Blowing the Whistle on Securities Fraud Means Money for Whistleblowers
The Dodd- Frank Wall Street Reform and Consumer Protection Act: The SEC Whistleblower Provision
On July 15, 2010 the Senate voted 60-to-39 to adopt the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). President Obama signed the bill into law on July 21, 2010.
Under the new legislation, the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting a new Section 21F, which includes provisions dealing with whistleblower incentives and protection.
Under Section 21F the voluntary submission of “original information” relating to a violation of the securities laws to the Securities and Exchange Commission (“SEC”) that leads to the successful enforcement of a judicial or administrative action, and that results in monetary sanctions exceeding $1,000,000, will entitle the whistleblower to an award equal to not less than 10 percent, but not more than 30 percent, of the total amount of the monetary sanctions collected from the action.1 In contrast with the provision included in the False Claims Act (“FCA”), the whistleblower may not bring an action before the Court pursuant to Section 21F of the Act in the event that the SEC decides not to pursue judicial or administrative action.
The term “whistleblower” includes any individual who provides, or two or more individuals who jointly provide, information relating to a violation of the securities laws to the SEC, in a manner established by rule or regulation by the SEC. The SEC has 270 days after the date of enactment of the Act to issue final regulations implementing section 21F of the Securities Exchange Act of 1934.2
Of particular interest is the broad definition of “original information” that may be presented by the whistleblower. Public information may be included, provided that the information leading to the SEC action is derived from the independent analysis of the whistleblower. The original information cannot be exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information. Likewise, the information is not “original information” as defined by the Act if it is known to the SEC from any other source, unless the whistleblower is the original source of the information.
While the Act provides whistleblower protection against retaliation, the information may be offered anonymously if the whistleblower is represented by counsel. The identity of the whistleblower will be disclosed to the SEC prior to the payment of the award.
All information provided by the whistleblower, unless and until required to be disclosed to a defendant in connection with a proceeding instituted by the SEC or by certain entities specifically identified,3 shall remain confidential and privileged and shall not be subject to civil discovery, or other legal process, and shall not be subject to disclosure under the Freedom of Information Act.
The award is not limited to the information submitted after the enactment of this Act. Rather, if the violations of securities laws have been reported by the whistleblower prior to the enactment of the Act, the whistleblower has a right to collect the award if the monetary sanctions are collected by the SEC after the date of enactment of the Act or if related to a violation for which an award under this section could have been paid at the time the information was provided by the whistleblower.
 The final determination of the amount of the award is in the discretion of the SEC, but among the criteria to be evaluated in determining the amount weigh is given to the degree of assistance provided by the whistleblower and any legal representative of the whistleblower, thus granting significance to the expertise and ability of whistleblower’s counsel. Additional criteria in the determination of the amount of the reward are the significance of the information provided by the whistleblower to the success of the covered judicial or administrative action, the programmatic interest of the SEC in deterring violations of the securities laws by making awards to the whistleblowers, and additional relevant factors as the SEC may establish by rule or regulation. The determination is discretional, but it may be appealed, except the determination of an award, if the award was made in accordance with subsection (b), which provides for a bounty of not less than 10, but not more than 30, percent of the total amount of the monetary sanctions that are recovered.
 The Act does not provide that loss causation is a required element of the action and does not specify how the SEC will calculate the monetary sanctions. The SEC final regulations implementing section 21F of the Securities Exchange Act of 1934, however, may contain provisions on those issues.
 The SEC in its discretion may determine if the information may be disclosed to certain entities, if necessary to accomplish the purpose of the Act and protect the investors. The information, which will not lose its confidential and privileged status, may be made available to: (i) the Attorney General of the United States; (ii) an appropriate regulatory authority; (iii) a self-regulatory organization; (iv) a State attorney general in connection with any criminal investigation; (iv) a State attorney general in connection with any criminal investigation; (v) any appropriate State regulatory authority; (vi) the Public Company Accounting Oversight Board; (vii) a foreign security authority; and (viii) a foreign law enforcement authority. With respect to foreign authorities, the information shall be maintained “in accordance with assurance of confidentiality” as the SEC determines appropriate.
Reuben Guttman is a founder partner in Guttman, Buschner and Brooks PLLC. in Washington, D.C.