Whistleblowing Opportunities Increase Under New Law


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The new Financial Reform Law, signed last month, allows whistleblowers to receive an award from the Securities and Exchange Commission (SEC) for providing information about securities fraud.  The new law is expected to cause an increase in whistleblowing cases filed, in part due to the fact that foreign companies operating in the U.S. will be held accountable under U.S. securities laws.  Some foreign companies may not have laws in their home countries that provide incentives for whistleblowers.  However, if fraud is committed by a foreign company in the U.S., whistleblowers can file cases and receive awards.  Shawn  Chen, a partner at Cleary Gottlieb Steen & Hamilton explained that, “‘The provision will have some wide-ranging consequences, affecting a lot of foreign companies who have securities that trade in the US, but who don’t necessarily think of themselves as being regulated by the SEC.’”

The new law will encourage reporting two kinds of cases: regulation of derivatives and violation of security laws.  It is expected that many of these claims will come from providing false information in corporate listings.  Tim Coleman, partner at Freshfields Bruckhaus Deringer, believes that corporations will be the largest target of whistleblowing cases because there are many corporations with many employees and fraudulent activity may be easier to identify and report.  For instance, it may be easy to demonstrate that the books may not add up correctly.

The pay-off for whistleblowers is at least $100,000, because whistleblowers must receive a minimum of 10 percent to a maximum of 30 percent of government recoveries (and whistleblowers can only receive awards in cases that recover $1 million or more). The SEC believes that 10 percent is an appropriate minimum considering the risk of being a whistleblower.  According to SEC official Stephen Cohen, this monetary incentive may encourage whistleblowing from those that are higher ranked in a company and therefore worried about losing their jobs.  “‘The scale of awards reflects the high quality of whistleblower we hope to get—people within a company, broker or other regulated firm we might not have heard from before.’”  (On the risks of being a whistleblower, see our recent blog: “Why It’s Worth It To Be a Whistleblower.”)

Karen Kaiser and her husband hold the record payoff from the SEC of $1 million because they blew the whistle on Kaiser’s ex-husband, which led Pequot Capital Management to pay $28 million to settle an insider trading case.

Masters, Brooke and Jean Eaglesham. “Tip-off law set to spark bounty hunts.” The Financial Times. 8 August 2010. http://www.ft.com/cms/s/0/f271ebcc-a313-11df-8cf4-00144feabdc0.html.
U.S. Securities and Exchange Commission. “SEC Center for Complaints and Enforcement Tips.” 21 July 2010. http://www.sec.gov/complaint.shtml.



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