Legal Developments in Securities Law

How Can I Claim an SEC Whistleblower Award: Dodd-Frank’s Whistleblower Incentives

Under the Sarbanes-Oxley Act of 2002 (SOX), the whistleblower provision prohibited publicly traded corporations from taking any adverse employment action against an employee that internally reported or externally disclosed conduct reasonably believed to be a violation of any rule or regulation of the Securities and Exchange Commission (SEC) or a violation of any provision of federal law concerning fraud against shareholders. While SOX was initially thought to provide important whistleblower protection, it soon became apparent that the laws under SOX did not do enough to encourage potential whistleblowers to come forward.

With the passage of the Dodd-Frank Act came great whistleblower incentives, including anti-retaliation provisions and the payment of bounty for a whistleblower’s tip, complaint or referral.  Since July 21, 2010, whistleblowers have been able to submit information to the SEC or CFTC pursuant to the new provisions in the Dodd-Frank Act, but the new Whistleblower Program took full effect today.

Individuals who feel they may have important information concerning a potential securities law violation should be aware of the following conditions:

Who Can Be a Whistleblower:

A whistleblower is not limited to an employee of a company, but can be any individual with original information about a potential securities law violation. Notably, companies and organizations cannot qualify as whistleblowers. In addition, a whistleblower will be denied a bounty if:

  • the whistleblower fails to submit information in accordance with the form required by the SEC
  • the whistleblower is or was at the time of submission a member of a regulatory agency, the Department of Justice, a self-regulatory organization, the Public Company Accounting Oversight Board, or any law enforcement organization
  •  the whistleblower is convicted of a criminal violation related to the judicial or administrative action involved; or
  • The whistleblower learned the information through performing an audit.

What Entitles a Whistleblower to a Bounty: 

The Exchange Act has been modified to provide the whistleblower a monetary incentive if the individual provides information relating to a violation of ANY of the securities laws.  A whistleblower is entitled to an award if:

  • A proceeding by the SEC results in monetary sanctions which exceed $1 million
  • The information provided by the whistleblower came from the whistleblower’s independent knowledge or analysis
  • The information provided by the whistleblower is either the only source for the SEC of that information or if it was the original source for the SEC; and
  • The information provided is not exclusively obtained from a judicial proceeding or other public source, unless the whistleblower was the original source of that information.

What Kind of Bounty Could a Whistleblower Receive:

If all of these conditions are met, then the SEC is required to pay the whistleblower 10% -30% of the monetary sanctions imposed in the action.  Although the SEC is required to pay the whistleblower an amount from 10-30%, the actual amount is within the discretion of the SEC, dependent on factors such as the significance of the information provided, the degree of assistance from the whistleblower, the SEC’s interest in creating an incentive for reporting potential securities law violations and other factors as established by the rule or regulation.

The whistleblower “bounty” program creates an incentive that previously did not exist – a whistleblower could stand to benefit immensely from alerting the SEC or CFTC about a potential securities law violation. For example, if the SEC collects $2,000,000 in penalties, disgorgement and interest from its successful prosecution of securities law violations that were related to the original information provided by the whistleblower, the whistleblower could earn between $200,o00 and $600,000 for his or her tip, complaint or referral.

What Other Incentives Are Offered to Whistleblowers:

Anti-Retaliation: The Dodd-Frank Act now protects whistleblowers from being demoted, suspended, threatened, harassed (directly or indirectly) or in any way discriminated against because the whistleblower provided information to the SEC, assisted in any proceeding brought by the SEC based on such information or made any disclosures required or protected under SOX. The new legislation now provides a private cause of action for reinstatement of the same seniority status the whistleblower would have had but for the discrimination, two times the amount of back-pay otherwise owed, with interest, and compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.

Anonymity: If the whistleblower wishes to remain anonymous, he or she must retain an attorney to submit the information about a potential securities law violation to the SEC or CFTC.

What the Dodd-Frank Whistleblower Incentives Mean:

With the new incentives in this legislation, individuals can gain a monetary reward in addition to greater legal protections from retaliation. Individuals who have experienced retaliation as a result of providing information to the SEC or those who feel they have important information to submit to the SEC should consider retaining an attorney with securities law experience to assist them with their retaliation claim or with submitting their information through the SEC’s online questionnaire or a Form-TCR. Of course, those individuals who wish to remain anonymous are required to retain an attorney to participate in the Whistleblower Program.

View the SEC’s Statement on the New Whistleblower Program


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