Buried in the 2,300 pages of the new Dodd-Frank Financial Reform Act is a provision called Section 922 that provides for substantial financial rewards for any person who provides “original information” to the SEC that leads to a successful enforcement action relating to the violation of federal securities laws. The whistleblower may be an investor, an employee or other industry insider, or any other member of the public not employed by a law enforcement or regulatory agency. If the whistleblower’s tip leads to a monetary sanction of over $1 million, the whistleblower will be entitled to between 10% and 30% of the amount recovered by the SEC. The new law also provides whistleblowers with legal protection from retaliation, giving them the right to sue for damages if they lose their jobs or are blackballed by the industry. Together, these new provisions provide a powerful incentive for investors and financial professionals to report misconduct in the securities industry, which will hopefully have the long-term effect of deterring fraud and other abuses.
Since the Act was just signed into law on July 21, details of how it will be implemented are not yet available. However, it is likely that the SEC will issue regulations and procedures that are comparable to those under similar whistleblower programs set up by the federal government, including one for the IRS and another under the False Claims Act that is designed to ferret out abuse by government contractors. Lawyers who have found their professional niche in representing whistleblowers before other government agencies will soon be expanding their efforts to take advantage of the new law, but most such lawyers have little or no background dealing with the securities industry or the SEC. According to Craig T. Jones, a partner in the Atlanta-based law firm of Page Perry, “our firm has many decades of combined experience representing investors and other participants in the securities industry, and we look forward to working with lawyers who represent whistleblowers in dealing with the SEC.”
While it is possible for a whistleblower to go directly to the SEC without a lawyer, experience in prior whistleblower cases shows that the whistleblower benefits from legal representation in several ways. First and foremost is the issue of privacy, and the new law provides that a lawyer can serve as an intermediary with the government without disclosure of the whistleblower’s identity. Secondly, an attorney or law firm that is experienced in dealing with the SEC and securities law issues can be helpful to both the whistleblower and regulators in seeing that the proper information is communicated to the proper authorities. “There is more to the process than simply bringing together whistleblowers and regulators,” says attorney Jones. In addition to convincing the government that the whistleblower is credible and has meritorious information, the lawyer may have to help the government build its case against the violator and often has to prove that the whistleblower is an original source and is not just parroting information that is available in the public domain. Finally, if other whistleblower programs are any indication, there will be a fair amount of subjectivity on the part of the SEC in determining the amount of the cash reward, and an attorney can negotiate the best deal possible. Most attorneys who represent whistleblowers will do so on a contingent fee basis?that is, for a percentage of whatever reward the attorney is able to negotiate with the government.
“Anyone connected with the securities industry who thinks they might qualify should investigate their legal options,” says Jones. “We are certainly interested in talking with potential whistleblowers, as well as any lawyers who already represent them, to develop a strategy that maximizes both the legal protection and financial recovery afforded to the client. There are few lawyers who singularly possess all of the knowledge and skills necessary to represent whistleblowers who are also familiar with the securities industry, so these cases lend themselves to a team approach.”