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Dodd-Frank’s buried whistleblower laws. Are you ready to blow the whistle for big money?

Thanks to Gregg Wirth, editor of Securities Litigation Report newsletter, for pointing out that the Dodd-Frank Act provides plenty of new incentives for whistleblowers, including big payouts and, best of all, anonymity. Harry Markopolos, the heroic whistleblower of Bernie Madoff’s $65 billion Ponzi scheme, would be deserving of some major moolah under the new law, just as one example.

Today, the SEC must now supply monetary awards to qualified whistleblowers whose information is integral to the successful resolution of an SEC enforcement action, according to the latest September issue of SLR. We excerpt part of that here:

Under the new law, the SEC will determine the amount of the award—between 10% and 30% of the monetary sanctions imposed—based on its consideration of several factors, including: 1) the significance of the information; 2) the degree of assistance provided by the whistleblower; 3) the SEC’s interest in deterring the laws allegedly violated; and 4) any other factors the SEC considers relevant.

To be eligible to receive an award, the whistleblower must meet certain conditions, according to the SLR article penned by Rebecca M.Katz, a partner in the New York law firm of Bernstein Liebhard LLP, and David Harrison, an associate at the firm. First, the whistleblower must disclose original information, that is, “information derived from independent knowledge and analysis that is not already known to the SEC.” Second, no double-dipping on the job: the whistleblower must not be a member of a regulatory or law enforcement organization, must not have committed a crime related to the information disclosed, must not have obtained the information from an audit, and must submit all information required by SEC rule.

The determination of an award by the SEC is reviewable by a federal court of appeals under an abuse-of-discretion standard. However, the amount of the award is not appealable provided it falls within the percentage range of monetary sanctions set by the statute, SLR reports.

The Dodd-Frank Act also creates a private right-of-action for whistleblowers who are the targets of employer retaliation for reporting securities violations. These aggrieved whistleblowers can bring their action in federal court, where the remedies include reinstatement, two times backpay, and costs and fees against their employers.

There is a time limit. Under Dodd-Frank’s statute of limitations, whistleblowers must bring the action within six years of the act, or within three years of when facts material to the action taken by the employer areknown or reasonably should have been known by the whistleblower.

To further protect whistleblowers, the Dodd-Frank Act includes a confidentiality provision which prohibits the SEC and its employees from disclosing any information “which could reasonably be expected to reveal the identity of a whistleblower,” unless disclosure to a defendant is required in connection with a criminal proceeding, or a public proceeding instituted by the SEC.

Whistleblowers Anonymous

Whistleblower bounties, and protection from retaliation, however, are nothing new. But the Dodd-Frank Act does something unique. It guarantees anonymity to the whistleblower. Whistleblowers may remain anonymous under the Dodd-Frank Act provided they are represented by counsel. Counsel can then submit the complaint and necessary paperwork in his or her own name, rather than in the name of the whistleblower. Best of all? Whistleblowers are not even required to disclose their identity to the SEC until payment of an award!

The provision is somewhat buried in the new financial reform bill, but now those who engage in “gaming” should beware that those with certain inside knowledge now have a strong incentive to switch to the role of “referee,” according to Charlie Hess at Inferential Focus. He writes: “Should we expect whistles to start blowing?”


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