Tuesday, July 20, 2010

The Financial Reform Bill's Whistleblower Provisions And The FCPA

Section 1504 (see here for the prior post) of the Dodd-Frank Wall Street Reform and Consumer Protection Act is not the only provision of the "financial reform package" that may impact Foreign Corrupt Practices Act compliance and enforcement.

Sections 922-924 of the Act President Obama is expected to sign soon also has the potential to impact FCPA enforcement.


Because it creates new whistleblower provisions applicable to all securities laws violations and the FCPA is part of the Securities and Exchange Act of 1934.

This post will cover three topics: an overview of the new whistleblower provisions; some thoughts on whether whistleblower provisions applicable to FCPA enforcement is wise policy; and some thoughts on whether the new whistleblower provisions will impact FCPA enforcement, and if so, to what extent.


Section 922 amends the Exchange Act by including a new section, 21F, titled "Securities Whistleblower Incentives and Protection."

Pursuant to the new section:

* any whistleblower (meaning "any individual who provides, or 2 more more individuals acting jointly who provide, information relating to a violation of the securities laws" to the SEC)

* who voluntarily provides original information (meaning information that: (a) "is derived from the independent knowledge or analysis of a whistleblower;" (b) "is not known to the [SEC] from any other source, unless the whistleblower is the original source of the information;" and (c) "is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information")

* to the SEC that leads "to the successful enforcement" of a "covered judicial or administrative action" (meaning "any judicial or administrative action brought by the [SEC] under the securities laws that results in monetary sanctions exceeding $1,000,000")

* shall be entitled to an award equal to "not less than 10%" and "not more than 30%" "of what has been collected of the monetary sanctions imposed" in the underlying SEC enforcement action.

Monetary sanctions include "any monies, including penalties, disgorgement, and interest ordered to be paid" by the SEC.

In determining the amount of the award the whistleblower shall receive, the SEC "shall take into consideration: (i) the significance of the information provided by the whisteblower to the success [of the enforcement action]; (ii) the degree of assistance provided by the whistleblower [or the whistleblower's legal representative] [in the enforcement action]; (iii) "the programmatic interest of the [SEC] in deterring violations of the securities laws by making awards to whistleblowers who provide information that lead to the successful enforcement of such laws; and (iv) such additional relevant factors as the [SEC] may establish by rule or regulation."

Pursuant to the new whistleblower provisions, a whistleblower may be represented by counsel.

The provisions allow a whistleblower to submit information to the SEC anonymously, however in such a case, the whistleblower "shall be represented by counsel" and the whistleblower's identity must be disclosed to the SEC before an award is made to such a whistleblower.

Section 922 specifically authorizes a whisteblower to receive an award "regardless of whether any violation of a provision of the securities laws, or a rule or regulation thereunder" underlying the SEC enforcement action "occurred prior to the date of enactment" of the provisions.

As with many whistleblower provisions, Section 922 prohibits employers from directly or indirectly discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against a whistleblower.

Section 922 also authorizes the SEC to share whistleblower provided information with other U.S. government agencies, including the Attorney General, as well as foreign securities authorities and foreign law enforcement.

In addition to the "original information" limitation discussed above, Section 922 also precludes the following categories of persons from receiving whistleblower awards: (a) various government and law enforcement agency employees; (b) "any whistleblower who is convicted of a criminal violation related to the [enforcement action];" and (c) "any whistleblower who gains the information through the performance of an audit of financial statements required under the securities laws and for whom such submission would be contrary to the requirements of section 10A of the Exchange Act."

Pursuant to Section 922, the SEC "shall have the authority to issue such rules and regulations as may be necessary or appropriate" to implement the above-described provisions.

Wise Policy As Applied to FCPA Enforcement?

As indicated above, the new whistleblower provisions are applicable to all securities laws violations - not just the FCPA.

While the new provisions may or may not represent needed legislation as applied to non-FCPA securities law violations, I do not believe that the whistleblower provisions represent wise policy as applied to FCPA enforcement.


Quite simply the FCPA is enforced like no other securities law (at least that I am aware of).

