In this edition of our “Ask the Experts” series, we examine the benefits and drawbacks of the Dodd-Frank whistleblower program with Geoffrey Rapp, the Harold A. Anderson Professor of Law and Values at the University of Toledo College of Law, and Lawrence A. Hamermesh, the director of the Widener Institute of Delaware Corporate and Business Law.
It’s a staple of any kindergarten curriculum: Don’t be a tattletale. However, it seems that many in the corporate world were absent the day their teachers went over that golden rule because not only is “whistleblowing” a somewhat accepted practice, but you can actually get paid for doing it. That’s important too because if you’re in the unfortunate position of working for a company whose practices put it at risk of having the whistle blown, this sort of referee-esque payday might just be your retirement account as well as one of the best personal finance tips you’ve ever received.
You see, Section 922 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act holds that employees who report violations of federal securities law to the Securities and Exchange Commission (SEC) are eligible for monetary rewards if the information is original and leads to a successful enforcement action. We’re not talking chump change either; whistleblowers stand to get 10-30% of total monetary sanctions over $1 million.
“This idea of whistleblower bounties is something that has been circulating for years. Sarbanes-Oxley in 2002 created a protective scheme for whistleblowers in the securities context where they couldn’t be terminated,” said Geoffrey Rapp, the Harold A. Anderson Professor of Law and Values at the University of Toledo College of Law. “But the problem was Sarbanes-Oxley didn’t give any positive financial incentive. It gave you a little bit of protection, but the protection is only as good as the position that you’re protecting. If it’s a big scandal … [and] you blow the whistle, now you’re not going to be fired, but the company’s going to go under or face significant cutbacks and you’re likely to not work again in the industry anyway whether or not you had that Sarbanes-Oxley protection.”
While Dodd-Frank supposedly rectified that problem by offering the financial incentives needed to elicit the best tips, the law isn’t without its own issues – namely the fact that its espoused benefits are still largely theoretical. Despite prompting roughly 3,000 tips during 2012, the program only yielded one major payout, as compared to a number of high-profile cases involving whistleblowers who spoke out, got fired, and are being forced to wait and see whether the government will pay or protect them. As these folks sit in limbo, their newfound reputation as snitches makes it harder and harder to find work in their chosen field.
The Dodd-Frank program, which is based on a similar system long employed by the Justice Department to combat fraud against the government, also raises a number of important questions about the motivations of those who come forward. More specifically, you have to wonder whether whistleblowers tend to be motivated by the desire to do what’s right or other, less noble factors like revenge.
“In our other experience with whistleblower statutes, you see some genuine do-gooders who are motivated exclusively by the desire to do the right thing. In this case it would be to protect shareholders and to protect companies from someone who is committing a fraud that threatens the company. But you also see probably many more people who are invoking the whistleblower statute only after they’ve been terminated, suspended, or their career has stalled,” said Professor Rapp, adding that such motivations don’t necessarily make their claims any less important. “What I’m optimistic about is that a part of the SEC that gets used to dealing with whistleblowers and all their personality quirks might be in a position to actually respond to even an oddball if the complaint has legitimate merits.”
Regardless, it’s obvious that lawmakers’ intentions were in the right place, as the whistleblower program is just another cog in the overall effort to prevent the type of risk-taking and law-skirting by financial companies that helped lead to the Great Recession. Legislators also provided for the Consumer Financial Protection Bureau’s creation, revamped consumer rights, cracked down on shadow banking, and much more.
While many of these prominent regulatory changes instituted in reaction to the recession have clearly proven worthwhile to date, it looks like we’ll have to wait and see how ultimately beneficial the Dodd-Frank whistleblower program can be. The good news is that experts seem to agree the future is bright.
“It’s certainly been effective in raising awareness among financial industry workers about the possibility that there are going to be bounties available. And I would say it’s been effective in tooling, or refocusing the SEC on the potential that a tip would have some useful applications for their investigation. The SEC has received tips for years, but what they’ve historically done is ignored them,” said Professor Rapp. “Will it deter fraud? Will it lead to a lot of high-dollar-value bounties being paid? I’m not so sure. The financial markets are so complex and move at such a fast pace that any little bit of strength for the enforcement process helps, but is it really going to make a difference? I don’t know.”
The hope, however, is that the SEC will become more responsive in addressing fraud in order to prevent it from spiraling out of control and costing a lot of people a lot of money, as was the case with the Bernie Madoff scandal, for example. Interestingly, the Dodd-Frank program may also spur companies themselves to do the same thing.
“One effect may be to have companies be much more aggressive and encouraging about internal reporting to avoid whistleblowing,” according to Lawrence A. Hamermesh, the director of the Widener Institute of Delaware Corporate and Business Law. “If it has that effect of improving internal compliance, that’s a good thing that might not get measured if you only look at the performance of the Dodd-Frank program.”
