Ten years after the enactment of the Dodd-Frank Act, the public benefits of the resulting Securities and Exchange Commission whistleblower reward and protection program are undeniable. Yet, despite the program’s great success, changes are needed to ensure it becomes more effective in the next 10 years.
Congress should support a bipartisan bill introduced last year by Sen. Charles Grassley (R-Iowa) that offers two important legislative fixes: protection from job retaliation for whistleblowers who report concerns about possible securities or commodity law violations to a supervisor or other relevant individual, and deadlines for the SEC and the Commodity Futures Trading Commission to issue initial award determinations.
Also needed is a mechanism that would enhance the public-private partnership between the SEC, CFTC, and the whistlebower’s team, much like the False Claims Act qui tam provision.
Dodd-Frank—A Whistleblower ‘Game Changer’
In the last decade, the whistleblower program has been a “game changer” for enforcement, SEC officials have said. Thousands of whistleblowers from around the world report securities law violations to the SEC every year, ranging from crooked financial accounting to stock manipulation to corporate bribery.
With the help of whistleblowers, the SEC has collected more than $2 billion in monetary sanctions and has stopped many serious and costly violations that the agency otherwise would never have known about.
Although the SEC is required by law to keep whistleblowers’ identities confidential, several whistleblowers or their attorneys have publicly announced whistleblowers’ involvement in a number of high-profile SEC enforcement actions. These include:
- Bank of New York Mellon’s $716 million settlement for what it admitted were fraudulent foreign exchange trading practices.
- Bank of America’s $415 million settlement of charges against its Merrill Lynch brokerage unit for misusing client funds and failing to safeguard customer securities.
- JPMorgan Chase’s $367 million settlement of SEC and CFTC charges that it had failed to inform wealth clients about its conflicts of interest.
Efforts to Weaken the SEC Whistleblower Program
When the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted on July 21, 2010, the provisions that created the whistleblower program at the SEC and a similar one at the CFTC escaped public notice, for the most part.
Dodd-Frank offers whistleblowers a reward, based on 10 percent to 30 percent of the sanctions collected, when the SEC or CFTC collects more than $1 million in sanctions as a result of the whistleblower’s information. Since its first whistleblower award in 2012, the SEC has awarded $505 million to 87 individuals.
Dodd-Frank also promises whistleblowers confidentiality and strong legal recourse if they suffer employment retaliation.
Once the SEC started to set up the whistleblower program, business interests woke up to the impact whistleblowers could have and tried to weaken the program.
First they attempted to persuade the SEC that whistleblowers should be required to report their concerns internally first, claiming that employees would run to the SEC rather than use internal compliance programs. Such a requirement would have discouraged many whistleblowers from coming forward.
Recognizing this, the SEC adopted a rule to encourage internal reporting by offering those who report internally first a bigger share for their reward.
Then a court fight erupted on whether whistleblowers were protected if they hadn’t reported their concerns to the SEC before they were retaliated against, even if they had reported internally. In a blow to whistleblowers, the U.S. Supreme Court ruled in Digital Realty Trust v. Somers in 2018 that Dodd-Frank protects from retaliation only those whistleblowers who report to the SEC before they suffer retaliation.
Although corporate interests won that case, they effectively lost the war. Whistleblowers are now much more likely to go directly to the SEC rather than report possible securities violations internally, since that is the only way they can protect themselves under the anti-retaliation provisions of Dodd-Frank.
Changes Needed in the SEC Whistleblower Program
Last year, Sen. Chuck Grassley (R-Iowa) proposed two important legislative fixes for the SEC program in a bipartisan bill.
The Whistleblower Programs Improvement Act would protect from job retaliation whistleblowers who report concerns about possible securities or commodity law violations to a supervisor or other relevant individual. This would close the dangerous exception for whistleblower protection that the Digital Realty ruling exposed.
The proposed legislation also would create needed deadlines for the SEC and the CFTC to issue initial award determinations. The SEC in particular suffers from a huge backlog of whistleblower cases.
That change would be significant and make a meaningful difference for whistleblowers. The SEC and CFTC often have taken more time to make decisions about individual whistleblower awards than they have taken to investigate the whistleblower’s allegations and resolve an enforcement action.
Separately, the SEC would benefit from the creation of a mechanism that would create a stronger public-private partnership between the agency and the whistleblower’s team, much the way the False Claims Act has so successfully done.
The additional resources for investigation and litigation that whistleblowers and their counsel provide in False Claims Act cases have made a substantial difference in recovering funds lost to the federal Treasury because of frauds on government programs. “Qui tam” cases brought by whistleblowers under the False Claims Act have recovered more than $50 billion.
For the SEC and CFTC, this partnership should be allowed on at least a selective basis. Deepening the collaboration between the government and whistleblowers would enhance the government’s limited resources and yield greater success. The False Claims Act has demonstrated that by doing so, the public comes out ahead.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Erika A. Kelton is a whistleblower attorney and partner at Phillips & Cohen LLP, which exclusively represents whistleblowers. She represented the major whistleblowers in two record-setting cases against GlaxoSmithKline ($3 billion settlement) and Pfizer ($2.3 billion settlement). She also represented a whistleblower who received one of the SEC’s largest whistleblower awards, more than $32 million.