Navigating Whistleblowing: A Guide for Financial Services Professionals

July 11, 2023

Many would-be whistleblowers in the financial services industry have long faced a common dilemma: they have a good, high-paying job, a strong career trajectory, and substantial potential lifetime earnings, but their employer is committing fraud or misleading investors, and the employee knows someone needs to speak up. But they also know that if they blow the whistle, they face potential retaliation, from harassment and sidelining, to demotion, termination, and blackballing. In light of these realities, and aware of the importance of whistleblowers in exposing fraud in the securities industry, Congress has passed federal laws that protect and incentivize whistleblowers to speak up, including the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).

A. The Sarbanes-Oxley Act

SOX provides anti-retaliation protections for whistleblowers who report within their company and those who report to the SEC. Under SOX, employers may not retaliate against a whistleblower who engages in certain protected conduct, including:

  • reporting suspected mail, wire, bank, or securities fraud;
  • reporting suspected violations of any SEC rules or regulations;
  • reporting violations of law that defraud shareholders.

A whistleblower who suffers retaliation in violation of SOX is potentially eligible for reinstatement, back pay with interest, compensatory damages, and special damages. But SOX has strict time limits (180 days of the violation or after the employee becomes aware of the violation) and procedural requirements (the employee must first report to the Department of Labor) that must be followed, so it is important for whistleblowers to act quickly if they have been retaliated against.

B. The Dodd-Frank Wall Street Reform & Consumer Protection Act

Dodd-Frank approaches securities industry whistleblowing from a different angle. After the financial crisis of 2007-2008 and in the wake of the Madoff Ponzi scheme, Congress sought to restore confidence in the securities industry and give whistleblowers the appropriate tools to report fraud. Congress looked to other successful whistleblower programs, including the False Claims Act, which provides both rewards and anti-retaliation protections for whistleblowers who report fraud against the government. With that successful law in mind, Congress included provisions in Dodd-Frank to create a whistleblower program that would give the SEC the tools to uncover and deter securities fraud.

One of those tools was a program to reward securities whistleblowers who provide original information to the SEC with 10-30% of the proceeds of successful enforcement actions based on their information. Unlike the False Claims Act, however, SEC whistleblower tips are generally confidential, and SEC whistleblowers who report through an attorney may even file anonymously.

This program has produced substantial results: whistleblower tips have led to more than $6.3 billion in monetary sanctions, and $1.3 billion in rewards to whistleblowers as of late 2022.

At the same time, Congress recognized that incentives alone might not be enough to encourage securities whistleblowers to come forward, given the risks to their career for speaking up and the uncertainty and long timeline for receiving an award. So Congress also provided protection against retaliation for whistleblower employees. Unlike SOX, which protects whistleblowers who only report internally, Dodd-Frank protections only extend to employees who report fraud to the SEC. However, as explained in a 2016 Supreme Court Decision, Digital Realty Trust, Inc. v. Somers, “dual reporters”—whistleblower employees who report both to the SEC and to their employer—are also protected under Dodd-Frank, even if their employer does not know that they reported to the SEC. So a whistleblower who simultaneously reports to the SEC and their employer is potentially protected against retaliation by Dodd-Frank, even if they do not disclose to their employer that they also reported to the SEC. (Recently proposed legislation in Congress would expand Dodd-Frank to protect individuals who only report internally, but this is not yet the law.)

While the Dodd-Frank whistleblower program is limited to those who first report to the SEC, it has certain advantages over the SOX program, including a longer statute of limitations and double back pay.

Financial industry professionals face tough questions when deciding whether, when, and how to blow the whistle. Everyone’s situation is different, and the risks and rewards must be weighed carefully against each other. If you are thinking about becoming a financial industry whistleblower, you can contact attorneys at Outten & Golden’s whistleblower and retaliation practice.

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