By PHILIP HILDER
In reaction to the Bernie Madoff scandal, Congress has offered lucrative bounties and effectively deputized millions of Americans to tell the government about insider trading, securities fraud, bribery of overseas businesses and governments and a host of financial crimes that employees may see on the job.
The stakes are higher than when my client Sherron Watkins, a one-time Enron vice president, warned her bosses in 2001 about the company’s accounting scandal. She was rewarded with inquiries about how to fire her. Back then, Watkins could not have cashed in on the potential bonanza for whistleblowers established earlier this year in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Dodd-Frank Act should create a friendlier legal landscape for corporate whistleblowers since it beefs up the payment to those who reveal real crimes, allows more people to blow the whistle, strengthens the protections against retaliation and doubles the amount someone can recover in a successful retaliation lawsuit.
Before this act, total awards to whistleblowers were discretionary and only rewarded for certain insider trading tips. Now, many financial crimes are covered and a successful enforcement exceeding $1 million could bring a whistleblower between a mandatory 10 percent up to 30 percent of what the government recovers.
It’s no longer just current and former employees who can blow the whistle. Subsidiaries and affiliates of publicly traded companies are now covered. Contractors, consultants and sales agents can be whistleblowers too.
Before this new law took effect last summer, retaliation protections were weak but now employers are prohibited more specifically from retaliating.
Prior to Dodd-Frank, the Department of Labor, through the Watkins-inspired Sarbanes-Oxley Act of 2002, was unenthusiastically pursuing whistleblower retaliation complaints. The agency denied awards in about 98 percent of cases and tossed out more than 1,000 claims. Now whistleblowers can bypass that agency and proceed directly to federal court.
A prevailing whistleblower in an unlawful discharge or discrimination action now doesn’t just get back pay with interest; they get twice the back pay with interest, compensation for litigation costs and attorneys’ fees. The new law even gives whistleblowers 10 years to file a lawsuit.
Because all securities law violations are included in the new act, an area sure to be hot is disclosures of Foreign Corrupt Practices Act violations. Recently, the U.S. Department of Justice has upped these prosecutions. These cases are low-hanging fruit for prosecutors because many companies hire people in other countries to follow local “customs” that sometimes include bribes that break U.S. laws.
The Dodd-Frank Act does set limitations on who can be deputized bounty hunters. It won’t work for someone convicted of a criminal violation relating to the information they provide the government. It also can’t be invoked by certain auditors or employees of the U.S. Securities and Exchange Commission and the Justice Department. The payouts come from SEC investor protection funds. Reward sizes depend on the significance of cases that came from the original tip and how much the whistleblower helped.
All this will add up to emboldened employees, lawyers looking to represent them, and employers being more careful.
Some critics have complained a likely downside will be more false claims in the flood of complaints to the SEC and the U.S. Commodity Futures Trading Commission. That seems likely, but worth it.
A bigger problem may be that whistleblowers will be encouraged to ignore their corporate ladder and instead rush to the SEC with “original information” that can be the foundation of an enforcement action. The race to report and cash in could conflict with internal company compliance and ethics programs, which encourage employees to internally report wrongdoing.
The law’s impact could be significant as companies may lose the opportunity to self-correct before a government investigation is launched. It is foreseeable that such an investigation could trigger shareholder or derivative lawsuits against the company. It is equally foreseeable that employees in Watkins’ situation will now bypass company protocol and proceed to grab for the golden ring.
Hilder, a former federal prosecutor and founder of Houston-based Hilder & Associates, P.C., focuses on white-collar criminal defense and whistleblower lawsuits.