May 21, 2024

Lessons Learned First Dodd Frank Whistleblower Award

Lessons Learned First Dodd Frank SEC Whistleblower Award –  Should Whistleblowers Jump In Naked?

November 2012 – Two years ago the Dodd Frank Wall Street Reform Consumer Protection Act was signed by the President and my firm initiated an advertising campaign in movie theatres in coordination with Wall Street Money Never Sleeps and promoting the new URL which resulted in numerous tips. Two months ago the SEC announced its first ever whistleblower award under Dodd Frank providing the maximum permitted under the statute 30% of the amount recovered which in dollar terms amounted to only $50,000 for now. Given less prominence was its denial of an award in relation to the same proceeding.

The SEC explained that the rejection of an award to the second individual was due to the fact that the information didn’t significantly contribute to the enforcement action. Such demonstrates the importance for any whistleblower to have experienced counsel in submitting and cooperating with the SEC in a whistleblower investigation. Certainly one does not want to bear the heavy burden and expense of being a whistleblower and take all the risks associated with being one, only to discover that the SEC takes action, issues an award and yet they are not compensated. What lessons can be learned by this?

What Risks Does the Whistleblower Take in Filing a Submission?

As an attorney I have represented whistleblowers in the securities industry, including firms such as UBS (UBS), collecting hundreds of thousands of dollars on behalf of whistleblowers in direct FINRA cases against wall street firms, having nothing to do with the SEC, but in reliance upon strong state whistleblower statutes such as those in New Jersey relating to retaliation against the whistleblower such as discharge. In such actions, unlike Dodd Frank, one is not dependent upon the SEC for a recovery.  However, Dodd Frank has greatly expanded the scope of potential whistleblower claims to any violations of securities laws and does not require retaliation to recover.  We have screened literally hundreds of Dodd Frank related whistleblower claims including those involving major corporations such Monsanto (MON) to Morgan Stanley (MS) and Phillip Morris (PM) and have actually submitted several carefully screened and selected claims involving major public corporations. As a result we now have a working knowledge of the minefield that one must be cognizant of when screening and filing a claim.

There is no doubt whistleblowers take substantial risks to their careers and professions by coming forward and one certainly does not wish to take on such risks only to learn that the SEC takes action and deems the whistleblower not worthy of an award. An whistleblower should not simply draft a whistleblower claim and send it on in to the SEC as one does with a resume seeking a job. Those whistleblowers who are employees or former employees of the firm in question must first be careful not to put their own necks on the line in submitting a claim. The whistleblower themselves can be the subject of SEC action or worse, criminal prosecution, if they are found to have participated in the wrongdoing. Submitting a claim does not provide immunity from prosecution by the SEC or criminal authorities. The ramifications of making a haphazard submission can range from receiving an award on the one hand and have that same award taken away as a result of enforcement action fines, or worse criminal prosecution. This absurd possible outcome was one of the many areas I commented on to the SEC during the Rule making process.

As a result, it is important for any whistleblower to have competent counsel who not only has experience in whistleblower claims, and securities   regulations which is the focus of Dodd Frank, including accounting fraud, foreign bribery, insider trading, but also having a criminal background. One must be able to recognize any potential criminal or civil liability to the whistleblower, well before something is filed when they open themselves up to legal action. It does not necessarily mean that the whistleblower should not proceed, but it does mean that their attorney must be experienced and cognizant of the potential issues and whether one would need to negotiate immunity in order to cooperate. If immunity may be required then the information may not be deemed voluntary by the SEC and thus possibly removing the whistleblower from consideration for an award under the rules published by the SEC.

The Real Deal Behind Anonymous Reporting:

Since the law went into effect we have received calls from pay phones from people who refused to provide their real names. We also received calls from people who refused to speak to anyone in my office but me and numerous calls from individuals who clearly were concerned about severe ramifications professionally and even physically if their identity were to be known. The categories of people ranged from ex-wives, to former employees, former business partners, to current members of Board of Directors of major public companies.  Dodd Frank permits anonymous reporting by a Whistleblower if they use an attorney, but in reality if the SEC in fact takes an interest in the submission, at some point they will seek detailed information which will likely narrow down the possibilities of who the whistleblower is. The whistleblower and their attorney will thus need to be prepared in advance on how to handle the possibility of the SEC seeking direct contact with the whistleblower.

Initially such may be accomplished by John Doe conference calls arranged by counsel, but down the road the whistlblower may have to balance his interest in being anonymous to the SEC and willingness to assist the SEC in assisting in their investigation. However, simply because one is revealed to the SEC does not mean the whistleblower is revealed to the world.  Notably in the press release related to the recent award, the SEC did not reveal who the whistleblower was. This was true, notwithstanding the fact that the statute specifically requires the whistleblower to come out from the cover of anonymity at the time the award is to be granted. This demonstrates that the SEC and its whistleblower czar Sean Mckessy Esq. understands and appreciates the importance of protecting whistleblowers, so as to encourage others to come forward. If the matter actually went to hearing or trial and the SEC needed the Whistleblower to testify, which typically is the case; his or her identity obviously would then become known. However if the SEC’s action is significant, at that late stage, it very well may be worth such exposure, as it could lead to millions of dollars in a bounty.

At the end of the day, although the recent award was small in dollar terms, the SEC’s announcement is the first step toward demonstrating that Dodd Frank is for real , but at the same time those wishing to take the giant step of submitting a claim should take such steps carefully with experienced counsel before one jumps in naked.

Stuart D. Meissner Esq. is a New York-based attorney, former securities regulator and financial crimes prosecutor for the New York State Attorney Genera and Manhattan District Attorney’s Office. He represents individual investors, corporate whistle-blowers, securities employees and general consumers in matters related to securities violations.