Dodd Frank Information

A Law Placing Major Regulations on the Financial Industry

The new "SEC Whistleblower" legislation poses wide-ranging and deep ramifications for every public company in the United States, and every subsidiary on a public company's consolidated financial statements. For the first time, individual whistleblowers may go directly to the SEC with original information about potential violations of federal securities laws including but not limited to the Securities Exchange Act of 1934 ('34 Act) and Sarbanes-Oxley (SOX), the Commodity Exchange Act (CEA), jointly enforced by the SEC and the Commodity Futures Trading Commission (CFTC), the Foreign Corrupt Practices Act (FCPA), and participate, to a financially significant degree, in the successful outcome of an SEC investigation and regulatory action against the company.

The potential award to a whistleblower bringing a successful claim can range from 10-30% of collected monetary sanctions exceeding $1 million dollars. Recent penalties imposed by the Commission against companies like AIG ($800 million) and Goldman Sachs ($500 million), will yield potentially huge awards to individual whistleblowers. The SEC presently has about $450 million set aside to fund this program.

The Dodd-Frank Act was signed into law on July 21, 2010. Certain regulations related to the Act, including Rule 21F (which deals with important carve-outs for public companies' "management" of the employee-focused incentives described above), were proposed on November 3, 2010. The comment period ended December 17, 2010, and the final version of the rule will be adopted on April 21, 2011. The overall provisions of Dodd-Frank apply to any information regarding violations of securities and related laws provided to the SEC on or after July 22, 2010.It is not necessary that the actual violation occurred after the Act was enacted. For example, an employee of a public company may bring a claim to the Commission in 2011 relating to violations of securities laws taking place in 2008 or 2009.

Dodd-Frank covers the following non-exhaustive list of violations:

  • fraudulent accounting and incentive compensation practices
  • insider Trading
  • manipulating the price or trading volume of a security
  • abusive Naked Short Selling
  • fraudulent or unregistered sale of securities
  • Ponzi schemes
  • theft or misappropriation of funds or securities
  • violation of the Foreign Corrupt Practices Act

The statute of limitations for bringing claims relating to the '34 Act and violations of SOX can range from six to 10 years, and two years for conduct regulated by the CFTC.

Under Section 922 of Dodd-Frank potential whistleblowers must supply original information regarding securities laws violations, derived from independent knowledge or analysis. Such information cannot be already known by the SEC from any other source, unless the whistleblower is the original source of the information, and cannot be derived exclusively from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit or investigation, or from the news media, unless the whistleblower is a source of the information. The precise amount of the ultimate award for whistleblowers will be determined by factors including the quality and significance of the information provided to the Commission and the degree to which the whistleblower assisted in the action. Unlike a qui tam claim, whistleblowers under Dodd-Frank may not bring actions independently, but may only recover if the Commission prevails on the basis of the information they provide.

Potential whistleblowers may appeal the SEC's decision relating to such awards, if:

  • no award is made by the SEC;
  • the award is outside of the 10-30% range; or
  • the SEC chooses not to pursue the matter.

Potential whistleblowers are afforded strong protections under the Act regarding confidentiality and employment status. Potential whistleblowers facing discrimination relating to the terms of their employment due to their participation in a Dodd-Frank action may file claims in federal district courts. Companies may not preemptively seek to impose waivers on employees' rights in this context, including pre-dispute arbitration clauses in employment contracts. Freedom of Information Act (FOIA) requests and other such inquiries will not be honored by the Commission.

Those not afforded such protections or allowed to participate in this program include employees of regulatory or law enforcement agencies, individuals convicted for criminal violations relating to the information at issue, and in most circumstances those gaining such information through the course of audit, compliance, or work as in-house or external counsel. Foreign officials are also ineligible to participate.

While potential whistleblowers need not first report violations to corporate counsel and may first go straight to the SEC, the complexity of seeing a Dodd-Frank action through to a successful conclusion is significant. Hiring counsel experienced in both securities fraud and employment law is of critical importance to bringing or defending a successful claim.

Potential whistleblowers and others in positions of responsibility within a public company should also be aware of certain other key provisions of Dodd-Frank, including proposed Rule 21F, mentioned above, which allows compliance, in-house counsel and other corporate officers 90 days to investigate and resolve an issue, should the whistleblower approach them before going to the SEC. The incentives for corporate officers to make this option attractive to employees are considerable, and such efforts also often require companies to hire outside counsel experienced in securities fraud, compliance and employment law issues.

Hertz Schram's Securities Team, experienced in securities fraud, regulatory compliance, employment law, whistleblower, false claims, and qui tam actions, and composed of former general counsel and assistant prosecuting attorneys, is your best choice in bringing or defending a Dodd-Frank claim, or in strengthening your company's best practices and defenses in this context. Hertz Schram will address your particular needs from all relevant aspects, providing comprehensive advice and ongoing support toward the most favorable outcome.