United States: When The Whistle Blows

Last Updated: January 14 2013
Article by Steven A. Wolf and Orie Attas

The enhanced regulatory environment under Sarbanes-Oxley, Dodd-Frank and the Foreign Corrupt Practices Act coupled with financial incentives to whistleblowers will drive a renewed need for legal counsel and forensic accountants to investigate, report, and remedy alleged U.S. Securities and Exchange Commission ("SEC or Commission") violations. Richard Fogarty, Managing Director of Capstone Advisory Group's FCPA and Global Fraud Investigations practice says, "Given the increased protection and avenues of reporting for whistleblowers, combined with the aforementioned financial incentives and overall efforts of regulators in pursuing the investigation of potential violations of Dodd-Frank, FCPA, or a myriad of other regulations, companies should be ready to investigate."  He added, "Companies should be prepared to operate in a much more active whistleblower environment."

Dodd-Frank Whistleblower Program First Anniversary

The SEC whistleblower program implemented under Section 922 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, effective August 12, 2011, recently celebrated its first anniversary. This whistleblower program is primarily intended to reward individuals who act early to expose violations and who provide significant evidence that helps the Commission bring successful cases against those who violate federal securities laws. To be considered for an award, the rules require that a whistleblower must provide the SEC with original information that leads to the successful enforcement action whereby the SEC obtains monetary sanctions totaling more than $1 million. Awards can range from 10 percent to 30 percent of the money collected.

While Dodd-Frank's monetary award provision and retaliation protection has seen little fanfare thus far, with only one reported SEC sanction and award to date as of October 2012, it may be the catalyst of many more whistleblower actions to come. As a result, organizations should re-examine their internal compliance programs to ensure they are prepared to address possible whistleblower activity that gives rise to SEC enforcement actions, including having a team of outside professionals to perform an independent internal investigation. The Dodd-Frank Act includes enhanced anti-retaliation employment protections for whistleblowers and provisions to protect their identities. The law specifies that the SEC cannot disclose any information, including information the whistleblower provided to the SEC, which could reasonably be expected to directly or indirectly reveal a whistleblower's identity. This protection should also provide potential whistleblowers incentives to report potential securities violations.

Origin of Whistleblower

Whistleblower monetary incentive awards and protection are not new concepts. Even though the Commission enacted the whistleblower award provision only fourteen months ago under Dodd-Frank, its origin dates back 150 years when Congress passed the False Claims Act in 1863, signed by President Lincoln. The False Claims Act was established as a result of fraud and abuse against the federal government by government contractors during the Civil War. Noted examples of the basis for this Act include many Union War Department contracts marked by fraud and abuse such as the government's purchase of faulty rifles and ammunition, purchase of rancid rations for soldiers and the Army's purchase of sick horses from dubious sellers. In fact, the concept of a whistleblower action originates centuries earlier during the 13th century in England. Known as a writ of qui tam, it allowed for a private individual with knowledge of past or present fraud, who assists the prosecution, to receive all or part of any penalty imposed. Today, the qui tam provision of the False Claims Act includes financial incentives to individual "relators", commonly referred to as whistleblowers, to share a percentage of the recovery.

Whistleblower Incentives and Results

According to the Department of Justice ("DOJ"), the U.S. government recovered $30.3 billion pursuant to the False Claims Act between 1987 and 2011. During the fiscal year ending September 30, 2011, approximately 84% or 638 of the 762 new cases that were initiated by the DOJ were whistleblower qui tam actions. This year the DOJ expects False Claims Act recoveries to reach $9 billion. These expected whistleblower recoveries are in large part due to several investigations initiated through qui tam actions involving pharmaceutical manufacturers. Similarly, it is expected that the Dodd-Frank whistleblower provisions will have comparable results for the SEC in the coming years.

The Commission has reported that since the enactment of the Dodd-Frank whistleblower program the number of alleged violation tips per day has steadily increased. In the SEC whistleblower program's first year, 2,870 tips, or about eight per day, were reported as of August 12, 2012. The first award recently announced that has had substantial publicity may lead to additional tips being filed with the SEC. The director of the SEC's whistleblower office, Sean McKessy, stated "We are getting very, very high-quality information from whistleblowers and the fact that we made the first payment after just one year of operation shows that we are open for business and ready to pay people who bring us good, timely information." SEC Chairman Mary L. Schapiro, who advocated for the program, stated that "the whistleblower program is already becoming a success," and "we're seeing high-quality tips that are saving our investigators substantial time and resources." However, Forbes has raised questions about the viability of the program, including whether the quantity of tips will be too high, or the quality too low, to result in many effective enforcement actions, and whether the anonymity provisions will work as intended.

