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Big Payoffs Possible for Securities Fraud Whistleblowers Thanks to

Aug 16, 2010 | Parker Waichman LLP

source hold . The law empowers the U.S. Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) to award between 10 percent and 30 percent of any monetary sanctions that exceed $1 million to whistleblowers who provide information leading to a successful enforcement.

According to a report in the Financial Times, the so-called “Wall Street Tip-Off Law” is expected to lead to a sharp increase in tips from senior employees and third parties with knowledge of securities fraud.

“The scale of the awards reflects the high quality of whistleblower we hope to get – people within a company, broker or other regulated firm that we might not have heard from before,” Stephen Cohen, an SEC official, told the Financial Times. “We’re expecting a tremendous response.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in response to the recent recession, which holds the record as the worst economic meltdown experienced by the US since the Great Depression. Securities malfeasance played a large role in the downturn. Until Dodd-Frank was enacted, the SEC could only provide a whistleblower award for information regarding insider trading. What’s more, it limited the award to a maximum of 10 percent of the recovered amount.

Under Dodd-Frank, a whistleblower can be awarded for providing “original information” that leads to “any judicial or administrative action brought by the commission under the securities laws that results in monetary sanctions exceeding $1,000,000.” Whistleblower payments can be made in any type of case that results in a civil penalty or disgorgement, according to a recent New York Times report. Applicable cases could include broker-dealer violations, corporate disclosure cases, accounting fraud and even violations of the Foreign Corrupt Practices Act, which is part of the federal securities law, the Times said.

Under the new law, whistleblowers can report fraud anonymously and employers are prohibited from firing, demoting, suspending, threatening, harassing or discriminating against whistleblowers. An employee who is retaliated against either by discharge or “other discrimination” as a result of their action may sue in court for reinstatement at the same seniority level, double back-pay owed to the individual with interest, as well all costs and reasonable attorney’s fees.

To be eligible for an award, a whistleblower’s information must lead to a successful SEC or CFTC enforcement. Regulators will determine the extent of all awards based on a number of factors, including the significance of the information provided and the assistance given by the whistleblower.

According to a report in The Washington Post, details of the whistleblower program will be hammered out during a 270-day rulemaking process, for which the SEC has requested comment. It is not known when the SEC will start taking whistleblower reports, the Post said.

Another report in Forbes Magazine recommended that anyone who wants to take advantage of the new “Wall Street Tip-Off Law” consult with an attorney to make sure their rights are protected. It should also be noted that anyone who wants to be an anonymous whistleblower is required to be represented by an attorney.


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