Today, July 21, 2020, marks the tenth anniversary of the passage of the Dodd-Frank Act (DFA)— the most significant financial reform law enacted since the Great Depression to combat financial fraud. The whistleblower program was established by Congress to incentivize whistleblowers with specific, timely and credible information about federal securities laws violations to report to the SEC. This law has proven to be a useful tool in combatting corporate fraud and foreign corruption.
The Need for Reform
The Dodd-Frank Act is a major Wall Street reform that was signed into law on July 21, 2010 and was enacted in reaction to the financial crisis and stock market fallout of the Great Recession. The federal government had to bail out major banks and corporations, and the President and many members of Congress wanted to make sure this would never happen again.
During the drafting of the Dodd-Frank Act, whistleblower attorneys at the law firm of Kohn, Kohn & Colapinto worked directly with the Senate Banking Commission to ensure that whistleblowers could maintain anonymity, protect their jobs, and receive monetary rewards as an incentive for providing critical information about financial fraud to the Securities Exchange Commission. After the Dodd-Frank Act was signed into law, Kohn, Kohn & Colapinto’s partners met directly with every Commissioner of the Securities and Exchange Commission. They submitted written comments to the SEC that greatly influenced the shape of the final whistleblower rules for the SEC’s whistleblower program
Kohn, Kohn & Colapinto have successfully fought to defend these provisions in the past, continue to protect corporate whistleblowers in individual cases, and protect the rights achieved under whistleblower laws as the Dodd-Frank Act and False Claims Act.
These reforms include protections to encourage corporate whistleblowers to report securities violations and foreign corruption:
- The ability of qualified whistleblowers to obtain a financial reward.
- Financial rewards are available to non-U.S. citizens who blow the whistle on potential securities frauds committed by publicly traded companies outside the United States, including violations of the Foreign Corrupt Practices Act.
- A broad “related action” provision permits the payment of rewards based on sanctions obtained from other law enforcement agencies.
- The requirement that the SEC strictly protect the confidentiality of whistleblowers and permit anonymous filings.
- A strong anti-retaliation law that allows whistleblowers to file retaliation cases in U.S. District Court and obtain double back wages.
Filing Anonymous Tips
One of the most critical aspects of these reforms is the ability of whistleblowers to remain anonymous. Whistleblowers must hire an attorney to remain anonymous. The Dodd-Frank Act’s anonymity provisions must be carefully followed to ensure the whistleblower’s identity is not revealed. The whistleblower’s attorney must obtain proof of the anonymous SEC whistleblower’s identity, usually through a copy of the whistleblower’s passport or driver’s license. The attorney is under an ethical obligation to keep the client’s identity secret unless the client waives that right. The whistleblower then submits the signed TCR to his or her attorney. The attorney then fills out another TCR form, with the whistleblower’s precise information, signs the form, and files the form on behalf of the whistleblower. In this way, the SEC only knows the identity of the whistleblower’s attorney, and the identity of the anonymous SEC whistleblower remains confidential.
The whistleblower maintains his or her anonymity throughout the investigation. However, once the SEC sanctions a company for over $1 million, the whistleblower is required to file a new form, known as the APP form, to request a reward. At the time an APP form is submitted, the SEC can require that the whistleblower’s identity be provided and can require proof that the whistleblower provided to his or her attorney the signed TCR form and proof of identity before the attorney files the reward claim.
In addition to creating strong reward provisions for securities and commodity fraud cases, the Dodd-Frank Act also created new whistleblower protections covering consumer frauds. Specifically, Dodd-Frank whistleblowers are protected from retaliation if they reported violations of law to the newly created Consumer Financial Protection Board or reported violation of consumer protection laws to their supervisors.
The SEC has also brought enforcement actions against companies that retaliate against whistleblowers through the use of restrictive non-disclosure agreements. Many companies tried to undermine the Dodd-Frank provision by using broadly worded non-disclosure agreements restricting the release of confidential information to the company’s legal department as a condition of employment. When leaving the company, employees who have threatened to file whistleblower claims were also forced to accept non-disclosure requirements as a condition of a settlement or before they could obtain a severance payment after they were fired or laid off.
These agreements explicitly prohibit employees from communicating with anyone except attorneys hired by the company. Some go as far as explicitly barring communication with regulators, such as the Securities and Exchange Commission.
In 2014, while litigating against KBR, Inc., a large government contractor, KKC documented that KBR forced all of its employees with knowledge of fraud to sign non-disclosure agreements that threatened them with termination if they chose to reveal fraud allegations to anyone outside of KBR’s legal department. KKC filed a complaint with the SEC regarding this practice. The SEC took enforcement action on that complaint on April 1, 2015, and issued the first penalty against any company attempting to silence a whistleblower. KBR had to pay a $130,000 penalty and agreed to cease this practice. The KBR enforcement action was widely applauded and served as the springboard for the series of related enforcement actions that followed.
The Success of the Program
Since the enactment of Dodd-Frank, the Securities and Exchange Commission’s Office of the Whistleblower has received thousands of high-quality whistleblower allegations each year about ongoing financial fraud and securities violations. The SEC has awarded more than $500 million to whistleblowers since the inception of its whistleblower program. SEC enforcement actions from whistleblower tips have resulted in more than $2 billion in financial remedies.
The Dodd-Frank Act authorizes the SEC and the Commodity Futures Trading Commission (CFTC) to pay monetary awards to whistleblowers that come forward with information leading to more than $1,000,000 in sanctions. The range for awards is between 10 and 30 percent of the money collected.
The CFTC whistleblower program has also been successful in combatting Commodities Fraud. Since issuing its first award in 2014, the CFTC has awarded approximately $110 million to whistleblowers. The Commission actions associated with those awards have resulted in sanctions orders totaling nearly $900 million.