Dodd-Frank: Incentivising whistleblowing

Author:

Bettina B Plevan and Previn Waran
Proskauer Rose LLP
New York

In the wake of the economic crisis, recently-promulgated legislation will dramatically alter the existing securities enforcement landscape in the United States. One such example, the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21 2010 by President Obama, represents the most significant expansion of government power over banking and markets since the Great Depression. While numerous aspects of the Act have already sparked considerable commentary, somewhat overlooked have been those provisions creating expansive protections and incentives (bounty awards) for whistleblowers in the financial services industry. The Dodd-Frank Act augments existing whistleblower protections under the Corporate and Criminal Fraud Accountability Act of 2002 (known as Sarbanes-Oxley), and furnishes new private rights of action for whistleblowers under the Securities Exchange Act of 1934 and the Commodity Exchange Act of 1936.

New whistleblower provision

The Dodd-Frank Act provides a new private right of action for financial services employees retaliated against for having disclosed information about fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service. The provision applies to any "covered person or service provider", a term that encompasses diverse entities in the financial services industry. The Act's whistleblower protections will extend to all "covered employees", specifically prohibiting retaliation by any covered entity against an employee who engaged in protected activity. Specifically, the Act applies to any employee who has (i) provided or is about to provide information to the Bureau of Consumer Financial Protection or any other government authority or law enforcement agency regarding any violation of the Dodd-Frank Act's consumer protection provisions as well as any rule, order or standard prescribed or enforced by the Bureau; (ii) testified or will testify in a proceeding resulting in the administration or enforcement of the Dodd-Frank Act's consumer protection provisions; (iii) filed or instituted any proceeding under federal consumer financial law; or (iv) objected to, or refused to participate in any activity, practice or assigned task that the employee reasonably believes to be a violation of any law, rule, standard or prohibition subject to the jurisdiction of, or enforceable by, the Bureau.

Of note to legal practitioners, the Dodd-Frank Act whistleblower regime adopts a relatively lenient burden of proof. Employees are required merely to demonstrate by a preponderance of the evidence that the protected conduct was a "contributing factor" to the employer's retaliatory act. Under other federal anti-retaliation statutes, by contrast, an employee must satisfy the arguably more rigorous burden of establishing that the impermissible consideration was a "determining" or "significant" factor behind the employer's reprisal. Where an employee succeeds in making this showing, the burden then shifts to the employer to demonstrate by "clear and convincing evidence" that it would have arrived at the same employment decision even in the absence of the employee having engaged in protected conduct. This burden is higher than the framework under anti-discrimination laws where an employer need only articulate a legitimate, non-discriminatory reason for its decision to return the burden to the employee-plaintiff to show discriminatory intent and pretext.

Expansion of Sarbanes-Oxley protections

The Dodd-Frank Act further provides that Sarbanes-Oxley's whistleblower provision will apply to employees of any subsidiaries or affiliates of publicly-traded companies whose financial information is contained in the publicly-traded company's consolidated financial statements, an issue on which courts had previously been divided with respect to the reach of the Sarbanes-Oxley's whistleblower protection provision.

New private rights of action

The Dodd-Frank Act also amends the Security Exchange Act 1934 and Commodity Exchange Act 1936 to create new private rights of action for employee victims of retaliation as a result of reporting matters to the Securities and Exchange Commission or Commodities Futures Trading Commission. Notably, these rights of action are in addition to an employee's rights under Sarbanes-Oxley and the Dodd-Frank Act's whistleblower provisions, and include provisions highly favourable to employees. For example, under the amendments, complainants are not required to adhere to any administrative prerequisites before commencing a lawsuit against the whistleblower's employer. By contrast, under Sarbanes-Oxley and the whistleblower provisions in the Dodd-Frank Act, it is a mandatory prerequisite to an employee's filing of a suit that the employee first file a complaint with the US Department of Labor. Additionally, the amended Acts provide employees greater incentive to report fraud and other misconduct by allowing successful employees to obtain expanded remedies, such as double back-pay with interest, litigation costs, expert witness fees, reasonable attorneys' fees and punitive damages.

Financial incentives to report fraud

Under Section 922 of the Dodd-Frank Act, employees can receive a bounty for providing original information regarding a violation of securities or commodities laws that leads to monetary sanctions exceeding $1 million. Such an award may be between 10% and 30% of the total monetary sanction imposed, which, as recent events have shown, can amount to large figures. Indeed, in a frank statement of its intent to implement the Dodd-Frank Act's whistleblower protections zealously, the SEC announced, a mere two days after the Act's passage, a $1 million bounty in an insider trading case. The significance of this change is demonstrated by the fact that according to the announcement, in the prior 20 years the SEC had awarded a total of only $160,000 in bounties to five claimants.

There are, however, certain limits on recovery under the incentive provision. A whistleblower cannot receive a bounty if he or she (i) is convicted of a criminal violation based on the underlying conduct; (ii) gains the information through the performance of an audit of financial statements; (iii) fails to submit information to the SEC as required by the rules; or (iv) works for law enforcement, regulators or a self-regulatory organisation.

As a final incentive to reporting in pursuit of monetary award, the SEC is obliged to keep a whistleblower's identity confidential, and a whistleblower may remain anonymous until receipt of payment if represented by counsel when making a claim for the bounty.

Serious repercussions

Given the tremendous incentive to report fraud and other misconduct engendered by the Dodd-Frank Act and its whistleblower protections, employers would be wise to respond with heightened caution upon learning that one of their employees has reported to, or is assisting, a financial services administrative oversight agency. Specifically, it would behoove employers to evolve robust and clearly-articulated anti-retaliation policies, and, perhaps more importantly, to communicate such policies actively to their employees and managers. Although such policies will undoubtedly encourage financial services employees to blow the whistle on unlawful acts perpetrated by their employers, by emphasising the protected nature of these reports, managers will be deterred from engaging in reprisals or other adverse employment actions that could lead to lawsuits brought by such employees against their employers.