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Second Whistleblower Award Under Dodd-Frank 11/25/2013

Posted by Morse, Barnes-Brown Pendleton in Corporate, Legal Developments.
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Corporate Attorney Joseph MarrowBy: Joseph Marrow

More than three years ago, pursuant to the Dodd-Frank Act, the Securities and Exchange Commission (SEC) established an award program for whistleblowers creating a new private right of action for employees in the financial services sector who suffer retaliation for disclosing information about fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service. See article from December 2010 Enhanced Whistleblower Provisions Under Dodd-Frank Act. It was expected that the program would lead to a bounty of whistleblower awards. This has not been the case. Indeed, on August 30, 2013, the SEC announced just the second payment under the program, a $125,000 award to three whistleblowers.

The most recent award was made in connection with information that led to an SEC enforcement action against Andrey Hicks, the operator of a sham hedge fund. To be eligible for an award, whistleblowers must provide the SEC with “original information” about a violation of the securities laws that leads to a successful enforcement action in which the SEC obtains monetary sanctions exceeding $1 million. The information provided must cause the SEC to start or reopen an investigation or must significantly contribute to the success of an SEC enforcement action.

In Hicks, two of the whistleblowers furnished the SEC with information that led the SEC to open an investigation. The other whistleblower provided information that identified key witnesses and corroborated information provided by the other whistleblowers. Interestingly, the SEC only awarded the whistleblowers 15% of the award collected (the Dodd-Frank Act allows the SEC to award up to 30% to the whistleblower). It is possible that extenuating factors were in play that led to a lower award – possible culpability on the part of the whistleblowers.

The record in the proceeding demonstrates that the award process can be quite time consuming – it took more than 20 months from the filing of the enforcement action before the SEC issued its final whistleblower eligibility order. The length of time for the award process to be completed may present the most compelling evidence why there have been so few awards since the program was enacted.

For more information on this topic, please feel free to contact Joe.

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