• SEC Whistles Grow Louder
  • September 17, 2013 | Author: Rebecca M. Katz
  • Law Firm: Motley Rice - New York Office
  • More than two years have passed since the launch of a new Securities and Exchange Commission (SEC) whistleblower program established by the 2010 Dodd-Frank Act - a program that offers a bounty of 10 to 30 percent of recovered sanctions to whistleblowers that significantly assist an SEC investigation, along with increased protections from employer retaliation. Since that time, the SEC has issued only two awards to whistleblowers.

    The first award of $50,000, announced on Aug. 12, 2012, was granted to a whistleblower who helped the SEC in stopping a multi-million dollar fraud. The second payout of more than $125,000 was announced ten months later on June 14, 2013, and will be split between three claimants in a case against a faux investment fund whose CEO was jailed for fraud.

    As an attorney with years of experience representing whistleblowers, I will be the first to acknowledge that the SEC’s rate of issuing awards has not met initial expectations. As an advocate, I want justice for my clients ASAP, but the reality is that the pace of this type of litigation is not unique. Justice can take time.

    I know I am not alone in wanting SEC whistleblower submissions to be resolved more quickly. Perhaps more than anyone else, the SEC wants this program to pick up speed. Sean McKessy, Chief of the SEC’s new whistleblower office, has stated the same desire on more than one occasion, and I am confident that his team is doing everything they can to fast-track the program.

    Besides the potential for awards, there are at least three positive signs that things are improving for potential whistleblowers since the inception of the SEC program.

    1. More media attention has been directed toward those blowing the whistle. Before the Dodd-Frank Act, the plight of whistleblowers was often unseen except for a few blockbuster cases. After the launch of the SEC whistleblower program, there has been a steady stream of media attention focused on whistleblower actions and rights. While some of the information out there should be taken with a grain of salt, whistleblowers, now more than ever, have a better chance of knowing their rights and how to seek protection. This claim is supported by the thousands of tips the SEC’s Whistleblower Office has received since the program launched.
    2. Corporations have been forced to examine their business practices and compliance programs. It is no secret that some corporations have been exceedingly hostile towards the laws that enacted the whistleblower program, because they believe the regulations place undue burdens on their operations. While I have a different view, most will agree that the laws have caused many affected corporations to reflect on how to handle questionable conduct and whether their compliance procedures are up to par. As a result, some companies have improved their corporate governance and certain businesses have acknowledged beefing up their internal reporting systems. If these laws can serve as a deterrent to stem bad behavior and create a more transparent work environment, then employees, employers and investors are benefiting from the SEC whistleblower program.
    3. A legal road map is developing that will benefit future whistleblowers. Some of the current buzz regarding whistleblowers has to do with recent court decisions determining whether a person is entitled to whistleblower protections if he or she chooses not to report the alleged wrongdoing to the SEC first. In a recent federal court case brought in Texas, a terminated employee argued that he should be protected under the Dodd-Frank Act’s anti-retaliation provisions, after reporting internally that his employer, G.E. Energy (USA) LLC, had allegedly engaged in bribery in violation of the Foreign Corrupt Practices Act. G.E. argued that the former employee did not qualify as a whistleblower under the SEC whistleblower statute because he had not brought the claims to the SEC. In a surprising decision, the Fifth Circuit Court of Appeals agreed with G.E.’s position.

    While this court ruled against providing protections to a whistleblower who did not first report the alleged misconduct to the SEC, five other district courts facing the same question have taken an expansive view of the whistleblower protections, ruling that the whistleblowers were entitled to the Dodd-Frank Act protections regardless of whether they reported the alleged misconduct to the SEC. Thus, the momentum across the country is clearly in favor of whistleblowers. Moreover, the Fifth Circuit’s ruling may be appealed to the Supreme Court.

    The Fifth Circuit ruling, however, highlights a major issue that potential whistleblowers should consider. Because the whistleblower law is developing, with courts across the country potentially taking conflicting positions, it is critical to seek the advice of a competent attorney when confronted with a situation that might require blowing the whistle. The average employee may not be aware of all available options, or the processes needed to be taken in order to preserve his or her rights. Indeed, some work situations can be complicated and frustrating, and it is not recommended that whistleblowers go it alone. Seeking trusted legal advice from the outset could save whistleblowers time and frustration down the road, particularly if it is a long journey.

    The SEC whistleblower program has assisted in alleviating some corporate fraud and has forced many corporations to take a serious look at their reporting process. More awards are sure to come, but in the meantime, this is a program worth watching and supporting.