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Securities Fraud

On July 21, 2010, the Dodd-Frank Wall Street Reform & Consumer Protection Act was signed into effect, finally giving teeth to the SEC whistleblower program.  The Act entitles securities fraud whistleblowers to between 10-30% of SEC recoveries for original information prompting “any judicial or administrative action brought by the commission under the securities laws that results in monetary sanctions exceeding $1,000,000.” Prior to the Dodd-Frank Act, there was no minimum whistleblower award — meaning that successful whistleblowers could risk their careers and still receive nothing — and the maximum award was only 10%.  As a result, prior to the enactment of the Dodd-Frank Act, few whistleblowers were motivated to come forward and those that did come forward were awarded with paltry sums if they received any reward at all.

Consider Madoff whistleblower, Harry Markopolis. His warnings to the SEC of the largest securities fraud in American history went largely ignored, and he received nothing for uncovering the $50 billion fraud. While it must be little constellation to Markopolis, under the newly enacted Dodd-Frank Act, he would be entitled to a minimum of 10% of any disgorgement, pre-judgment interest, and civil-penalty that the SEC ultimately recovers from the Madoffs.

Likewise, there has been muted buzz about the recent SEC payout to whistleblowers’ Karen and Glenn Kaiser, who received the largest SEC whistleblower award to date — $1,000,0000 — for reporting Mrs. Kaiser’s ex-husband, David Zilkha, for insider-trading. Zilkha, a former Microsoft employee, allegedly gave insider-information about Microsoft to hedge-fund manager, Arthur Samberg, at Pequot Capital. While the $1M award was extremely large compared to previous sums paid to whistleblowers by the SEC, it would have been a minimum of almost three-times that amount under the new Dodd-Frank provisions (the Pequot SEC settlement was $28 million). And if the beefed-up SEC whistleblower program is even close to as promising as its cousin — the False Claims Act — then the Kaiser whistleblower award will be paled by future SEC whistleblower awards. The Department of Justice estimates that $13 billion has been recovered under the federal False Claims Act since the act was overhauled in 1986 and that more than $2 billion has been paid to whistleblowers.

The new SEC whistleblower provisions  under the Dodd-Frank Act also expand the scope and types of fraud to which the program applies.  Previously, the SEC only paid rewards for information regarding insider-trading, such as that paid to the Kaisers for the Pequot insider-trading fraud. This could be particularly important in the area of Foreign Corrupt Practices Act investigations, which have international implications and have historically amounted for some of the SEC’s largest settlements and judgments (e.g., in 2009 KBR paid $402 million in criminal fines; in 2008 Siemens paid $450 million).

Perhaps most importantly, the new provisions provide that a whistleblower’s identity may be protected and held confidential if the whistleblower reports its original information to the SEC by and through his or her attorney. After the investigation is concluded, however, a whistleblower will have to reveal her identity in order to receive the statutory share of the award. Exactly how these new provisions will be implemented is ultimately up to the SEC and has yet to be determined. Pursuant to Section 924, the SEC must promulgate rules and regulations for implementing the whistleblower reward and protection provisions of the Dodd-Frank Act within 270 days of its enactment — on or before April 18, 2011.

Although the new whistleblower provisions are in their infancy, Frohsin & Barger’s attorneys are well-versed in whistleblower litigation in general and are responsible for record recoveries under the False Claims Act; accordingly, we are poised to be among the few niche law firms that break ground using these latest fraud-fighting tools provided in the Dodd-Frank Act. Read the Act in its entirety below (the whistleblower provisions begin at Section 922):

Dodd-Frank Wall Street Reform & Consumer Protection Act

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To report securities fraud, contact Frohsin & Barger.

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