SEC Approves Whistleblower Rewards Program


The Securities and Exchange Commission has voted to allow whistleblower employees to go straight to the SEC with information about securities law violations without reporting it to their employer, and still collect the full amount of the monetary reward authorized by the Dodd Frank financial reform act, according to a May 25, 2011 article in InvestmentNews entitled “SEC lets whistle-blowers bypass internal programs.” The SEC approved the rule by a 3-2 vote on Wednesday, May 25, 2011.

The SEC crafted a rule that permits and incentivizes, but does not require, whistleblowers to first report violations internally, by permitting full rewards for people whose tips are reported internally and subsequently passed along on to the SEC. The SEC also expanded the time whistleblowers can preserve their rights while reporting to the company.

“Incentivizing — rather than requiring — internal reporting is more likely to encourage a strong internal compliance culture,” SEC Chairman Mary Schapiro was quoted as saying.

David S. Hilzenrath of the Washington Post had earlier reported that the SEC was expected to approve its proposed whistleblower rule, which is designed to reward those who report corporate wrongdoing to the SEC. Those who blow the whistle could receive from 10% to 30% of amounts over $1 million collected by the SEC through an enforcement action.

Advocates said the reward system and anti-retaliation provisions are necessary to encourage them to accept the risk of disclosing what they know. Whistleblowers risk the destruction of their careers and lives, losing their jobs and being subjected to litigation with its attendant attorney’s fees, costs, and aggravations. The federal False Claims Act contains similar whistleblower protections, which have been credited with bringing to light and correcting abuses in the pharmaceutical industry.

Reducing the amount of the reward for those who go straight to the SEC without reporting the violations internally ? an amendment favored by some companies ? would have discouraged people from coming forward, according to Lynn E. Turner, who has served as a corporate director and chief accountant at the SEC.

While corporate respondents argued that whistleblower rewards will encourage troublemakers to advance personal vendettas, observers correctly predicted that the SEC was unlikely to require them to go through corporate channels because of the well-documented risk of retaliation, and the risk that the SEC will not receive good information about bad acts.

The first case to go to trial under the Dodd Frank whistleblower provisions shows why strong whistleblower rewards are needed.

In that case, the whistleblower learned that his company’s CEO was diverting corporate assets to another company solely owned by the CEO. The whistleblower reported this to the company’s president, who informed the board of directors, which hired a law firm to investigate. The law firm confirmed the whistleblower’s allegations and reported the matter to the SEC.

The CEO fired the whistleblower, who sued for wrongful discharge under the Securities Whistleblower Incentives and Protection provisions of Dodd Frank. The company tried to get the case dismissed on the ground that the whistleblower did not personally report the matter to the SEC. The court denied the company’s motion to dismiss holding that the whistleblower’s joint action with others satisfied the reporting requirement.

Page Perry is an Atlanta-based law firm with an active practice in representing individuals in whistleblower situations and other employment disputes with firms in the financial services industry. The firm is currently involved in representing several employees in such disputes. Recently, the firm won arbitration awards for clients in employment disputes in the amounts of $1.7 and $3.9 million. For further information, please contact