The new whistleblower program that pays big cash rewards for tips about investment fraud has already resulted in a large number of high quality tips to the SEC, but it has also gotten the attention of Wall Street. As the SEC tries to implement regulations and procedures to carry out the program, several large companies have urged the agency to adopt a requirement that whistle-blowing employees first report their complaints to their employer before going to the government. They argue that such a requirement would give employers an opportunity to correct problems without SEC intervention, but whistleblower advocates argue that giving employers a heads up would also give them an opportunity to destroy evidence, pressure employees to keep quiet, and get their defense together.
“I doubt that this proposal will be adopted by the present SEC administration,” says Craig T. Jones, a partner at the Atlanta law firm Page Perry, “because it is wholly inconsistent with the whistleblower protections that Congress built into the Dodd-Frank Act, such as the provision that prohibits retaliation again whistleblowers and gives employees as right to sue their bosses if they are discriminated against for blowing the whistle.” But Jones also points out that the advance reporting requirement, proposed by a handful of big companies including Google and GE, would apparently only apply to complaints by employees against their employers. “Even if it were adopted,” says Jones, “it would not apply to whistleblower tips made by investors, which are also allowed under a broad reading of the Act.”
This is not the only attack that has been mounted against the new SEC whistleblower program, which was created by last year’s Dodd-Frank financial reform legislation. Republicans in Congress have so far blocked funding for new positions requested by the SEC to implement the program, but the SEC has begun implementation with existing staff and resources. SEC Director Mary Schapiro has stated that she strongly supports the program, and it has already begun to generate promising leads. A recent report by CNBC said that by the SEC expects to receive 30,000 tips this year, quoting SEC Enforcement Director Robert Khuzami as saying “we’re gonna get information hopefully sooner on in the life cycle of a fraudulent scheme, so there’s less investor loss, less harm.”
According to attorney Jones, whose law firm represents investors in fraud and suitability claims against investment firms, “the beauty of the whistleblower program is that it evens the playing field. To the extent that Wall Street firms have a financial incentive to cut corners and skirt legal requirements, the new law gives investors and employees a financial incentive to report wrongdoing by those firms. That makes the SEC’s job easier and ultimately promotes fairness in the market.” Page Perry is based in Atlanta but represents investors all over the country.
The financial incentive for whistleblowers is the prospect of lucrative cash awards, ranging from $100,000 into the millions, depending on the amount of monetary penalties that the SEC recovers from the firm. For any recovery over $1 million, the SEC is required to pay between 10 and 30% of the recovery to the whistleblower. Whistleblowers are allowed to funnel information and negotiate through lawyers in order to protect their anonymity, and most lawyers will provide such representation on a percentage or contingent fee basis. The law is designed to protect the confidentiality of whistleblowers while compensating them in proportion to the magnitude of the enforcement action that they make possible, but the law also protects them from retaliation in the event that it is not possible to protect their confidentiality. “For this reason,” says Jones, it makes sense for whistleblower’s lawyers to team up with employment lawyers?as well as with securities lawyers who can educate the SEC on potential violations?in order to provide the optimal representation of the client, particularly where there is the potential for a large award.”