Dodd-Frank Whistleblower Provisions

In addition to tighter scrutiny of publicly traded companies and securities dealers, the Dodd-Frank legislation established protections and rewards for whistleblowers who report fraud, corruption and other criminal acts relating to investment programs.

SFMS represents executive insiders, employees and citizens who report fraudulent activity to the Securities and Exchange Commission or assist federal law enforcement agencies in prosecution of securities fraud. Our firm has been at the forefront of whistleblower lawsuits under Dodd-Frank, with numerous recoveries and many investigations in progress.

With multiple offices around the U.S., we are able to represent whistleblowers nationwide. Our affiliation with the law firm of H.S. Brown, Ltd., further enables us to pursue whistleblower cases which involve corruption of foreign officials or otherwise overlap into European jurisdictions.

Whistleblower Claims Under The Dodd-Frank Securities Fraud Provisions

In July 2010, Congress signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which includes a whistleblower program that directs the SEC to pay monetary awards to whistleblowers who provide information against publicly traded companies for violations of U.S. federal securities laws, including violations under the Foreign Corrupt Practices Act (FCPA).

Potential whistleblower claims under Dodd-Frank may involve evidence of:

  • Manipulation of a share or security's price or volume
  • Fraudulent or unregistered offer or sale of shares or securities, including Ponzi schemes, high-yield investment programs and other investment programs
  • Insider trading
  • False or misleading statements about a company or its performance
  • Abusive naked short selling
  • Theft or misappropriation of funds or securities
  • Fraudulent conduct or other problems associated with municipal securities transactions or public pension plans
  • Bribery of foreign officials (in violation of the FCPA)

Dodd-Frank And Foreign Companies

To have a possible claim under Dodd-Frank's whistleblower provisions, the violation does not even have to be committed by a U.S. company. Dodd-Frank allows the SEC to exercise its regulatory enforcement powers over foreign companies listed on the U.S. stock exchange, as well as U.S. companies with foreign operations. Thus, where a company's conduct within the U.S. constitutes a significant step in furtherance of a violation of U.S. securities laws, even if the transaction occurs outside of the U.S. and involves only foreign investors, or a company's conduct occurring outside of the U.S. has a foreseeable substantial effect within the U.S., the SEC may bring an enforcement action against the company in U.S. District Court and, as provided by Dodd-Frank, the U.S. District Court has jurisdiction over the action.

A violation of the FCPA can also give rise to a potential whistleblower claim against publicly traded companies. This is because Dodd-Frank applies to violations of securities laws and, pursuant to 15 U.S.C. § 78dd-1, the FCPA is a securities law which governs all U.S. issuers. Under the FCPA's anti-bribery provision, it is unlawful for certain classes of people and entities — including U.S. companies and citizens, companies listed on the U.S. stock exchange (including foreign companies whose misconduct touches and concerns the U.S.), or any person acting while in the U.S. — to make payments or offers of payments to foreign government officials to assist in obtaining or retaining business.

The FCPA also requires U.S. issuers, both domestic and foreign companies, to create and maintain accurate books and records, and to devise an adequate system of internal accounting controls. Enforcement responsibilities for FCPA violations are shared by the Department of Justice (DOJ) and the SEC. The DOJ enforces the FCPA's criminal anti-bribery provisions, while the SEC enforces the FCPA's civil books and records provisions.

Finally, under Dodd-Frank, the SEC is expressly authorized to impose aiding and abetting liability on any person who "knowingly or recklessly had aided, abetted, counseled, commanded, induced or procured" a violation of the Securities Exchange Act, Investment Advisers Act or the Investment Company Act. Such a person who provides substantial assistance to another person in the violation of these laws "shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided."

Dodd-Frank Reporting Procedure

The Dodd-Frank whistleblower program requires the whistleblower to file a tip, complaint or referral ("TCR") with the SEC's whistleblower office, via fax, post or online through the SEC's website. The SEC whistleblower office then investigates the TCR and determines whether or not to pursue the case. If the government decides not to take action, the whistleblower's claim will become extinguished.

Who Can Be A Whistleblower?

Under Dodd-Frank, a "whistleblower" is defined as any individual who provides or two or more individuals acting jointly who provide information to the SEC relating to a violation of the securities laws, within the manner and rules established by the SEC.

There are three basic requirements to be an eligible whistleblower under Dodd-Frank: The whistleblower must voluntarily submit original information regarding the possible violations of securities laws that leads to a successful SEC action.

Voluntarily means the information is submitted "before a request, inquiry or demand" is made by the SEC or another regulatory or enforcement agency or self-regulatory organization such as the Financial Industry Regulatory Authority (FINRA).

Original information is information that: is derived from the whistleblower's independent knowledge or analysis; is unknown to the SEC at the time of submission; does not come exclusively from a public allegation or from the news media; and was submitted after July 21, 2010. To qualify as independent knowledge, the information must have been obtained from non-publicly available sources. In other words, non-public information that is obtained secondhand, such as through discussions with others, may qualify as independent knowledge. On the other hand, to qualify as independent analysis, the information must be the product of the whistleblower's own evaluation and analysis, even if the information itself is derived from publicly available sources, such as a company's public securities filing.

Leads to a successful SEC action means that the information causes the SEC to open a new investigation, re-open a previously closed investigation or pursue a new line of inquiry in connection with an ongoing investigation, and the information brings a successful enforcement action based at least in part on the information provided by the whistleblower. The whistleblower may still be eligible even if he or she reported the information internally first to the company and the company later reports the whistleblower's information to the SEC or it reports the results of an internal investigation that was prompted by the information, as long as the whistleblower reports directly to the SEC within 120 days.

How Are Dodd-Frank Whistleblowers Compensated?

Similar to a qui tam action under the False Claims Act, an eligible whistleblower in a securities fraud case may be entitled to a financial reward if he or she provides information that leads to a successful enforcement action. If the total monetary sanctions levied against the company exceed $1 million, a qualifying whistleblower shall receive an award between 10 and 30 percent of the SEC's total recovery.

Relief From Retaliatory Actions

Dodd-Frank also provides protection to whistleblowers. The act forbids employers to "discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against" a whistleblower in the terms and conditions of employment as retaliation for a lawful act done by the whistleblower, either by providing information or assisting in the SEC's investigation.

However, an action for retaliatory claims must be made in a timely manner. The action must be brought within six years from the retaliatory act or within three years after the date when facts material to the right of action are known or reasonably should have been known by the employee. Relief may include reinstatement with the seniority status that the individual would have had, double the amount of back pay with interest and compensation for litigation costs and expenses.

Although a non-U.S. citizen may be eligible to claim a whistleblower reward, recently, some U.S. courts have held Dodd-Frank's anti-retaliation provisions do not apply extra-territorially. See, e.g., Meng-Lin Liu v. Siemens A.G., 13 CIV. 317 WHP, 2013 WL 5692504 (S.D.N.Y. Oct. 21, 2013).

Are You Aware Of Securities Violations?

A whistleblower may submit a complaint with the SEC whistleblower office without being represented by a lawyer under Dodd-Frank. However, in order to preserve anonymity, a whistleblower must retain a lawyer and have the U.S. attorney file his or her claim. Anonymity serves as a protection to an employee who is afraid of retaliation. Moreover, an experienced SEC whistleblower lawyer can help to evaluate the information, provide guidance and secure a higher reward.

The decision ultimately lies with the SEC whether to prosecute or decline a case. The attorneys of SFMS can help you protect your interests and convince the SEC to follow through on your concerns. We handle cases nationwide and internationally, with offices in California, Florida, New York and beyond. Contact SFMS for a confidential consultation.