23 July 2010
One key provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is a new bounty provision that will undoubtedly lead to more FCPA, accounting fraud, and trading investigations. The provision relates to Congress’ stated desire to increase regulatory enforcement remedies available to the Securities and Exchange Commission (SEC).
Specifically, newly enacted Section 21F of the Securities Exchange Act of 1934 creates a whistleblower program designed to provide lucrative monetary incentives for individuals who provide information to the SEC leading to any successful enforcement action. The provision enhances the prior bounty program, which permitted the SEC in its sole discretion to award up to 10 percent of any penalty it recovered in an insider trading case to any person who provided information that led to the imposition of the penalty.
Now, as part of Dodd-Frank, the SEC has 270 days from July 22, 2010, to promulgate rules that will require the SEC to provide an award to a qualifying whistleblower of no less than 10 percent and no greater than 30 percent of any sanction that the SEC imposes against a violator in an enforcement or related action as a result of “original information” “voluntarily provided” by the whistleblower. Importantly, Dodd-Frank authorizes this reward for information leading to any securities law violation (not just insider trading matters), including violations of the Foreign Corrupt Practices Act (FCPA) and cases of accounting fraud. Because of the disgorgement provision within the FCPA, the monetary amounts involved in many FCPA matters routinely are in the tens of millions of dollars and can reach into the hundreds of millions. Sanctions in recent accounting fraud cases have been on a similar scale.
The newly created whistleblower provision envisions a mechanism through which the SEC will richly reward a person who provides original information that is used to promote a successful recovery by the SEC. The law provides a flexible sliding scale which will enhance or decrease the award between 10-30 percent of the SEC’s recovery based on factors such as the significance of the information, the degree of assistance provided by the whistleblower, and the interest of the SEC in “deterring violations of the laws” through the awarding of these bounties. Until Dodd-Frank, the award of a bounty was totally discretionary upon the Commission and applied only in insider trading cases. Dodd-Frank now makes the award of a bounty an obligation of the SEC for any securities law violation upon the existence of various conditions.
Although the rules implementing the whistleblower provisions have not been promulgated, and are not due until April 2011, Dodd-Frank specifically provides that information provided to the SEC in writing by a whistleblower does not lose the status of “original information” solely because the information was provided prior to the effective date of the regulations. Thus, whistleblowers now have new incentives to provide information related to violations of the FCPA and other securities laws.
If the history of whistleblower incentives written into existing federal laws—such as the qui tam provisions of the False Claims Act—is any indication, it is highly likely that companies engaged in significant overseas business will face additional federal scrutiny because of whistleblower activity. This is notable because SEC enforcement to date has been increasingly aggressive. For instance, in May of this year, the Assistant Attorney General for the Criminal Division, Lanny Breuer, commented that since 2004 the Department had resolved 37 corporate FCPA matters totaling more than $1.5 billion in fines and restitution. The SEC’s efforts in accounting fraud cases have also been notable, with sanctions increasing dramatically following the enactment of the Sarbanes-Oxley Act. Further, the government has dedicated new attorneys and agents to the investigation and resolution of securities law allegations.
Creating legislation and promulgating rules that will provide a mechanism to reward individuals who turn information over to the SEC are likely to bolster the already considerable efforts that the government has made. Accordingly, now more than ever, corporations must ensure that they have strong compliance programs and internal controls that will minimize the likelihood of whistleblower allegations directed against them.
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