Monday, July 26, 2010

Dodd-Frank and Whistle-blowing to the SEC

I just read an interesting post in the NY Times about how the new Dodd-Frank financial regulations bill will provide an incentive for whistle-blowers to give information about various frauds to the SEC. Apparently, deep in the bowels of the 2,500 page Dodd-Frank bill that overhauls our financial regulatory system is a provision that requires the SEC to award whistle-blowers 10-30% of monetary sanctions collected by the SEC that exceed $1 million.

 The NY Times post also said that while the amount of the award must range from 10-30% of the sanctions, the exact amount awarded is up to the discretion of the SEC. Also, the whistle-blower must meet certain conditions in order to collect under Dodd-Frank.  Here is what the post said about the requirements:
In order to qualify for an award, the person must provide the “original information” that was “derived from the independent knowledge or analysis of a whistle-blower” about which the S.E.C. was unaware and that was not drawn from the news media, a legal proceeding or government report, unless the person was the source of that information.
This provision should make insiders who are aware of significant financial statement fraud, Ponzi schemes, and other frauds, think twice about calling the SEC. Recent examples of sanctions include the Dell Corp. financial statement fraud case that settled last week. Under Dodd-Frank, a whistle-blower in, say, Dell's accounting department could get $11-$33 million since $110 million was collected from Dell.

The post also speculates that FCPA cases would also apply. Given the plethora of those cases and the large settlements, the SEC may be paying out a significant amount of cash under this provision. Siemens paid $800 million in 2008 to settle an FCPA case. A whistle-blower would get at least $80 million for providing the SEC with original information on this case.

I personally like this provision in Dodd-Frank since I think encouraging whistle-blowing is a good way to reveal fraud. However, this provision will lead to some challenges as the SEC will now need to figure out which of the many reports of fraud to follow up on. They also may find themselves in court defending their payments. Just like many regulations, this one is likely to employ a lot more attorneys! However, if it can eliminate one large financial statement fraud a year or one Bernie Madoff or Allen Stanford Ponzi scheme every decade, it may be worth it.


  1. Do multiple whistleblowers split the 10-30%?

  2. It also gives a potential whistle-blower incentive to wait until the fraud is significant enough to earn the whistle-blower a payout.