{"id":1566,"date":"2011-07-25T15:55:10","date_gmt":"2011-07-25T19:55:10","guid":{"rendered":"http:\/\/journals.law.harvard.edu\/hblr\/?p=1566"},"modified":"2016-07-04T21:55:12","modified_gmt":"2016-07-05T01:55:12","slug":"the-secs-whistleblower-program-what-the-sec-has-learned-from-the-false-claims-act-about-avoiding-whistleblower-abuses","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/hblr\/the-secs-whistleblower-program-what-the-sec-has-learned-from-the-false-claims-act-about-avoiding-whistleblower-abuses\/","title":{"rendered":"The SEC’s Whistleblower Program: What the SEC Has Learned from the False Claims Act about Avoiding Whistleblower Abuses"},"content":{"rendered":"

Download PDF<\/a><\/p>\n

Douglas W. Baruch*<\/a> and Nancy N. Barr**<\/a><\/p>\n

Introduction<\/strong><\/p>\n

The Dodd-Frank Wall Street Reform and Consumer Protection Act\u2019s (\u201cDodd-Frank Act\u201d) sweeping overhaul of the financial system now requires the SEC to pay substantial monetary awards to whistleblowers who disclose wrongdoing by publicly traded companies, financial services institutions, and other covered entities, and it prohibits employers from retaliating against SEC whistleblowers.[1]<\/a> On May 25, 2011, the SEC adopted final rules implementing these new mandates.[2]<\/a> Although the rules become effective 60 days after publication in the Federal Register, they apply retroactively to tips provided on or after July 21, 2010, Dodd-Frank\u2019s enactment date. The SEC\u2019s new whistleblower program borrows heavily from the whistleblower provisions of the civil False Claims Act (\u201cFCA\u201d), albeit with important distinctions that reflect an attempt by the SEC to distance itself from some of the problems plaguing FCA enforcement.<\/p>\n

The concept behind the SEC\u2019s whistleblower program, initially proposed by University of Alabama Law School Professor Pamela (Bucy) Pierson in a seminal article published nine years ago, is based on the view that so-called \u201cqui tam<\/em> enforcement\u201d had worked so well in enforcing the FCA that it should be imported to enforce the securities laws.[3]<\/a> Indeed, although a 2006 revision to the IRS whistleblower program served as a model for the award levels and appeals process under the SEC\u2019s program,[4]<\/a> a number of elements in the SEC\u2019s whistleblower provisions derive from the FCA. For example, the 10\u201330% whistleblowers\u2019 share levels, the \u201coriginal information\u201d requirement, and the \u201cvoluntarily provided\u201d requirement are similar to FCA requirements. In its proposed whistleblower rules, the Commission noted that the FCA provided \u201chelpful guidance\u201d on whistleblower legal standards, and the SEC\u2019s adopting release relied on a number of FCA decisions in defining the standards for the program.[5]<\/a> However, the overall balance struck between the competing interests of whistleblowers, companies, and the government in the SEC\u2019s whistleblower program results in a program that differs from the FCA and enables the SEC to curtail some of the whistleblower abuses that have occurred under the FCA\u2019s qui tam<\/em> enforcement mechanism.<\/p>\n

The SEC\u2019s Whistleblower Program Has No Qui Tam<\/em> Enforcement<\/strong><\/p>\n

The most significant distinction between the SEC\u2019s whistleblower program and the FCA\u2019s enforcement regime is that the SEC program does not allow qui tam <\/em>enforcement. The FCA gives the federal government powerful enforcement resources, but it also empowers private plaintiffs, referred to as qui tam<\/em> relators, to pursue claims on behalf of the United States even when the United States decides not to prosecute actions on its own. The term “qui tam<\/em>” is derived from a Latin phrase, “qui tam pro domino rege quam pro se ipso<\/em>,” or \u201cwho pursues this action on our Lord the King\u2019s behalf as well as his own.\u201d[6]<\/a> As this phrase indicates, the qui tam <\/em>action arose in early English common law <\/em>as a device for permitting private individuals to litigate claims on the sovereign’s behalf. Like relators in modern FCA <\/em>actions, early qui tam <\/em>litigants not only gained standing to sue that they otherwise would lack, but they also received a share of any recovery obtained on the sovereign’s behalf as a result of the qui tam <\/em>action.[7]<\/a> Significant FCA amendments in 1986 strengthened relators\u2019 rights and increased their potential bounties, thus dramatically increasing the incentives to filing suit. FCA amendments in 2009 and 2010 further enhanced relators\u2019 ability to share in recoveries and added additional protections against retaliation.[8]<\/a><\/p>\n

While the original purposes of the FCA qui tam <\/em>enforcement mechanism included \u201csetting a rogue to catch a rogue,\u201d[9]<\/a> the FCA actually prevents recovery of an award by a whistleblower convicted of criminal conduct related to the action. It also restricts the ability of a relator with unclean hands to collect a qui tam<\/em> bounty.[10]<\/a> However, while the FCA specifically provides that a prevailing relator\u2019s attorneys\u2019 fees are paid by the defendant, a prevailing defendant may recover reasonable attorneys\u2019 fees only if the qui tam<\/em> action was clearly frivolous, vexatious, or brought in bad faith under the FCA.[11]<\/a> And, under FCA case law, qui tam <\/em>defendants may not bring claims for indemnification against relators, even those who assisted in perpetrating the fraud.[12]<\/a> Given these parameters, there is plenty of room for whistleblower abuses under the qui tam <\/em>enforcement mechanism.[13]<\/a><\/p>\n

