Investments Dupery, SECURITIES AND EXCHANGE COMMISSION’S Whistleblowers, with Divider Streets In the Dodd-Frank Respond

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 underneath the securities laws that results in monetary sanctions exceeding $1,000,000.” Before the Dodd-Frank Act, there was no minimum whistleblower award – meaning that successful whistleblowers could risk their careers and still receive nothing – and the maximum award was just 10%. As a result, before the enactment of the Dodd-Frank Act, few whistleblowers were motivated in the future forward and those that did come forward were awarded with paltry sums.

Consider Madoff whistleblower, Harry Markopolis. His warnings to the SEC of the biggest securities fraud in American history went largely ignored, and he received nothing for uncovering the $50 billion fraud. Although it must be little consulation to Markopolis, underneath 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 in regards to the recent SEC payout to whistleblowers’ Karen and Glenn Kaiser, who received the biggest SEC whistleblower award currently – $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. As the $1M award was extremely large compared to previous sums paid to whistleblowers by the SEC, it would have been at the least almost three-times that amount underneath 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 your Kaiser whistleblower award will soon be paled by future SEC whistleblower awards. The Department of Justice estimates that $13 billion has been recovered underneath 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 newest SEC whistleblower provisions underneath the Dodd-Frank Act also expand the scope and types of fraud to which the program applies. Previously, the SEC only paid rewards for information regarding insider-trading, such as for example that paid to the Whistleblower awards  Kaisers for the Pequot insider-trading fraud. This might 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 of all, the newest provisions provide that the 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 must reveal her identity to be able to get the statutory share of the award. Exactly how these new provisions will soon be implemented is ultimately up to 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 will play out.

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