Recent Dodd-Frank First Whistleblower Award

To date, the Commission has reported only one whistleblower case that resulted in an award for helping stop a multi-million dollar fraud. The whistleblower's assistance led to a court ordering more than $1 million in sanctions, of which approximately $150,000 has been collected thus far. In this case, the whistleblower is expected to receive nearly $50,000. The award represents 30 percent of the amount collected in the SEC enforcement action against the perpetrators of the scheme, the maximum percentage payout allowed by the whistleblower law. Although this first award is modest in dollar amount it reflects the maximum whistleblower percentage reward allowable under the Act. Future dollar rewards will likely increase commensurate with greater SEC dollar recoveries.

The award recipient, who did not wish to be identified, provided documents and other significant information that allowed the SEC's investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims. Of note, the SEC did not approve a claim from a second individual seeking an award in this matter because the information provided did not lead to or significantly contribute to the SEC's enforcement action, as required for an award. The court is considering whether to issue a final judgment against other defendants in the matter. Any increase in the sanctions ordered and collected will increase payments to the whistleblower. "This whistleblower provided the exact kind of information and cooperation we were hoping the whistleblower program would attract," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Had this whistleblower not helped to uncover the full dimensions of the scheme, it is very likely that many more investors would have been victimized."

The SEC whistleblower program allows a whistleblower to report violations or potential violations to the SEC while remaining anonymous if the whistleblower submits their information through an attorney. An anonymous tip provides further protection against retaliatory action and added comfort for a whistleblower. Mr. McKessy states that "assistance and information from a whistleblower who knows of possible securities law violations can be among the most powerful weapons in the law enforcement arsenal of the Securities and Exchange Commission. Through their knowledge of the circumstances and individuals involved, whistleblowers can help the Commission identify possible fraud and other violations much earlier than might otherwise have been possible."

In the federal court decision Kramer v. Translux, an employer's motion to dismiss a claim of whistleblower retaliation under the Dodd-Frank Act was denied. In this case, the employee worked as a Vice-President of Human Resources responsible for ensuring that the company's benefit plans were in compliance with applicable law. He had expressed concern to his company's audit committee as well as the SEC of his company's failure to adhere to statutory disclosure requirements. The employee claimed he was reprimanded and was the subject of an investigation. Thereafter, he claimed he was stripped of his responsibilities and later terminated.

The court allowed the employee's claim to proceed, noting that under the facts alleged, the employee had a viable claim. Issues in this case addressed whether the employee was a "whistleblower" protected under the Dodd-Frank Act, 15 U.S.C. Sec. 78u -6(h)(10(A). The employer argued that the employee letter to the SEC was not a protected activity because the employee did not comply with the requirements established by the SEC. The court rejected this argument and found that the employee need only allege that he had "a reasonable belief that the information ...relates to a possible securities law violation". The court found that the protection language of the act is not "unambiguous" and found that e-mails and letters by the employee demonstrated that he "reasonably believed" the company was committing violations of SEC rules or regulations. As Dodd-Frank whistleblower retaliation provisions have begun to be tested and applied, this federal court decision should provide whistleblowers added comfort and assurance to provide tips without fear of retaliation.


During the past year, it appears that the monetary incentive awards and retaliatory protection afforded by the Dodd-Frank whistleblower program are taking hold, resulting in increased tips to the SEC for suspected corporate securities violations. As a result, audit committees, directors and officers, risk compliance managers, and general counsel should anticipate a rising tide of whistleblower activity. Undoubtedly, the Dodd-Frank whistleblower program will stir a renewed effort for corporations to enhance their internal control environment to address how employees report suspected SEC violations and revisit their anti-fraud detection programs. This new wave of investigation will drive a need for outside counsel to engage forensic accountants, fraud investigators and computer forensic professionals to conduct internal investigations.

For more information about the whistleblower program and how to report a tip, visit www.sec.gov/whistleblower.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions