Dodd-Frank Financial “Reform” Act May Force Companies to Clean Up Their Act

Wall Street lobbyists may have successfully managed to emasculate most of the important parts of the financial reform bill just passed by Congress last month, but one part of that 2000-page act, which establishes as bounty for whistleblowers who expose corporate financial wrongdoing to the Securities and Exchange System, managed to slip through unscathed.

If this surprisingly strong measure is supported by strong enabling regulations at the SEC, which has until next April to draw them up and approve them, some legal experts, including at law firms that specialize in representing corporate clients, say it could have a profound effect on the behavior of American companies.

The language being used by some of these attorneys is actually pretty apocalyptic, and entertaining to read.

Here’s a comment by the corporate law firm of Seyfarth Shaw on the new whistleblower provision’s significance:

“Employers need to ensure that, where practicable, whistleblower claims are resolved internally, as employees now have a unique incentive (in the form of a bounty) to report perceived misconduct to third-parties, such as the SEC, even before an employer may adequately address their concerns.

“Thus, employers are compelled to implement sophisticated complaint hotlines and provide multiple avenues through which employees can report perceived misconduct without fear of retaliation. Likewise, employers, including both publicly traded companies and their private subsidiaries and affiliates, need to promulgate appropriate codes of ethics and anti-retaliation policies and train managers to be receptive and responsive to employee complaints. Further, on a broader scale, management should adopt leadership models that foster a culture of integrity and accountability throughout the organization. Management should do so with an eye towards encouraging employees to raise complaints internally rather than to third parties.”

The implication here, of course, is that the present situation is the opposite, which as almost anyone who has worked for a corporation will attest, is exactly correct. More often than not, the norm is that employers do routinely retaliate against employees who try to do the right thing and report corporate malfeasance, even internally, and lower-level managers are unresponsive and prone to retaliation. Furthermore, senior management at many companies does not provide any kind of model of integrity and accountability or encourage employees to raise complaints internally.

It will be interesting to see what the impact of this new legislation will be.

According to a Senate investigation conducted several years ago, 50% of the investigations by the SEC’s enforcement division that led to sanctions or prosecution of corporations for violations of securities law over the years since the agency was created in 1934 have been the result of whistleblower disclosures, and that was before the agency was paying bounties for information. People were reporting financial crimes and misbehavior out of moral indignation or a desire for revenge even where there was no financial incentive for them to do so.

But now the new law requires the SEC to pay a bounty, ranging from 10-30% of any sanction that is over $1 million, to a whistleblower. Furthermore, unlike other whistleblower statutes, like the highly-successful False Claims Act which offers bounties to whistleblowers who report fraud by government contractors (which has recovered $25 billion from corporate fraudsters and paid over $3 billion in bounties), this latest whistleblower statute allows the whistleblower to remain anonymous, even from the SEC, until the payment of the bounty, and even then, only the SEC needs to know the identity of the recipient—not the employer. Anonymous tipsters are allowed to have a private attorney contact the SEC for them, and can remain unidentified. It also allows a whistleblower to collect a bounty even if he or she was involved in the scam or scheme, as long as the person is only civilly, and not criminally liable.

One indication that the SEC may take the new law seriously: On July 23, just a day after the July 22 signing of the Dodd-Frank Act into law, the SEC awarded a $1-million bounty to the Connecticut couple who blew the whistle on an insider trading scheme at Pequot Capital Management. It was the largest bounty ever awarded by the SEC under a little-used discretionary bounty law that is limited to insider-trading cases.

As as one attorney with a corporate law firm based in Washington, DC, notes, “This huge bounty award was clearly a signal to potential corporate whistleblowers, and to corporate executives, that the SEC wants people with information about corporate wrongdoing to come forward. I think they’re trying to lure the tiger from the woods.”

Says another attorney specializing in representing corporations in whistleblower cases and other labor issues, “This new statute, if it is aggressively implemented by the SEC, could be a game changer for public corporations.”

DAVE LINDORFF is a founding member of ThisCantBeHappening!, the new independent, collectively-owned, journalist-run online newspaper. His work, and that of colleagues John Grant, Linn Washington and Charles Young, may be found at www.thiscantbehappening.net.