Against the backdrop of little substantive FCPA case law, the FCPA is enforced based largely on government enforcement agency interpretations that have never been accepted by a court. For every FCPA enforcement action alleging conduct that all reasonable minds would agree violates the FCPA, there is seemingly three FCPA enforcement actions alleging conduct that many reasonable minds question whether the conduct even violates the FCPA. Yet, these latter FCPA enforcement actions, notwithstanding the dubious and untested legal theories they are based on, are routinely settled by companies via a resolution vehicle that does not require the company to admit or deny the SEC's allegations. Quite simply, a settled SEC FCPA enforcement action does not necessarily represent the triumph of the SEC's legal position over the company's, but rather reflects a risk-based decision primarily grounded in issues other than facts and the law. It is simply easier and more cost-efficient for a company to settle an SEC FCPA enforcement (notwithstanding whatever dubious and untested legal theory it is based on) than to participate in long, protracted litigation with its principal government regulator. Ask any seasoned FCPA practitioner and, in a candid moment, they will tell you the same thing.

Against this backdrop, is it wise to award a whistleblower 10-30% of the fines, penalties and disgorgement the SEC recovers in an FCPA enforcement action? Is it wise to award a whistleblower in connection with an FCPA enforcement action when the contours of the FCPA largely remain undefined by the courts? It is wise to award a whistleblower when the company, for reasons other than law or fact, does not even mount a legal defense?

I submit that the answer to each of these questions is no.

Impact on FCPA Enforcement?

Much has been written about the whistleblower provisions and the impact on FCPA enforcement - beginning when the provisions were first included in Congressional financial reform bill drafts.

Among other law firms with an FCPA practice or FCPA practitioners writing about the subject, Morgan Lewis stated that the "new law is likely to greatly increase the number of FCPA matters under government investigation" (see here); Fried Frank predicted that the "new whistleblower program may end up playing a key role in identifying and prosecuting violations of the FCPA" (see here); and Richard Cassin on the FCPA Blog guessed that the "bounty program will result in more FCPA cases against corporations" (see here).

I am not so sure and my guess is that the new whistleblower provisions will have a negligible impact on FCPA enforcement.

My reasons?

For starters, the SEC has long had a similar whistleblower program for insider trading. The results? According to a Senate report accompanying the financial reform package, less than $160,000 paid out to five whistleblowers.

In addition, the new whistleblower provisions will only be triggered when a public company issuer is the subject of an FCPA enforcement action. No public company issuer, means no SEC jurisdiction, means no whistleblower awards. There are many more private companies subject to the FCPA than public company issuers and the new whistleblower provisions should not impact this prong of FCPA enforcement which is indeed large. For instance, with a few exceptions, the vast majority of companies indirectly implicated (at least at this point) in the Africa Sting case are all private companies.

Furthermore, and perhaps most important, most FCPA enforcement actions already result from voluntary disclosures. Is the universe of FCPA enforcement actions really going to expand when public company issuers are already largely voluntarily disclosing conduct to the SEC - presumably the same conduct that a whistleblower would disclose?

On this issue, one thing the new whistleblower provisions may do is pit the whistleblower vs. the company in a strange, yet competitive, high-stakes game of "who has the fastest car" to Washington to disclose the conduct. Simply put, if the whistleblower loses, the information he or she discloses will no longer be "original information" and thus no award. If the company loses, the disclosure will no longer be "voluntary" and the hoped for credit under the DOJ's Principles of Prosecution of Business Organizations and the Sentencing Guidelines will disappear. Against this backdrop, it may be that more conduct will be disclosed that may not even violate the FCPA because the risks of having the "slower car" are to great to pass up. But then again (as detailed in this post) a company voluntarily disclosing conduct that may not even violate the FCPA seems to a norm these days.

If the new whistleblower provisions do indeed have an appreciable impact on FCPA enforcement, the following questions, among others, come to my mind.

Will a law firm with an established FCPA practice start representing whistleblowers on the theory that a contingent fee on a 10-30% cut of an FCPA settlement is more profitable than hourly fee investigations or compliance?

Will a go-to FCPA plaintiffs firm emerge? Which firm/lawyer will it be?

Will the new whistleblower provisions trigger more substantive FCPA case law? How many enforcement actions based on whistleblower information that a company paid for a bottle of wine and opera tickets for an employee of a Chinese state-owned enterprise (ignoring the fact that the company did the same thing for other customers) will it take before a company says - enough of this silliness - will someone please litigate the enforcement agencies "foreign official" interpretation?

Will a "sophisticated" whistleblower with knowledge of the enforcement agencies many dubious and untested legal interpretations use this "gray space" as a point of entry into a much larger potential award on the theory that the "sophisticated" whistleblower is well aware that the enforcement agencies will ask the "where else" question before agreeing to resolve an enforcement action even if the whistleblower is unaware of anything else besides the provided information (which may not even violate the statute) guessing that there is some books or records or internal control issue somewhere in the company that will crop up and raise the award level? (For more on this "where else" question see this prior post).

