Whistleblowing Galore Under the Dodd-Frank Act

Posted on August 24, 2010 by Kevin Griffith

Congress’ recent passage and President Obama’s signing of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” provides significant incentives for financial industry whistleblowers to assist the government root out fraudulent practices and other unlawful conduct in the industry. Supporters of the Dodd-Frank Act are praising its expansive whistleblower protections as a necessary good corporate-citizen tool to help the government ensure a financial crisis like 2008 never happens again.

Under the Dodd-Frank Act, whistleblowers in publicly traded companies are provided significant personal financial incentives to disclose to the SEC “original” information concerning securities laws violations occurring within their companies. “Original” information means the information must be derived from the whistleblower’s independent knowledge or analysis and cannot be known to the SEC from any other source. The available financial reward — or “bounty” — available to a qualifying whistleblower will range from 10% to 30% of any financial recovery in excess of $1,000,000 that the SEC obtains from the targeted corporation, including the amount of any penalties, disgorgement and interest.

The Dodd-Frank Act also protects the whistleblower from being retaliated against by the employer because the whistleblower provided information to the SEC. The Act gives the whistleblower a private right of action in federal court to try to establish the unlawful retaliation. Remedies for the successful whistleblower may include reinstatement, double back pay with interest, expert witness fees, and attorneys fees. Thus, Congress clearly intended for these remedies, coupled with a possible incentive bounty of at least $100,000, to encourage whistleblowers to come forward and assist the government attack corporate financial fraud.

Comparing Dodd-Frank with SOX

Unlike under Dodd-Frank, a whistleblower who is a victim of retaliation under the Sarbanes-Oxley Act of 2002 (“SOX”) must first file a complaint with OSHA of the U.S. Department of Labor and exhaust such administrative remedies before bringing an action in court. As under Dodd-Frank, however, SOX also provides whistleblowers protection from retaliation for providing, in good faith, information to the SEC about possible violations of any SEC rule or regulation. But SOX also provides whistleblowers even broader protection from retaliation, including for reporting information of a possible SEC rule violation within the company to “a person with supervisory authority over the employee” or, for example, to an audit committee.

The remedies available under SOX and Dodd-Frank to whistleblowers who have been retaliated against are similar, except Dodd-Frank expressly allows for the recovery of “double” back pay, while SOX does not. Of course, unlike under SOX, a Dodd-Frank whistleblower also has an opportunity to recover a “bounty” of 10% to 30% of any SEC recoupment over $1,000,000.

Also, the statute of limitations under Dodd-Frank is much longer than under SOX. Under Dodd-Frank, the whistleblower can bring a retaliation action up to six years after the date on which the retaliation occurred, or three years after “the facts material to the claim are known.” By contrast, and as now amended by Dodd-Frank, a SOX whistleblower only has 180 days from the date the employee becomes aware of the retaliatory decision to file a SOX retaliation claim with OSHA.

In addition, as amended by Dodd-Frank, SOX complaints, after administrative exhaustion, can now be tried before a jury and cannot be the subject of mandatory pre-dispute arbitration agreements. Finally, Dodd-Frank amends SOX to clarify that SOX covers whistleblowers who work for subsidiaries of publicly traded companies.

The Dodd-Frank Act – The Gift to Whistleblowers that Keeps on Giving

Dodd-Frank also enacted additional federal whistleblowing protections, including into the Commodity Exchange Act for whistleblowers who report information to the Commodity Futures Trading Commission. In addition, Dodd-Frank also created the new Bureau of Consumer Financial Protection and added protections to financial services industry whistleblowers who disclose information to the company or the Bureau about fraudulent or unlawful conduct by companies that extend consumer credit, provide real estate settlement or appraisal services, or provide financial advisory services to consumers. Similarly, Dodd-Frank broadened the existing anti-retaliation provisions under the Federal False Claims Act.

So, Be Careful If an Employee is Complaining About Financial Fraud in Your Organization

With the passage of Dodd-Frank, President Obama obviously is trying to make good on his administration’s promise to “clean up” the financial services industry. Dodd-Frank’s extensive encouragement of and protections for individual whistleblowers is one step toward trying to keep that promise. The federal government clearly is trying to enlist assistance from employees inside the industry who should be in the best position to know whether any fraudulent or unlawful financial conduct is occurring. Whether these incentives and protections under Dodd-Frank will prove to be an effective step will be determined through litigation in the years to come.
Tags: , , , ,

Are Financial Institutions Required to Comply with e-Verify?

Posted on September 22, 2009 by Mike Underwood

 

As a follow up to our recent post on e-Verify [link], many of our financial institution clients have been asking whether they are required to comply with the new federal e-Verify requirements for federal contractors.

Under federal affirmative action laws, many banks are considered federal contractors because they are issuing and paying agents for U.S. savings bonds or they are insured by FDIC. However, as explained below, issuance and payment of U.S. savings bonds and FDIC insurance do not trigger e-Verify obligations.

Clarifying language in the e-Verify regulations states that:

Agreements or activities performed by financial institutions that are not subject to the FAR (Federal Acquisition Regulation) are not required to comply with the e-Verify provisions and clauses of the FAR.

This statement in the e-Verify regulations is given in response to a specific question about whether banks and other financial institutions whose federal contracts are limited to serving as issuing and paying agents for U.S. savings bonds or being insured by the FDIC should be excluded from e-Verify requirements. Since issuance of or payment on U.S. savings bonds and FDIC insurance are not covered by FAR, they do not trigger e-Verify obligations. Similarly, the clarification notes that financial agency agreements (FAAs) between banks and the federal government are not subject to FAR and, therefore, do not trigger e-Verify obligations.

For all of these reasons, so long as the only federal contracts for your bank are of the sort described above, you can rest assured that you do not have to comply with the federal e-Verify requirements. 

The e-Verify regulations do not address specifically federal share insurance of the sort that credit unions have under the National Credit Union Insurance Fund. However, the rationale for concluding that FDIC insurance does not trigger e-Verify requirements would apply also to federal share insurance for credit unions. 

Tags: , , ,