The Dodd-Frank Bounty Provisions: A Former FBI Agent’s Perspective

By Kevin Knierim[1]

Now that the Securities and Exchange Commission’s (“SEC’s”) Whistleblower Office website is (finally) open for business, uncertainty and curiosity surround the long-debated enforcement tool’s implementation. Preceded by a contentious comment period that did little to illuminate the parameters of the Dodd-Frank Act’s incentive program, the proof will be in the proverbial pudding. A former FBI agent turns a criminal investigator’s eye on the unfolding process and its participants.

THE PROCESS

Civil-to-Criminal Referrals

The Dodd-Frank whistleblower bounty provisions have been widely heralded as a panacea for government enforcers. But not so fast….

Optimistic expectations notwithstanding, experienced investigators and prosecutors are concerned that the new Dodd-Frank bounty provisions may actually impede the existing criminal referral process.

By way of some background: collaboration between the SEC, which handles the civil aspects of anti-bribery enforcement, and the Department of Justice (“DOJ”), which deals with criminal matters, enjoys a long and productive history. The SEC has a well-established practice of referring cases to the DOJ where there is strong evidence suggestive of criminal intent.

The concern is that, if the volume of SEC referrals under Dodd-Frank increases, but the core reliability of those referrals is not maintained, the new bounty provisions, designed to promote successful enforcement actions, may, in fact, to some extent backfire. More specifically, real-world experience teaches that the DOJ may begin to approach such referrals skeptically, declining to prosecute a greater percentage than under the old system. Furthermore, the DOJ can be expected to make its own assessment of the whistleblower’s financial motives and their impact on his credibility as a witness. Put simply, the concern is about a flood of lower-quality tips, made by individuals with a strong financial motivation to potentially "gild the lilly." The concern is that these considerations may deter prosecutors from pursuing what would otherwise be strong criminal cases.

Dodd-Frank vs. Qui Tam

A comparison between the new Dodd-Frank bounty provisions and the existing qui tam process provides insights into why the Dodd-Frank whistleblower bounty provisions threaten to have some considerable downsides. While qui tamproceedings are in a sense "vetted" by government prosecutors, the Dodd-Frank whistleblower provisions in the first instance rely on the (potentially anonymous) whistleblower and his or her counsel to provide reliable, probative evidence of wrong-doing.

More specifically, in a qui tam proceeding, brought by a private citizen for “the government as well as the plaintiff,” a witness (known as the "relator") must first file a civil action. DOJ then performs a “risk free” evaluation/vetting of the merits of the case – as alleged in court filed papers – for reliable evidence indicating fraud against the governmentbefore deciding to whether to intervene. The pending civil action, therefore, often provides a solid indication of theevidentiary strength of the case, while the relator’s willingness to independently pursue the case can establish the relator's motivation and conviction to follow through with the case.

In contrast, the Dodd-Frank bounty provisions do not benefit from any independent "vetting," and carry no requirement that litigation be pending in order to collect the reward. The whistleblower and whistleblower’s counsel are not obligated to file a complaint that is reviewed by anyone, let alone prepare a case, and, therefore, have much less “skin in the game” in terms of time and resources.

COUNSEL

The Role of “Plaintiff’s” Counsel

“Plaintiff’s counsel,” as that term is used in Dodd-Frank, is a misnomer because, technically, the SEC is the moving party. Nevertheless, if the increase in the number of on-line ads and domain names, including keywords such as “whistleblower,” are any indication, the plaintiff’s bar sees an important role for itself in the enforcement process. Perhaps this has something to do with the windfall whistleblowers’ counsel stand to gain from taking cases that are, from their perspective, nearly cost and risk-free.

Although the SEC does not require whistleblowers to be represented by counsel, it clearly anticipates that they will be. For example, a large section of the whistleblower intake form is reserved for information from counsel. It is a role that many plaintiffs’ attorneys are only too happy to play.

THE WHISTLEBLOWER

No review of the new bounty provisions would be complete without a discussion of the person at the center of it all: the whistleblower.

More Corruption?

By establishing bounty provisions, the SEC may have inadvertently increased the likelihood of fraudulent complaints. Whenever a witness has a financial incentive to report wrongdoing, the temptation to embellish (or fabricate) increases. Those screening whistleblower claims will have to demonstrate to skeptics that they can separate the gold from the dross.

The Dangers of Freelancing

As experienced fraud investigators know, complaints are fraught with uncertainty due to the lengthy fact-gathering process and the complexity of the evidence. Early investigative efforts post-intake often focus on the accuser and, as the case develops, place great emphasis on the whistleblower’s credibility.

This will undoubtedly be the case when the SEC assesses new claims under Dodd-Frank, a process which can take substantial time and research. The target company’s response is unpredictable at best and obstructive at worst. If it appears that the investigation has stalled or a response from the SEC is not forthcoming, the whistleblower may be emboldened to bolster his case by engaging in “freelance” evidence gathering.

The road to conviction is strewn with the bodies of strong cases inadvertently slain by freelancing witnesses. Unauthorized acts, such as the taping of relevant (or worse yet – irrelevant) conversations, without an understanding of the legal pitfalls such sleuthing entails, may be case “killers” if revealed late in the proceedings. Failure by the government to clearly establish at the outset the role of the witness and its limitations is, put simply, an invitation for disaster. Ground rules for assisting with and participating in the investigation should be established early on to avoid procedural problems down the road.

Dodd-Frank was passed in order to reassure a skeptical public weary of financial scandals that regulators could restore transparency to the marketplace, over the objections of a cynical business community opposed to government interference in corporate affairs. Those of us who spent years investigating and prosecuting these cases, in short, have reasonable concerns that whistleblowers who make fraudulent claims, or weaken legitimate ones with their self-motivated meddling, risk undermining the very process they are being incentivized to improve.

[1] Kevin Knierim is a co-founder and Managing Director of Human Intelligence for investigative service provider Cyopsis. As an FBI Agent for 15 years, Mr. Knierim had lead investigative responsibility for many complex financial crimes and schemes to defraud, including securities fraud, bank fraud, commodities fraud, health care fraud, wire fraud, mail fraud, money laundering, and false claims against the United States. The views expressed here are those of the individual author and are not necessarily those of the ABA or the Task Force.

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Kevin Knierim

Kevin Knierim