A provision in pending financial regulatory legislation would allow whistleblowers in Foreign Corrupt Practices Act ("FCPA") and securities fraud cases to claim a 10 percent to 30 percent bounty in enforcement actions that impose penalties of more than $1 million. The U.S. government has levied significant penalties against corporations and individuals for violations of the FCPA in recent years, including a record $800 million fine in 2008. The promise of bounties measured as a percentage of such large penalties threatens to have immediate repercussions on the enforcement environment faced by companies with securities traded in the United States.
Senate Bill 3217, the Restoring American Financial Stability Act of 2010, seeks to pay a bounty to whistleblowers who voluntarily provide "original information" to the Securities and Exchange Commission ("SEC"). Such whistleblowers could receive between 10 percent and 30 percent of any monetary sanctions imposed in resulting enforcement actions. These payments would be measured by the sanctions imposed not just by the SEC, but also by those imposed in "related actions" brought by the U.S. Department of Justice or other agencies. The SEC would determine the precise amount of any award within the permitted range, taking into account such factors as the significance of the information received and the level of cooperation provided. Individuals convicted of related crimes would be barred from receiving awards. Whistleblowers are permitted to be represented by counsel under the legislation, and those who choose to provide information anonymously are required to have an attorney.
The SEC has operated a so-called "Bounty Program" for more than 20 years in connection with its enforcement of insider trading laws, although the agency has made few such awards. Some commentators suggested that the SEC expand this existing program to apply to all securities fraud after New York investment adviser Bernard Madoff cost investors billions of dollars in a massive Ponzi scheme that went undetected by the SEC for several years. In a June 30, 2009 letter to Representative Paul Kanjorski (D-Pa), however, the SEC's Inspector General H. David Kotz recommended that Congress itself create an expanded whistleblower program and provide specific criteria for awarding bounties.1
The program described in the Senate legislation would complement existing whistleblower protections provided by the Sarbanes Oxley Act of 2002 ("SOX"). Section 1107 of SOX grants the DOJ jurisdiction to impose criminal penalties on companies or individuals who knowingly and willfully retaliate against whistleblowers raising concerns about criminal law violations. SOX § 1107, 18 U.S.C. § 1513 (2006). Section 806 of SOX further creates a private right of action for whistleblowers who suffer retaliation for reporting violations of the securities laws or SEC regulations. 18 U.S.C. § 1514A(2) (2006).
Proponents of the Senate whistleblower provisions argue that the promise of a financial windfall is necessary to encourage key witnesses to come forward in light of the personal and professional risk associated with reporting violations. They point to a 2008 report from the Association of Certified Fraud Examiners, which found that more than half of the 1,000 fraud cases studied were discovered by tips, often from employees; only 4 percent of cases were found by external auditors, such as the SEC.2 As one expert noted in written testimony to the House Committee on Financial Services, whistleblowers are the "best and cheapest" source of cases.3
On the other hand, it is not entirely clear that increased financial incentives for whistleblowers will result in better corporate compliance. Such rewards may create an incentive for employees to hide ongoing violations and report them externally, rather than taking proactive measures to stop ongoing violations. Moreover, giving witnesses a financial stake in enforcement actions arguably undermines the legitimacy and reliability of complaints, fostering spurious reports that could drown out the voice of legitimate whistleblowers. Allowing whistleblowers to submit reports anonymously only increases the risk of false alarms. The time and effort spent investigating such false accusations would be borne not only by the companies involved, but also by the SEC.
Footnotes
1.Congressman Paul E. Kanjorski web site, "7/1/2009: Kanjorski Receives SEC Inspector General's Initial Legislative Proposals From Madoff Investigation," available at kanjorski.house.gov/index.php?option=com_content&task=view&id=1571&Itemid=1 (all web sites herein last visited June 7, 2010).
2.2008 Report to the Nation on Occupational Fraud and Abuse, Association of Certified Fraud Examiners, available at www.acfe.com/documents/2008-rttn.pdf .
3.Testimony of Harry Markopolos, CFA, CFE, Chartered Financial Analyst, before the U.S. House of Representatives Committee on Financial Services (Feb. 4, 2009), available at financialservices.house.gov/markopolos020409.pdf .
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