On July 21, the Dodd-Frank Wall Street Reform Consumer Protection Act was signed into effect, finally giving teeth to the SEC whistleblower program. The Act entitles securities fraud whistleblowers to between 10-30% of SEC recoveries for original information prompting “any judicial or administrative action brought by the commission under the securities laws that results in monetary sanctions exceeding $1,000,000.” Prior to the Dodd-Frank Act, there clearly was no minimum whistleblower award – and therefore successful whistleblowers could risk their careers and still receive nothing – and the utmost award was just 10%. As a result, ahead of the enactment of the Dodd-Frank Act, few whistleblowers were motivated ahead forward and those that did come forward were awarded with paltry sums.
Consider Madoff whistleblower, Harry Nashville Whistle Lawyer Markopolis. His warnings to the SEC of the largest securities fraud in American history went largely ignored, and he received nothing for uncovering the $50 billion fraud. Whilst it must certanly be little consulation to Markopolis, under the newly enacted Dodd-Frank Act, he would be eligible for at the least 10% of any disgorgement, pre-judgment interest, and civil-penalty that the SEC ultimately recovers from the Madoffs.
Likewise, there’s been muted buzz concerning the recent SEC payout to whistleblowers’ Karen and Glenn Kaiser, who received the largest SEC whistleblower award up to now – $1,000,0000 – for reporting Mrs. Kaiser’s ex-husband, David Zilkha, for insider-trading. Zilkha, a former Microsoft employee, allegedly gave insider-information about Microsoft to hedge-fund manager, Arthur Samberg, at Pequot Capital. While the $1M award was extremely large in comparison to previous sums paid to whistleblowers by the SEC, it could have been at the least almost three-times that amount under the new Dodd-Frank provisions (the Pequot SEC settlement was $28 million). And if the beefed-up SEC whistleblower program is even near to as promising as its cousin – the False Claims Act – then the Kaiser whistleblower award will soon be paled by future SEC whistleblower awards. The Department of Justice estimates that $13 billion has been recovered under the federal False Claims Act considering that the act was overhauled in 1986 and that more than $2 billion has been paid to whistleblowers.
The brand new SEC whistleblower provisions under the Dodd-Frank Act also expand the scope and forms of fraud to which this system applies. Previously, the SEC only paid rewards for information regarding insider-trading, such as for instance that paid to the Kaisers for the Pequot insider-trading fraud. This may be particularly important in the area of Foreign Corrupt Practices Act investigations, which may have international implications and have historically amounted for a number of the SEC’s largest settlements and judgments (e.g., in 2009 KBR paid $402 million in criminal fines; in 2008 Siemens paid $450 million).
Perhaps most importantly, the newest provisions provide that a whistleblower’s identity might be protected and held confidential if the whistleblower reports its original information to the SEC by and through his or her attorney. After the investigation is concluded, however, a whistleblower will have to reveal her identity to be able to receive the statutory share of the award. Just how these new provisions will soon be implemented is ultimately as much as the SEC and has yet to be determined. Pursuant to Section 924, the SEC must promulgate rules and regulations for implementing the whistleblower reward and protection provisions of the Dodd-Frank Act within 270 days of its enactment – on or before April 18, 2011. Time will tell how it’ll play out.