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Dodd-Frank

Whistleblowers, Dodd-Frank and Sarbanes-Oxley

by   |   August 5, 2010

The Dodd-Frank Act and the Sarbanes-Oxley Act both have provisions for whistleblowers.  Public companies need to be familiar with all of these provisions.

The Dodd-Frank Act provides that if a “whistleblower” provides “original information” in certain judicial or administrative actions, the whistleblower may be entitled to as much as 10 percent to 30 percent of the monetary sanctions imposed.  The provisions of the Dodd-Frank Act, unlike the Sarbanes-Oxley Act, do not appear to be strictly limited to public companies.

The term whistleblower means any one or more individuals acting jointly who provide information to the SEC relating to a violation of securities laws.  The term “original information” as used in the Dodd-Frank Act means information that:

  • is derived from the independent knowledge or analysis of a whistleblower;
  • is not known to the Commission from any other source, unless the whistleblower is the original source of the information; and
  • is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information.

 

The Dodd-Frank Act also provides protection for whistleblowers.  It states no employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because

of any lawful act done by the whistleblower:

  • in providing information to the SEC in accordance with the provisions of the Dodd-Frank Act;
  • in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
  • in making disclosures that are required or protected under the Sarbanes-Oxley Act, the Securities Exchange Act and any other law, rule, or regulation subject to the jurisdiction of the SEC.

 

The Dodd-Frank Act also provides an employee with remedies against the employer if the employer is found to have violated the whistleblower provisions of the Dodd-Frank Act.  Remedies available to the employee include reinstatement with the same seniority status that the individual would have had, two times the amount of back pay otherwise owed to the individual, with interest; and compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.

The Dodd-Frank Act provides a statute of limitations for whistleblower actions of six years after the date of violation and three years after the facts should have been reasonably known by the employee alleging a violation, with an outside limit of ten years.

The Dodd-Frank Act also includes a similar provision for whistleblower actions related to the violation of commodities laws that is supervised by the Commodity Futures Trading Commission.

Concern has been expressed by the issuer community about the ramifications of these whistleblower rewards.  Large monetary fines in recent Foreign Corrupt Practices Act cases may provide an incentive to report alleged FCPA violations.  Public companies have relatively few defenses to an FCPA action, especially if an employee pleads guilty.

Sarbanes-Oxley

Section 806 of Sarbanes-Oxley provides no company with a class of securities registered pursuant to the Securities Exchange Act of 1934 or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee:

  • to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of certain criminal statutes, any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by certain Federal regulatory agencies, certain congressional investigations or certain supervisory personnel; or
  • to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed relating to the same criminal statutes, SEC rules, or any provision of Federal law relating to fraud against shareholders.

 

Damages and other remedies for breach of this section by employers can include  reinstatement with back pay and compensation for any special damages incurred.

Sarbanes-Oxley provides an action must be commenced by an employee within 90 days after the violation occurred by filing a complaint with the Secretary of Labor.

Section 301 of the Sarbanes-Oxley Act also requires each audit committee to establish procedures for:

  • the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and
  • the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.

 

Finally Section 1107 of the Sarbanes-Oxley Act makes it a crime to knowingly, with the intent to retaliate, to take any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense.

What Does All This Mean?

Employers, particularly public companies, must tread carefully when dealing with potential whistleblowers because of the non-retaliation provisions.  In addition to Dodd-Frank and Sarbanes-Oxley, there may be state law protections as well.  Whistleblowers now have a monetary incentive to report matters to the SEC rather than company management.  Accordingly, management should reemphasize to all employees the importance of prompt reporting of violations to management in accordance with established procedures.  Public companies should pay increased attention to complaints submitted to audit committees or employee hotlines to address areas of potential concern.  Where appropriate, companies should also revisit FCPA compliance procedures to avoid whistleblower claims.