Since the August 2011 adoption of the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act, the barriers for employees of SEC-regulated corporations and financial institutions to report wrongdoing by their companies (known as whistleblowing) have been significantly lowered. If a whistleblower voluntarily provides information to the SEC, and that information leads to a successful enforcement action of at least $1 million, the whistleblower will not only be protected from losing his or her job, but will be eligible from between 10% to 30% of what the government recovers from the delinquent company. On its face, the Act sounds like a giant leap forward in both nailing wrongdoers engaged in securities fraud and protecting the whistleblowing employee from retaliation by his or her boss, right? Maybe not.
The increase in whistleblower claims has become both stifling and problematic. According to businessinsider.com, the SEC Office of the Whistleblower received close to 400 claims within the first few weeks of the Dodd-Frank Act’s inception in August of 2011, a figure that has increased to over 100 claims per day and rising. By making it incredibly easy to file whistleblower claims (it can be done with only a few clicks at sec.gov/whistleblower), with virtually no costs to file a claim and potentially high benefits to the whistleblower if a claim succeeds, the claims have been flooding in, overwhelming the SEC in the process. The rapid filing of these claims is directly attributable to the minimal standard required by the Act. The Act allows a whistleblower to be eligible to collect a reward if they have a “reasonable belief that disclosure to the SEC is necessary to prevent the company from engaging in conduct that could cause substantial injury to investors,” virtually leaving the decision to the discretion of the claimant.
While the intention of the act was to discover major violations by SEC-regulated institutions as soon as possible, what has instead resulted is a situation of extreme disloyalty. Rather than approaching the compliance departments of their respective institutions, which often are perfectly capable of handling issues that arise, employees are going directly to the SEC. With eyes widened by the prospect of a potential financial windfall, employees are rushing to report these claims, a majority of which, writes Denise Champagne of the Daily Record, are not detailed enough, and prove futile for the SEC. If these instances were first reported to the financial institutions’ compliance departments, many of them could be handled internally without incurring the high costs associated with an SEC investigation. By bypassing this stage, it also takes away the institutions’ ability to report these claims to the SEC themselves.
In order to limit whistleblower claims, it would be wise for the financial institutions to incorporate whistleblower remedies into their internal infrastructure. Some have suggested that these institutions provide internal, penalty-free incentives and rewards for coming forward with a claim. Under this system, a whistleblower would still be rewarded for honesty without the accompanying disloyalty, while the company would avoid the high SEC costs.
The frequency with which these whistleblowing claims are being filed is diluting the very purpose of the Dodd-Frank Act. If the financial institutions and corporations could internally stem the flow of these claims, it would be beneficial to both the firms and the SEC as a whole.
Richard Roth is the founder and president of The Roth Law Firm, PLLC, a boutique litigation firm that concentrates in litigating securities arbitrations and SEC/FINRA enforcement actions.