The financial regulation bill nearing a vote in the U.S. Senate carries new financial incentives and protections for whistleblowers in cases of securities violations. In addition, proposed amendments to the bill would extend whistleblower protections to employees of nationally recognized statistical rating agencies and revive an additional avenue of liability for private litigants to pursue.

Recent amendments to Senator Christopher J. Dodd's bill, the Restoring American Financial Stability Act of 2010, would amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to encourage whistleblowers to report violations. The Senate could vote this week on the bill.

Under the legislation, whistleblowers who provide information leading to a successful enforcement action―where the monetary sanctions imposed exceed $1 million―could be eligible for a bounty of 10 percent to 30 percent of what is collected based on the information provided. The legislation excludes whistleblowers who are criminally convicted for conduct related to the violations. In addition, existing whistleblower protections would be extended to employees of subsidiaries and affiliates of a securities issuer when the subsidiary or affiliate’s financial information is included in the issuer’s consolidated financial statements.

Further, on May 11, 2010, the Senate approved an amendment to Senator Dodd's bill that provides whistleblower protection to employees of nationally recognized statistical rating agencies.

The additional incentives and protections are particularly significant in light of recent research. According to a recent study by the Association of Certified Fraud Examiners, whistleblowers initiated 54.1 percent of fraud cases against public companies. Similarly, a study out of the University of Chicago, soon to be published in The Journal of Finance, found that in cases in which company management did not first discover fraud, whistleblowers were responsible for discovery of the fraud 17 percent of the time. In contrast, the SEC uncovered fraud in 6.6 percent of cases.

In addition to encouraging the reporting of suspected fraud, the legislation would revive an avenue of liability for private litigants to pursue. For nearly 20 years and pursuant to U.S. Supreme Court precedent, only the SEC and Department of Justice have been able to pursue securities fraud actions against secondary actors, or those who aid and abet securities fraud. Senator Arlen Specter recently introduced an amendment to Senator Dodd’s bill that would overturn this precedent and allow private litigants to include secondary actors―possibly lawyers, accountants, and other advisors―as defendants in securities fraud actions.

For more information on SEC enforcement, handling whistleblower complaints, internal investigations, or securities litigation, please contact John C. Grugan at 215.864.8226 or gruganj@ballardspahr.com, Justin P. Klein at 215.864.8606 or kleinj@ballardspahr.com, or M. Norman Goldberger at 215.864.8850 or goldbergerm@ballardspahr.com.


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