Securities Deception, SEC Whistleblowers, from Outlet St Below the Dodd-Frank Function

On July 21, the Dodd-Frank Wall Street Reform Consumer Protection Act was signed into effect, finally giving teeth to the SEC whistleblower program. The Act entitles securities fraud whistleblowers to between 10-30% of SEC recoveries for original information prompting “any judicial or administrative action brought by the commission underneath the securities laws that results in monetary sanctions exceeding $1,000,000.” Before the Dodd-Frank Act, there is no minimum whistleblower award – meaning that successful whistleblowers could risk their careers and still receive nothing – and the utmost award was just 10%. Consequently, prior to the enactment of the Dodd-Frank Act, few whistleblowers were motivated to come forward and those who did come forward were awarded with paltry sums.

Consider Madoff whistleblower, Harry Markopolis. His warnings to the SEC of the biggest securities fraud in American history went largely ignored, and he received nothing for uncovering the $50 billion fraud. Although it should be little consulation to Markopolis, underneath the newly enacted Dodd-Frank Act, he could be entitled to no less than 10% of any disgorgement, pre-judgment interest, and civil-penalty that the SEC ultimately recovers from the Madoffs.

Likewise, there has been muted buzz about the recent SEC payout to whistleblowers’ Karen and Glenn Kaiser, who received the biggest SEC whistleblower award currently – $1,000,0000 – for reporting Mrs. Kaiser’s ex-husband, David Zilkha, for insider-trading. Zilkha, a former Microsoft employee, allegedly gave insider-information about Microsoft to hedge-fund manager, Arthur Samberg, at Pequot Capital. Whilst the $1M award was extremely large compared to previous sums paid to whistleblowers by the SEC, it would have been no less than almost three-times that amount underneath the new Dodd-Frank provisions (the Pequot SEC settlement was $28 million). And if the beefed-up SEC whistleblower program is even near to as promising as its cousin – the False Claims Act – then your Kaiser whistleblower award will soon be paled by future SEC whistleblower awards. The Department of Justice estimates that $13 billion has been recovered underneath the federal False Claims Act since the act was overhauled in 1986 and that a lot more than $2 billion has been paid to whistleblowers.

The newest SEC whistleblower provisions underneath the Dodd-Frank Act also expand the scope and kinds of fraud to which this program applies. Previously, the SEC only paid rewards for information regarding insider-trading, such as that paid to the Kaisers for the Pequot insider-trading fraud. protections for whistleblowers  This may be particularly important in your community of Foreign Corrupt Practices Act investigations, which may have international implications and have historically amounted for a number of the SEC’s largest settlements and judgments (e.g., in 2009 KBR paid $402 million in criminal fines; in 2008 Siemens paid $450 million).

Perhaps most of all, the brand new provisions provide a whistleblower’s identity might be protected and held confidential if the whistleblower reports its original information to the SEC by and through his / her attorney. Following the investigation is concluded, however, a whistleblower must reveal her identity to be able to receive the statutory share of the award. Just how these new provisions will soon be implemented is ultimately around the SEC and has yet to be determined. Pursuant to Section 924, the SEC must promulgate rules and regulations for implementing the whistleblower reward and protection provisions of the Dodd-Frank Act within 270 days of its enactment – on or before April 18, 2011. Time will tell how it’ll play out.



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