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Ask the Experts: Congress Told Us to Blow the Whistle, But Are We Listening?

Dodd Frank Whistleblower Bounties

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?
 
Image: Africa Studio/Shutterstock

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