The Dodd-Frank Act requires the SEC and the CFTC to pay between 10 percent and 30 percent of any award received by the government to whistleblowers who voluntarily provide original information regarding a violation of securities or commodities laws leading to a government recovery. A whistleblower may only recover if the whistleblower is the original source of the allegations. Specifically, the allegation must contain information “derived from the independent knowledge of the whistleblower” that is not otherwise known to the regulatory agency and is not based exclusively on allegations or reports made by another party including both formal reports and proceedings or news reports.
Although the FCA contains a similar restriction, the Dodd-Frank Act’s definition of original source is more specific. Under the FCA, it is doubtful that, if a relator provided new analysis of information that the government already had without providing at least some new facts, the relator would qualify as an original source. The Dodd-Frank Act, on the other hand, specifically allows for a whistleblower providing new “knowledge or analysis” to qualify as an original source. The Dodd-Frank Act also expands the original source rule by providing that the claims may be partially contained in allegations already made public as long as they are not exclusively derived from the public allegations. Thus, while the government may already know some of the facts, if a whistleblower provides information that helps complete the picture, the whistleblower is still entitled to share in the recovery. Again, such an outcome would be unlikely under the FCA.
In some regards, though, the Dodd-Frank Act’s original source rule is more restrictive than that contained in the FCA. The FCA only requires that a relator be an original source if the allegations have already been made public through the news media. If the relator learned of the activity at issue from a third party but it has not been made public or known by relevant government officials, the relator may still proceed with the FCA claim. The Dodd-Frank Act, on the other hand, requires that any claim be “derived from the independent knowledge or analysis of the whistleblower.” Although the meaning of that language may be subject to varying interpretations, it is likely that a whistleblower would be denied a bounty under the Dodd-Frank Act if the allegations are based on knowledge learned solely from a third party, regardless of whether or not it was public.
The Dodd-Frank Act limits the universe of individuals who may recover a bounty. In order for a whistleblower to be entitled to recovery, the information provided cannot be gathered through the performance of an SEC-mandated audit. Furthermore, employees of regulatory agencies, the Department of Justice, a self-regulatory organization, the Public Company Accounting Oversight Board or any law enforcement organization are ineligible to obtain a portion of the award. As under the FCA, the whistleblower is ineligible to participate in the award if he or she is convicted of a criminal violation in connection with the alleged activity. It is noteworthy that individuals conducting internal audits are excluded from recovery under the Dodd-Frank Act if the audit is required by the SEC. The FCA contains no such prohibition on individuals responsible for internal audits participating in a recovery.
The universe of claims for which a whistleblowing party may potentially receive a bounty under the Dodd-Frank Act is expansive. A whistleblower may recover a reward obtained by the government as part of any action brought by the SEC “under the securities laws” or brought by the CFTC under the Commodity Exchange Act. This is far more expansive than the previous provision in the Securities Exchange Act, which applied exclusively to issues of insider trading.
The Dodd-Frank Act does impose two significant limitations on potential recoveries that are not present in the FCA and could prevent the act from having the same consequences as the FCA has had. First, a whistleblower may only recover under the Dodd-Frank Act if the award exceeds $100 million. While calculation of the total award includes all penalties, interest and disgorgement, $100 million may be a significant threshold that will dissuade would-be whistleblowers from bringing claims that they view as more minor. The FCA, in contrast, does not mandate that an award meet any threshold before a relator can share in the award. Second, the Dodd-Frank Act does not provide a whistleblower with a private cause of action, unlike the FCA, which allows a whistleblower to initiate litigation and to continue that litigation if the government declines to participate. Thus, there may be little incentive for a whistleblower to present a claim under the Dodd-Frank Act unless he or she is confident that the evidence is convincing enough for the government to take up the case and that any award could exceed $100 million.
In determining what percentage of an award to allocate to a whistleblower, the act requires the SEC to consider a number of factors, including the significance of the information, the degree of assistance provided by the whistleblower and the interest of the government in deterring such violations. The allocation process is very similar to that contained in the FCA, which provides for a relator to receive 15 percent to 25 percent of the government’s award if the government pursues the claim and 25 percent to 30 percent of the award if the government declines to intervene. The FCA requires that the same factors be considered in determining how to allocate the award. However, while allocations under the FCA are made by the court or the parties through a settlement, allocations under the Dodd-Frank Act will be performed solely by the SEC or the CFTC, with no right to appeal an award that is within the range prescribed by the statute. Under the prior provisions of the Securities Exchange Act, a whistleblower was only entitled to the percentage of a recovery that the SEC “deems appropriate” and that percentage was not to exceed 10 percent. The SEC’s decision was final and there was no right to appeal.
The act allocates a substantial amount of money into funds to pay out potential bounties, suggesting that Congress anticipates that a great deal of enforcement activity will be prompted by the passage of the act. For violations of commodities laws, the fund may grow as large as $100 million and, for violations of securities laws, it may grow to as large as $300 million.
The Dodd-Frank Act also provides substantial protections to whistleblowers to prevent an employer from retaliating against an employee who has filed a report of wrongdoing, either internally or with the government. The act provides an independent cause of action for a whistleblower who has been retaliated against, under which the whistleblower may recover double back pay with interest and attorney fees. The whistleblower is also entitled to reinstatement to the position he or she would have held but for the retaliation. This is very similar to the whistleblower protection provision contained in Sarbanes-Oxley, with two key distinctions. First, while both provide for reinstatement, back pay and litigation costs, Sarbanes-Oxley previously did not entitle the employee to double back pay. Thus, while the civil right of action created by Sarbanes-Oxley may have been effectively crafted to put the parties back where they would have been but for the retaliation, there was no punitive or deterrent aspect of the right of action. Rather, Sarbanes-Oxley relied on potential criminal penalties to deter retaliation. Additionally, under Sarbanes-Oxley, a whistleblower had to first present the claim to the Department of Labor and could only bring a lawsuit after the Department of Labor has declined to intervene.