The potential for similar abuses may be curtailed under the SEC\u2019s program because it is an administrative process with limited circuit court review of the SEC\u2019s discretionary decisions on awards.[14]<\/a> SEC whistleblowers are afforded no special powers to investigate potential violations or to bring administrative or judicial enforcement actions based on violations. Thus, while the SEC\u2019s program requires the SEC to pay whistleblowers for information from the proceeds of successful actions, the fact that the program is essentially an administrative enforcement process enables the SEC to maintain complete control of enforcement of the securities laws, including whether, when, and how to exercise its prosecutorial discretion in enforcement matters.<\/p>\n

The decision to keep the SEC in charge reflects a legislative recognition that, while paying whistleblowers for information about violations may make economic sense, giving them Article II power to enforce the laws absent intervention or participation by the Department of Justice (\u201cDOJ\u201d) is a bad investment. Indeed, less than three percent of FCA recoveries and almost all adverse case law come from qui tam <\/em>cases litigated without the DOJ\u2019s involvement.[15]<\/a> The SEC, on the other hand, is able to pursue its programmatic interests and enforcement goals with whistleblowers\u2019 help, but without their interference.<\/p>\n

As under the FCA, the SEC\u2019s rules exclude any whistleblower convicted of a criminal violation related to the action from receiving an award,[16]<\/a> and a whistleblower\u2019s culpability or involvement in the underlying wrongful conduct is considered in determining the amount of an award.[17]<\/a> The SEC\u2019s rules also specifically bar awards to whistleblowers who obtained the information in a manner that violates federal or state criminal law,[18]<\/a> and in instances where liability stems from conduct substantially directed by the whistleblower, that conduct cannot factor into the $1 million threshold for an award.[19]<\/a> Like the text of the FCA, the SEC\u2019s rules are silent on the issue of indemnification actions against whistleblowers, which leaves that issue open to interpretation.<\/p>\n

Under the FCA, the entire qui tam <\/em>complaint is kept under seal until DOJ either intervenes or seeks court approval to partially unseal the complaint to seek the defendant\u2019s comments\u2015a cumbersome process. Although the SEC\u2019s rules permit a whistleblower to submit information anonymously,[20]<\/a> these confidentiality provisions are focused on the whistleblower\u2019s identity and thus their effect on litigation and settlement is more limited than the FCA\u2019s broad seal requirements, which should allow for better communication between the SEC and target companies. Both the FCA and the SEC broadly protect whistleblowers from retaliation.[21]<\/a><\/p>\n

The Commission\u2019s rules do not include any provision for attorneys\u2019 fees, which is an issue that is frequently disputed under the FCA\u2019s fee-shifting provision. Instead, the SEC leaves the issue of attorneys\u2019 fees to state bar authorities and to contractual arrangements between whistleblowers and their attorneys.[22]<\/a><\/p>\n

Eligibility to Receive an Award under the SEC\u2019s Whistleblower Program<\/strong><\/p>\n

The SEC\u2019s rules require whistleblowers to follow certain procedures in order to qualify for an award. Specifically, to be eligible for an award under the SEC\u2019s program, (1) a \u201cwhistleblower\u201d (2) must \u201cvoluntarily provide\u201d the Commission (3) with \u201coriginal information\u201d about possible violation of the securities laws (4) that \u201cleads to a successful enforcement action\u201d (5) resulting in \u201cmonetary sanctions\u201d of more than $1 million. While the SEC program eligibility requirements differ from the FCA in a number of respects, it is worth noting at the outset that enforcement of the SEC\u2019s eligibility requirements will be left to the SEC. Unlike the FCA, where defendants have the ability to contest the bona fides <\/em>of a qui tam <\/em>relator, there is no such vehicle for testing whistleblower eligibility under the SEC program.<\/p>\n

1. \u201cWhistleblower\u201d<\/strong><\/p>\n

The SEC defines a \u201cwhistleblower\u201d as an individual who, alone or jointly with others, provides the Commission with information relating to a \u201cpossible violation\u201d of the securities laws.[23]<\/a> Whereas virtually any person or entity (other than a former or present member of the Armed Forces)[24]<\/a> can be a qui tam <\/em>relator under the FCA, the SEC\u2019s program expressly excludes a company or other entity from eligibility as a whistleblower.[25]<\/a> A \u201cpossible violation\u201d under the SEC\u2019s rules broadly encompasses a violation that \u201chas occurred, is ongoing, or is about to occur.\u201d[26]<\/a><\/p>\n

a. Summary of Eligibility Exclusions <\/em><\/p>\n

Section 21F specifically excludes any whistleblower who acquired the information submitted to the SEC through employment at<\/p>\n