Dodd-Frank Act Gives Corporate Whistleblowers a Sword, a Shield, and a Cloak

August 11, 2016

Stories of corporate greed, cover-ups, and corruption make headlines nearly every day. Scandals at Enron, AIG, Madoff Securities, and elsewhere rocked the investment world to the point that we almost take such violations in stride. What we shouldn’t take for granted, however, is the critical role of the courageous whistleblower who exposes the wrongdoing, often at great personal risk.

But just who can be a whistleblower and how do U.S. laws encourage people to come forward while protecting them from retaliation?

Whistleblowing Laws Work

Congress and the U.S. Securities & Exchange Commission (SEC) rely heavily on whistleblowers to report corporate fraud and deception. following the enactment of Section 922 of the Dodd-Frank Wall Street Reform & Consumer Protection in 2010, the expansion of Sarbanes-Oxley Act of 2002, and other federal statutes, the number of whistleblower tips reported to the Commission has increased substantially – nearly 4,000 in 2015, up 30% from 2012, the first year in which data was collected. As a result, when investigation and enforcement by the SEC happen earlier, the risk to the public’s investment in financial markets is potentially reduced.

See Something, Say Something… Anonymously

The SEC defines a whistleblower as an individual or group of people who voluntarily provide the Commission or another regulatory or law enforcement authority “with original information about a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur.”

Many people think that a whistleblower must be employed by the company suspected of wrongdoing to report the violation, or that the company must be in the financial industry. In fact, as long as the company, regardless of its industry, is subject to SEC rules, virtually anyone – employee or not – with a reasonable belief of the violation can come forward, including:

  • Corporate officers and directors
  • Internal auditors, pricing specialists, and compliance staff
  • Engineers, scientists, and researchers
  • Financial advisors
  • Sales and marketing staff
  • former employees
  • foreign nationals outside the U.S.

Because many people – inside the organization and out – fear reprisal, the law allows them to submit a report anonymously if they are represented by an attorney.

Whistleblower Incentives & Bounties

Given the sheer size of the U.S. and global markets, the number of companies that operate in our economy, and the limited resources of the SEC and U.S. Department of Justice, federal whistleblower laws incentivize individuals to speak up by offering substantial awards equaling 10% to 30% of sanctions in excess of $1 million that the Commission recovers.

These whistleblower bounties can be considerable. In 2014, a whistleblower was paid more than $30 million, the largest award in the Commission’s history. other recent examples include:

  • $17 million – second largest SEC award (June 2016)
  • $450,000 award shared by two people (May 2016)
  • $5 million to former company insider (May 2016)
  • $3.5 million to a company employee whose tip bolstered an ongoing investigation with addition al evidence of wrongdoing (May 2016)

Intending for these lucrative bounties to be a sword to aid its enforcement efforts, the SEC has issued awards totaling more than $85 million since the inception of the whistleblower program in 2011.

Whistleblower Protection

To shield whistleblowers from retaliation and adverse treatment for reporting suspected violations, the Dodd-Frank Act offers broad protections:

No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower:

(i) in providing information to the Commission in accordance with this section;

(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action; or

(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002, the Securities Exchange Act of 1934, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

Regarding the specificity of the report, the law does not require that the employee identify the particular SEC rule or regulation the company is suspected of violating, nor does the whistleblower have to be correct in his or her assertion. The statute deems the whistleblower’s good faith belief about the wrongdoing to be sufficient notice.

Plaintiffs in civil actions usually have a limited amount of time in which to file a lawsuit, and whistleblower retaliation claims are no different. But unlike the 180-day statute of limitations under Sarbanes-Oxley, Dodd-Frank extends the deadline significantly, requiring the action be filed either 1) within six years of the date when the retaliation occurs, or 2) within three years after the date that the employee knew or should have known “facts material to the right of action” but no more than ten years after the date of the retaliation.

The whistleblower’s right to anonymity, though generally beneficial, can become a hurdle in alleging retaliation against the employer. To illustrate, if the employee anonymously reports a violation under Dodd-Frank and the employer never discovers his or her identity, it is extremely difficult for the employee to prove he or she was the subject of discrimination or a retaliatory act. There is an exception, however, if it can be shown that the employer knew or should have known it was the employee who reported the wrongdoing.

Employers often pay the price for retaliation. The law permits a whistleblower to seek job reinstatement and recover damages that can include double back pay, litigation costs, expert witness costs, and attorneys’ fees. In addition to his or her own lawsuit, the SEC can also bring a separate suit against the employer.

And the protection against retaliation is expanding. Last year, the Second Circuit Court of Appeals held that Dodd-Frank protects whistleblowers who submit reports internally within their companies but not to the SEC, thus extending anti-retaliation protections beyond communications with the Commission. Because the Second Circuit includes New York – the center of U.S. financial markets – as well as Connecticut and Vermont, the implications are significant. By contrast, the Fifth Circuit, which includes oil and gas epicenter Texas as well as Louisianand Mississippi, strictly construed Dodd-Frank to exclude whistleblowers who make internal communications from the law’s anti-retaliation protections. The split has divided federal district courts across the country and is ripe for consideration and resolution by the U.S. Supreme Court.

Efforts to uncover corporate wrongdoing are to be applauded, and the attorneys in Outten & Golden’s Whistleblower & Retaliation Practice Group are proud to represent the brave individuals who report such violations. To learn more about the work we do and the people whose rights we pursue, please watch the videos below.

(*Prior results do not guarantee a similar outcome.)