More than a year after it was created by the Dodd-Frank financial reform act, the U.S. Securities and Exchange Commission (SEC) opened its Office of the Whistleblower on August 12, 2011. According to a statement released by SEC Director of Enforcement Robert Khuzami, “early and quick law enforcement action is the key to preventing securities fraud and avoiding investor losses, and the whistleblower program gives us the tools to help achieve that goal.” Investor rights attorney Craig T. Jones of Page Perry in Atlanta agrees: “This program will catch fraud sooner because it gives Wall Street insiders a significant cash incentive to be the first to come forward with information about abusive practices. Not only will whistleblowers and their attorneys profit from doing the right thing, but the investing public as a whole will benefit.”
The new program allows tipsters to blow the whistle on financial industry wrongdoing while protecting the identity of the whistleblower by allowing him or her to funnel information to the SEC through a lawyer. If the tip results in a fine or other monetary payment in excess of $1 million, the SEC must share somewhere between 10% and 30% of the recovery with the whistleblower and his or her lawyer?who typically agree to work on a contingency percentage?depending upon how helpful the tip was in bringing about the enforcement action. In addition to funneling the information to protect the anonymity of the source, the whistleblower’s lawyer also has the important job of helping the SEC build its case and negotiating the best possible reward. The lawyer may also represent the whistleblower with respect to possible claims against the subject of the investigation, including a possible securities fraud claim if the whistleblower is an investor or a possible employment law claim if the whistleblower was an employee of the target company. The Dodd-Frank law prohibits discrimination or retaliation against whistleblowers and gives them the right to sue if it happens.
Similar whistleblower programs set up by other federal agencies have grown dramatically in popularity?and the amounts paid out?over the past two decades. CNBC recently reported that there were 43 federal whistleblower cases in 1988 resulting in $2 million in penalties and $97,000 in payments to whistleblowers, but in 2010, there were 573 cases generating $2.3 billion in penalties and paying more than $385 million to whistleblowers. Now that whistleblower rewards are available to those who expose abuses in the securities industry, those numbers are expected to go much higher.
“Anyone connected with the securities industry who thinks they qualify should investigate their legal options,” says attorney Jones. “A lot of law firms handle whistleblower claims, but few have our background in the securities industry. Since few firms are experienced in both securities matters and whistleblower representation, it makes since for law firms to work together where the potential reward is substantial enough to allow fee splitting between lawyers at no added cost to the client.” Jones’ law firm, Page Perry, is based in Atlanta but handles claims against investment firms all over the country.