Is the SEC on a roll or just looking over its shoulder at salivating securities whistleblowers? On the heels of settling with Goldman Sachs last week for $550 million, the SEC yesterday announced its $111+ million take from settling accounting fraud charges against Dell Computer and several current and former Dell executives including Michael Dell, Kevin Rollins and James Schneider. The three will pay the SEC $4M, $4M and $3M, respectively, to settle. Assuming the facts are as stated by the SEC, they’re fortunate. And wasn’t the Sarbanes-Oxley Act supposed to prevent this kind of thing? Continue reading
The leviathan Dodd-Frank bill, newly renamed the “Restoring American Financial Stability Act of 2010,” has been taken up by the Senate. On CSPAN-2, Hawaii Senator Daniel Akaka is now droning on about how “too many investors don’t know the difference between a broker and investment advisor.” Note well: Both “Wall Street Reform” and “Consumer Protection” have disappeared from the bill’s title. My brief analysis of the securities whistleblower provisions, in Act Section 922, tells me that once the bill is signed by the President the SEC should brace for a deluge of securities fraud claims. These claims will take years to process but the process holds out some hope that securities whistleblowers may receive some compensation for their efforts to bring fraud to light.
Thinking of blowing the whistle on securities fraud? Thanks to the Dodd-Frank Restoring American Financial Stability Act of 2010 (H.R. 4173), it now makes financial sense to consider it.
Securities whistleblowers may not have much company in cheering H.R. 4173 but Section 922 is a major improvement over the largely non-functional anti-retaliation provisions of the old Sarbanes-Oxley § 806.
For readers familiar with the somewhat comparable False Claims Act (a.k.a. “FCA”), in some respects Section 922 is nearly identical. In others, it differs significantly. In theory at least, both statutes offer whistleblowers potentially handsome financial rewards for bringing forward “original information” about fraud. The awards generally range between 15 and 30 percent under the FCA (10-30 percent under § 922) of what the government collects as a result of the whistleblower’s disclosures. The FCA seeks to protect government funds from unscrupulous contractors and tax cheats. In contrast, Section 922 purports to shield investors from securities fraud. Other major points of comparison and divergence follow.
Section 922 makes awards only in cases where the “monetary sanctions” collected from the defendant exceed $1,000,000. In contrast, there is no statutory floor on FCA claims although practically speaking each U.S. attorney’s office has its own threshold. There are just too many FCA cases and too few assistant U.S. attorneys to follow them all. Some won’t consider a case alleging less than $1,000,000 in “single damages”. Others will jump at $500K. Local context can loom large.
Section 922 excludes more whistleblowers
Section 922 offers no private cause of action
Unlike the FCA which authorizes plaintiffs called “relators” to sue even if the government decides not to, under § 922 only the government can pursue a securities fraud claim. If the SEC chooses not to pursue a whistleblower case, the whistleblower is pretty much out of options. To place this in practical context, not even Harry Markopolos — with all of his data and analysis — could force his Bernie Madoff case into court if the SEC didn’t want to go.
“Original information” is broader under Section 922
While the term “original information” is not used in the FCA, the FCA also makes awards only for the provision of new information. That said, Section 922’s formulation of “original information” appears to be more expansive than that of the FCA.
Unlike the FCA, Section 922 includes within its domain of “original information” not only bare “knowledge” but also “analysis” provided by a whistleblower. This should be seen as significantly expanding the “original information” perimeter to include private analysis of publicly available data like that which enabled Harry Markopolos to detect the Madoff fraud long before the SEC did. While it is possible that an FCA whistleblower may have won a settlement on the basis of such analysis alone, I am not currently aware of any such case.
On the flip side, Section 922 excludes from permissible “original information” information “exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report (as opposed to federal government, in the FCA), hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information. The phrases “exclusively derived” and “a source” are exclusive to Section 922 — they do not appear in the FCA.
Arguably, the net impact of “government,” “exclusively derived,” and “a source” — together with the addition of the word “analysis” — is to expand the pool of “original information” for SEC whistleblowers beyond than that available to FCA relators.
Section 922 will be administered by a dedicated SEC office
FCA relators should be so lucky. FCA claims are typically administered and enforced by Main Justice DOJ Civil Division attorneys or by local Assistant US Attorneys who have lots of responsibilities in addition to FCA cases. The focus offered by a special SEC whistleblower office should give SEC whistleblowers a leg up assuming that it is properly staffed and managed.
