July 05, 2011 Articles

The SEC Is Preparing for a Greatly Enhanced Reliance on Whistleblowers

Since the passage of the Dodd-Frank Act, white-collar and compliance lawyers alike have been consumed by the potential consequences of the elevation the role of whistleblowers.

By Anthony Pacheco, Sigal P. Mandelker, and Massiel Pedreira

Employers beware; the Securities and Exchange Commission (SEC) is intensifying its reliance on whistleblowers. Since the 2010 passage of the Dodd-Frank Act, which included key enhancements to the SEC’s whistleblower program, white-collar and compliance lawyers alike have been consumed by the potential consequences to companies of Congress’s decision to elevate the role of and empower whistleblowers. See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 922, 124 Stat. 1841 (2010) (to be codified at 15 U.S.C. § 78u-6). Is all the hype warranted? Should employers fear that there will be an increase in the number of whistleblowers and that those whistleblowers will view the new whistleblower program solely as a means to cash in?

The answer is that the new changes could result in a sea change in the number of actions brought against companies by the SEC. Indeed, the program under the act effectively “deputizes” employees as agents for the SEC in the enforcement of purported securities violations.

Previously, the SEC’s whistleblower program, confined to insider-trading cases, capped awards at 10 percent of the collected penalties. See Press Release, Sec. & Exch. Comm’n, SEC Proposes New Whistleblower Program Under Dodd-Frank Act (Nov. 3, 2010), available at www.sec.gov/news/press/2010/2010-213.htm. Now, the commission is empowered to compensate whistleblowers with 10 to 30 percent of the total monetary sanctions resulting from the successful enforcement of a judicial or an administrative action based on the whistleblower’s information. See Dodd-Frank Act, supra (to be codified at 15 U.S.C. § 78u-6(b)). Those percentages can be enormous, particularly in Foreign Corrupt Practices Act matters, where fines and penalties have been in the hundreds of millions.

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