Enhanced Whistleblower Bounty Provisions Of The New Financial Reform Law May Prompt Increased SEC Enforcement Activity

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On July 15, 2010, after months of deliberation, Congress passed a comprehensive financial reform bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). President Obama is expected to sign the act into law this week.

Most of the media attention surrounding the Dodd-Frank Act has focused on provisions creating sweeping changes throughout the financial sector. A sleeper provision in the act, however, may prove to be a harbinger of increased enforcement activity by the Securities and Exchange Commission (SEC). Section 922 of the act provides that the SEC may award whistleblowers who report securities violations, including violations of the Foreign Corrupt Practices Act (FCPA), anywhere between 10 and 30 percent of any monetary sanctions recovered by the SEC that exceed $1 million.

The SEC has had a whistleblower bounty program for reports of insider-trading violations since 1989. This limited program, to date, has resulted in a total of only $159,537 paid to only five claimants. Largely as a response to public outcry over the extraordinary fraud scheme perpetrated by Bernard Madoff, and the SEC’s apparent failure to act on valuable information about Madoff’s scheme provided by whistleblower Harry Markopolos, the Dodd-Frank Act greatly expands the whistleblower bounty program to include all securities violations. The new program applies to a wide range of securities law violations, including improper revenue recognition and other types of accounting fraud, insider trading, false representations in financial statements, and FCPA violations.

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