables the SEC to pay cash to whistleblowers who report significant wrongdoing (more than $1 million in sanctions). In November 2012, then SEC Chairman Mary L. Schapiro reported, "In just its first year, the whistleblower program already has proven to be a valuable tool in helping us ferret out financial fraud. When insiders provide us with high-quality road maps of fraudulent wrongdoing, it reduces the length of time we spend investigating and saves the agency substantial resources."
The second cash award under the SEC's whistleblower program was announced June 12, 2013. The SEC will award three whistleblowers 15% of the total amount recovered by the government in return for tips and information they provided to help the SEC and the Justice Department stop a sham hedge fund. The total reward is expected to amount to approximately $125,000. Whistleblowers are paid from the SEC's Investor Protection Fund, which held more than $453 million at the end of the 2012 fiscal year.
Additional and larger awards are expected in the future. The SEC Office of the Whistleblower had posted 76 orders in 2013 (through August), each with monetary sanctions exceeding $1 million. These include well-known defendants such as U.S. technology company IBM, Dutch bank ABN AMRO, Swiss bank UBS Securities, and French oil company Total S.A. According to whistleblower attorney Jordan Thomas, "There has been a green line that financial services professionals have historically feared to cross, but they are now more willing to break their silence because of the SEC Whistleblower Program." He added, "In the coming years, I predict many of the SEC's most significant cases will be the result of whistleblowers who report their tips to the agency."
A court decision in Houston, Texas, involving General Electric (GE) may confound the protective rights of whistleblowers to be shielded from retaliatory acts of their employer. The plaintiff was a former executive at GE who alleged he was fired because he was a whistleblower. GE, however, claimed that the executive never reported it to the SEC, blurring the SEC's definition of a "whistleblower." The court stated that "without any allegation that he reported a securities-law violation to the SEC, [the plaintiff] is not a 'whistleblower' under Dodd-Frank." GE stated its "consistent position has been that employees should report internally first, with lawsuits and bounties reserved for instances where a company fails to respond appropriately, obliging employees to report to the SEC." The plaintiff 's attorney is contemplating an appeal to the U.S. Supreme Court.
The case hinges on the issue of whether the Dodd-Frank Act protects whistleblowers in general or just those who report misdeeds to the SEC. Several courts held earlier that all whistleblowers were covered under Dodd-Frank and thus were protected from reprisal. It appears that whistleblowers need legal representation to help determine the appropriate strategy, as recommended by the IMA[R] Statement of Ethical Professional Practice.
Another potential obstacle to the effectiveness of the SEC's whistleblowing initiative was pointed out in a May 8, 2013, letter to the SEC from whistleblower attorneys David J. Marshall and Debra S. …