Hey, who knew Too $hort had such a keen, forward-looking mind for business?
Hi there, before I begin I wish to explain the purpose behind this rather long winded blog comment. My reply below is part of a Business Ethics Course in which we are asked to respond to a blog as part of our assessment. Through doing this course I have read a number of other blogs and articles surrounding the Dodd Frank Wall Street Reform and Consumer Protection Act. They have focussed on the Act and its relation to incentives for whistle-blowers and also the concern surrounding the protection of potential whistle-blowers. Upon reading your “Ask the Experts” article there are a number of points I wish to explore in order to harness the potential for the creation of an external organisation which is contracted by companies to deal with whistle-blowers in a stage prior to seeking out the Securities and Exchange Commission (SEC). The idea is that having an external contractor that acts on behalf of both the government and companies will help with the grey areas of employee protection. It will also be a means of weeding out false claims before they reach the SEC while also ‘taking a load off’ them, leaving the SEC with only high-risk cases and acting as part of an internal compliance scheme. Looking at this from the perspective of the Utilitarian Theory whose ultimate aim is to maximise happiness and minimise harm, we can see the benefits of an external contractor (Scholes, 2012. Module 1, p.19). Encouraging the whistle-blower to report internally to a contractor is ultimately best practice giving the company the opportunity to keep claims out of the media and reduce the level of damage that could incur if taken up by the SEC (maximising happiness and minimising harm) (Scholes, 2012. Module 1, p.19). This also relates to internal and external whistleblowing as is encourages internal whistleblowing over external (Scholes, 2012. Module 2. p.16). To begin with, you mention the Dodd Frank Act prompting about 3000 tips last year, many of which were never followed through leaving a number of whistle-blowers unemployed with no guarantee of any kind of payout, reinstatement and the label of ‘snitch’. The idea of having an external contractor which is responsible for dealing with claims made internally can be used to sort the real or critical claims from the claims which can be dealt with within the company itself or false claims all together. The contractor would become a sort of ‘middle-man’ giving employees protection from termination while also aiming to deal with most claims internally, only reporting serious claims to the SEC for further investigation. This almost puts claims in a state of protected limbo and follows on from your point regarding motivation behind the claim. With the development of an external contractor, this question of motivation as to whether whistle-blowers have a genuine desires to do what’s right or rather a less desirable motivation, allows claims to be investigated more thoroughly without the ramifications of lodging a claim directly with management or the SEC that then causes disrepute for either party. Specifically for the companies involved, the issue of libel and the defamation of their brand should be carefully considered when dealing with possible disgruntled employees or those who have already left the company and seeking a greater pay out. With the development of an external contractor a level of protection for companies can also be established. Acting as a ‘middle-man’ between companies and employees offers protection on both sides and has the ability to act as a mediator if cases turn sour while also being able to keep these disputes out of the media. Not only can these cases result in fines and prison time, but the amount of embarrassment and damage to a brand is something that can take years to rebuild which aids the importance of sorting the credible claims. From a fiscal perspective, hiring an external body to deal with claims in their initial phase means there is less financial pressure on both companies and the whistle-blowers. There will be less need to work on payout schemes or damages, as well as the SEC not having to promise financial security and incentive to those who do not have substantiated claims at the end of the process. In relation to the aforementioned Utilitarian Theory (Scholes, 2012. Module 1, p.19); there has been debate around the ethical issues behind the incentive scheme, arguing whether it can be considered ethical to report against your company and break the trust, which is expected from you as an employee. Ronald Duska (1990) is among authors who focus on whistleblowing and loyalty and states that ‘loyalty is ordinarily construed as a state of being constant and faithful in a relation implying trust or confidence, as a wife to husband, friend to friend, parent to child’ (p.143-144). While whistleblowing may be considered a betrayal of trust, loyalty and confidence, taking a claim to an external contractor in some part minimises this level of betrayal and protects employees when a legitimate case is brought forward. All of these factors offer support to the idea of an external organisation contracted to companies to handle claims made by whistle-blowers. While the idea of the Dodd Frank Act was partly to discourage fraudulent activity all together, the reality is company practices will always have flaws but it is unfair to punish them on such a grand scale without investigating into the root of the cause. Rather than attempting to stop this kind of activity all together, I think putting steps in place such as this external contractor to protect both parties where required and having a more efficient system in place will ultimately be more beneficial on a number of levels. References: Duska, R. F. (1990). Whistleblowing and employee loyalty. In J. R Desjardins & j. j. McCall (Eds.), Contemporary Issues in business ethics (2nd ed., pp.142-147). Belmont CA: Wadsworth. Scholes, V. (2009). Business Ethics. Module 1. Lower Hutt; The Open Polytechnic of New Zealand. Scholes, V. (2009). Business Ethics. Module 2. Lower Hutt; The Open Polytechnic of New Zealand.
February 4, 2013 at 02:32am