Eligibility for SEC Whistleblower Rewards
A memo circulated in early February regarding the Financial Choice Act produced by House Financial Services Chairman Jeb Hensarling (R-Texas) has proposed the elimination of SEC whistleblower rewards for co-conspirators.
The SEC whistleblower program established by the Dodd-Frank Act currently prohibits the SEC from taking into account any monetary sanctions “based on conduct that the whistleblower directed, planned, or initiated.” If a whistleblower is nevertheless eligible for a reward, there is no reward percentage based on monetary sanctions paid for such conduct. There is also no reward if a whistleblower is convicted of a criminal violation related to the judicial or administrative action.
This is a fairly common standard in the U.S. whistleblower laws. The IRS whistleblower program allows the reduction of awards if the whistleblower planned and initiated the tax underpayment. It also forbids awards to whistleblowers that are criminally convicted for their role in planning and initiating the action.
The False Claims Act, the nation’s leading law against fraud, bars the pursuit of a False Claims Act lawsuit by a person convicted of criminal conduct arising from his or her role. Awards can be reduced if the relator planned and initiated the fraud. In the legislative history of the False Claims Act, the theory behind this was espoused that sometimes the best way to stop fraud is by “setting a rogue to catch a rogue.”
Changes to the SEC Whistleblower program
Ultimately, the scope of the change to the SEC whistleblower program if the law passes will depend on the definition of co-conspirator. A broad definition of the term could put rewards for people who were not entirely innocent in jeopardy. For example, if an individual was ordered to engage in misconduct by their boss and they complied, they could potentially be ineligible for a reward under the proposed law.
The emergence of an employee that has participated in the fraud as a whistleblower has been a cornerstone of many False Claims Act cases. An individual that is a true insider to a fraudulent scheme often has great evidence of the fraud and a comprehensive understanding of the players and scheme.
This is not to say that they would necessarily fall into every meaning of the term co-conspirator. Often, they are employees who were instructed to perform certain tasks by their employer and followed those instructions because they did not fully appreciate the consequences. If these so-called participants were covered by the term co-conspirator it would eliminate a large segment of potential whistleblowers.
Commentary has already suggested that the proposed bill is unlikely to make it through the Senate in its current form. It would likely run squarely up against the advocacy of Senator Grassley if it were to go there and truly weaken the provisions. We will nevertheless keep an eye on the upcoming bill for these and other changes to the Dodd-Frank Act.
Update: The House passed the Financial CHOICE Act in June of 2017.