Opening the Floodgates: The Dodd-Frank Whistleblower Provisions’ Impact on Corporate America

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This provision of Sarbanes-Oxley worked.  Employees registered complaints and Audit Committees considered them and, in many instances, retained counsel and experts to investigate them.  Companies did not set up bounties, however, and are poorly positioned to compete with the SEC’s promise of a 15 to 25 percent cut of any potential fine.  Let’s say you were a well-intentioned employee of a publicly listed company and are distressed when you learn that high-ranking employees at your company are bribing government officials in foreign countries.  Do you call the audit committee hotline and sleep the sleep of the righteous?  Or do you contact the SEC’s brand spanking new whistleblower office and, perhaps someday, sleep in Gstaad after a day on the slopes?  In 2008, the SEC reached a settlement with Siemens AG for violations of the Foreign Corrupt Practices Act (FCPA) and obtained a $350 million disgorgement of profits.  Feel free to pause and do the arithmetic.  It is not unreasonable to assume that the Dodd-Frank whistleblower provisions will largely render moot the Sarbanes-Oxley audit committee procedures. 

FCPA—Where the Real Money Is:  Having mentioned the FCPA anecdotally, it’s appropriate to bring the point home.  Pursuant to the FCPA’s anti-bribery provisions, it is unlawful for any issuer, domestic concern, or person acting in the United States to offer anything of value to members of a foreign government, international organization, or political party for the purpose of: (1) influencing duties; (2) inducing them to use their influence to affect a foreign government’s or agency’s decision; (3) obtaining or retaining business for anyone; or (4) directing business to anyone. Fines and penalties for violating the FCPA tend to be higher than fines for violations of other aspects of the securities laws.  The reason for that is simple: The fines are driven by the profits a company makes by virtue of the wrongful conduct.  The SEC has made it clear through its public statements that it intends to focus on investigating and taking action on violations of the FCPA.  More importantly, the SEC has made the point clear through its enforcement program.  In 2010 alone, the SEC concluded 12 FCPA investigations and assessed monetary penalties totaling more than $360 million.

Putting aside the Goldman Sachs settlement of $550 million this year for alleged unlawful activity relating to the financial crisis, these numbers are staggering compared to standard SEC settlements.  Settlements in more typical SEC enforcement matters relating to insider trading and false financial reporting this year ranged from $20,000 to $28 million.  While whistleblower activity under the new regulatory regime will be robust in all areas, the FCPA will be the belle of the ball.

You Can Be a Whistleblower:  So can I.  Anyone can.  Renowned Enron whistleblower Sherron Watkins was an Enron employee and perhaps that created a perception that whistleblowers and corporate employees are one and the same.  That’s not an accurate association, however.  Dodd-Frank defines whistleblower as follows:  “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” [7] This is drafted broadly enough to encompass, for example, forensic accountants poring through public filings for perceived inaccuracies.  Could a competitor or customer become a whistleblower?  Sure.  Anyone can be a whistleblower, assuming they can dredge up information or an analysis indicating a violation of the securities laws.

Obvious Statements about the Future:  Although the SEC has work to do to flesh out the Dodd-Frank whistleblower provisions, for the first time the agency has the benefit of a significant incentive program for people to identify corporate wrongdoing.  The infrastructure and rules the SEC puts in place to implement the law will be modeled after the successful DOJ and IRS bounty programs.  There will be hundreds of whistleblower complaints to the SEC annually, and the Division of Enforcement and the new whistleblower office will be under a severe burden to handle them all.  Numerous investigations will ensue, prompting companies to respond to the SEC investigations and, in some cases, initiate audit committee investigations about the allegations.  Follow-on class and stockholder derivative actions may be filed in reaction to SEC investigations.

Lastly, at some point in the next year or so, it is quite likely that the SEC will announce a substantial bounty payment arising from the Dodd-Frank whistleblower initiative.  Then, the floodgates will truly open.

[1] See www.sec.gov for more information about the SEC’s Dodd-Frank implementation program and rulemaking/comment process.
[2] To see the Dodd-Frank text, go to http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html.
[3] See http://www.treas.gov/tigta/auditreports/2006reports/200630092fr.pdf.
[4] See http://www.phillipsandcohen.com/CM/Custom/Whistleblowers-for-SEC.asp.
[5] http://www.irs.gov/pub/whistleblower/annual_report_to_congress_september_2009.pdf
[6] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 §301, 116 Stat. 776 (2002)
[7] http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html

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