SEC determines Section 922 awards
Unlike the FCA where the district courts have authority to approve FCA settlements and associated whistleblower awards, Section 922 grants the SEC complete discretion to identify award recipients and set largely unappealable award amounts.
Act § 21F(c)(1)(B) directs the SEC to “take into consideration” a specific list of four factors in making awards.** However, the House-Senate Conference Committee’s softening of the Senate version language of § 21F(c)(1)(B) from “shall account for” to “shall take in consideration” signals that the SEC can weight and apply these factors almost at will. Act § 21F(f) deprives district courts of any supervisory role, sending award appeals directly to the circuit courts which must review SEC decisions in accordance with Section 706 of the federal Administrative Procedure Act. As a practical matter, SEC decisions on awards will be very difficult to overturn on appeal.
Readers may judge for themselves what awards whistleblowers should expect in light of the fact that awards will be paid out of the same SEC Investor Protection Fund from which the SEC’s OIG will fund its activities.
Bottom line: Dodd-Frank offers pros and cons for SEC whistleblowers. While it isn’t nearly as robust as the FCA, Dodd-Frank is a major improvement over Sarbanes-Oxley. If you’re thinking of blowing the SEC whistle and can’t wait to get started, give us a call. We can help you blow with greater velocity and focus.
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* The emphasis on “and” is mine. The contextual meaning of the phrase “contrary to the requirements of section 10A” is anybody’s guess at this point. This kind of legislative loose end keeps litigators employed and drives auditors — who crave definition and bright lines — to distraction.
** The § 21F(c)(1)(B) award-amount factors are as follows:
1. the significance of the information provided by the whistleblower to the success of the action;
2. the degree of assistance provided by the whistleblower and any legal representative of the whistleblower in a covered judicial or adrninistrative action;
3. the SEC’s programmatic interest in deterring violations of the securities law by making awards to WBs; and
4. such additional relevant factors as the Commission may establish by rule or regulation.
*Cross-posted at Whistleblower Central.
Does “academic freedom” include the right to falsify data in government grant applications? One might think so, to hear Rachel Levinson Waldman, senior counsel for the American Association of University Professors. She (and 810 Virginia professors) have objected to Virginia Attorney General Ken Cucinelli’s civil investigative demand or “CID” (shown below) that the University of Virginia produce documents and communications relating to $485,000 in government funds it received on behalf of then UVA prof Michael Mann (of Climategate Hockey Stick fame) for the study of global warming theories.
With today’s SCOTUS decision in Free Enterprise Fund v. PCAOB, the Public Accounting Oversight Board (“PCAOB”) survives but with less swagger and self-importance than before. This decision holding unconstitutional the “dual for-cause limitation” on the President’s ability to fire PCAOB members leaves the PCAOB’s form intact but downgrades its political independence. Continue reading
Business executives everywhere can breath a sigh of relief this morning after the U.S. Supreme Court (“SCOTUS”) yesterday struck down former Enron CEO Jeff Skilling’s convictions for so-called “honest services fraud”. While the SCOTUS decision temporarily leaves intact Skilling’s other convictions, they are now on life-support. Continue reading
You can tell governance in the United States is upside-down when a mere Lt. Commander in the U.S. Coast Guard can force a state’s governor — in this case Louisiana Governor Bobby Jindal — to stand down barges saving the state’s coast line from an oil spill. Not to mention that the spill itself is the proximate result of Coast Guard and other federal-government misfeasance. Continue reading
Lurking in the Senate version of HR 4173 , the so-called Wall Street Reform and Consumer Protection Act of 2009, is a juicy chunk of pork for the global warming lobby: the commissioning of a “carbon markets” study to be conducted by an “interagency working group” that includes Chairs of the CFTC, SEC and FERC. Secretaries of Treasury and Agriculture plus heads of EPA, FTC and EIA round out the working group’s roster. Continue reading
Jesse Drucker, writing this week in Bloomberg Businessweek, tells the fascinating story of “Forest Laboratories’ Globe-Trotting Profits” and bemoans the fact that billions in U.S. income tax are legitimately avoided by corporations like Forest through international transfer pricing strategies. Drucker’s last paragraph is the best:
“If multinationals cannot be prevented from shifting profits to low-tax jurisdictions, then it becomes impossible to maintain the domestic corporate tax base,” says Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan Law School. If that bleeding can’t be stanched, he says, “we might as well abandon the income tax.”
So true and so timely. But what would replace the income tax? Why not the Fair Tax? The Fair Tax would entirely close transfer-pricing loopholes while at the same time allowing corporations and their customers to save the billions they now squander on designing elaborate tax-minimization strategies.