A whistleblower provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act will likely lead to a large increase in whistleblower payouts.

The Dodd-Frank Act would add a new Section 21F to the Securities Exchange Act of 1934, as amended, encouraging whistleblowers to report violations of securities laws, including the Foreign Corrupt Practices Act (FCPA). Under the legislation, a whistleblower who provides original, independently derived information on a securities law violation that leads to monetary sanctions in excess of $1 million could be entitled to between 10 percent and 30 percent of any monetary penalty imposed on the corporate defendant. The amount of the award paid to the whistleblower would be determined by the U.S. Securities and Exchange Commission. The legislation excludes whistleblowers who are criminally convicted for conduct related to the violations.

The Dodd-Frank Act also creates a private right of action for whistleblowers against employers that retaliate. If a whistleblower prevails in an unlawful discharge or discrimination action, he or she would be entitled to:

  • Reinstatement at the same status
  • Compensation in the amount of back pay owed with interest
  • Reimbursement for litigation costs, including expert and attorneys fees

The whistleblower would have two years from the date of the retaliation to bring a complaint directly in federal district court.

Although this new provision would apply to all securities law violations, it could have a particular effect on FCPA violations, where prosecutions and settlements have risen dramatically in recent years, due, in large part, to the fact that the SEC and U.S. Department of Justice have focused their resources there. With corporations paying ever larger fines, whistleblowers would have a great incentive to report potential misconduct. As a result, companies may find themselves in a race to disclose their own misconduct first.

Proactively, corporations should ensure that they are prepared to handle a possible increase in reports of misconduct. Corporations should have an FCPA compliance program in place, including clear procedures for employees to report possible violations to the company, and a plan to investigate allegations of misconduct. In addition, in light of the increased risk of disclosure by current or former employees, companies should re-analyze whether and when to self-disclose a violation.

Ballard Spahr's Financial Institutions Reform Task Force will continue to monitor these and other portions of the Dodd-Frank Act, and its members are available to assist clients as they prepare to address the new requirements. For more information on handling whistleblower complaints or internal investigations, please contact Beth Moskow-Schnoll, 302.252.4447 or moskowb@ballardspahr.com; or John C. Grugan, 215.864.8226 or gruganj@ballardspahr.com.

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