The new whistleblower provisions provide much to think about and raise the above (and no doubt numerous other) questions.

The best part of the new whistleblower provisions would seem to be that its impact on FCPA enforcement can be monitored and analyzed as Section 922 requires the SEC to submit annual reports to Congress on its whistleblower award program including "the type of cases in which awards were granted." Section 922 also requires the SEC to "establish a separate office within the [SEC] to administer and enforce" the new whistleblower provisions and requires the SEC Inspector General to conduct a study of the whistleblower provisions.


  1. Mike

    Another area of disastrous "whistleblower" activity has been Section 806 of Sarbanes Oxley. The False Claims Act has a slightly better track record, but employees who have any understanding of the fate of whistleblowers under SOX or can do the math (10% of $1 million lasts how long?), will come to recognize that the fate of whistleblowers, once their identity is known, is not a happy one.

    Litigating against your former employer under the Whistle Blower Protection Act with your own money while the employer is spending shareholder funds is also a non-starter.

    Sox section 806 and Dodd Frank 922 are best understood as political theater and at best simply add bulk to U.S. Code.


  2. So would a company that self-discloses a violation be entitled to a 10-30% reduction in its fine/disgorgement, based on its status as a "whistleblower"?

  3. In response to "Anonymous" question - that would seem unlikely. Section 922 defines whistleblower as "any individual who provides, or 2 or more individuals acting jointly who provide, information ..." Would be a closer call it seems if the defined term used "person" rather than "individual" as the former term is often a term of art that can include corporate forms.

  4. I tend to agree with BWB that this is more political theater. Most companies have anonymous hotlines and already require employees to report illegal practices as part of policy. In these situations, is it really possible for the employee to go to the government first, rather than reporting the information to the hotline?

  5. If the company has a hotline reporting system or other similar policy, would that not create a conflict of interest for the employee? I would think the employee should first be required to report the information to the company before going to the government in hopes of collecting the bounty money for him or her self?

  6. RE: Anonymous

    Likely no because the bill prohibits awards to those convicted of a criminal violation related to the judicial or administrative action for which the whistleblower could other wise receive an award. Additionally, you are not eligible for an award if you fail to submit information to the SEC or CFTC as required by rule or regulation. In this case, the company would likely have been required to make a prior disclosure.

  7. I have one question: is there anything in this law that protects a whistleblower who is not an employee / former employee from retaliation ?

  8. The relevant provision - Section 922(h)(1)(A) begins - "No employer may ...." so the short answer seems to be no, the protections would seem to apply on to employees.

  9. Applicability to Private Companies:

    From blog:
    "In addition, the new whistleblower provisions will only be triggered when a public company issuer is the subject of an FCPA enforcement action."

    I find no support in section 922 for this claim. On the contrary, the definition of "whistleblower" seems to leave open the possibility that private companies will be subject to this whistleblower incentive/protection provision in an antibribery enforcement action (though, not, of course, with respect to the FCPA's accounting provisions).

    Please clarify the basis for the broad claim.

  10. Francisco,

    Thank you for your comment.

    Sec. 922(b) concerning the payment of awards is limited to "covered judicial or administrative actions" which is a defined term to mean "any judicial or administrative action BROUGHT BY THE COMMISSION." The SEC does not have authority to bring an FCPA enforcement action against a non public company.

    True, Section 922(b) also applies to a "related action" but that defined term is tied to the "successful enforcement of the COMMISSION action."

    In sum, my read is absent an underlying SEC FCPA enforcement action there can be no award.

    Because the SEC can not bring an FCPA enforcement action against a non-public company, it would seem that the whistleblower provisions will only be triggered when a public company issuer is the subject of an FCPA enforcement action.

  11. Thank you. Your explanation is helpful and instructive.

    Still, even if the incentive provisions are not applicable to private companies, the whistleblower protection provisions do not appear to have that limitation. Of course, without the incentive, individuals are less likely to come forward and have need of the protection provisions. Still, the protection provision, 922(h)(1)(A), provides that no employer may retaliate against an employee because, among other things, that employee provided information to the SEC (which may then pass the information on to the DoJ, see 992(h)(1)(D)). What is your assessment regarding whether the protection provisions could apply to private companies?

  12. The whistleblower protection provisions - Section 922(h) are still tied to SEC functions as well as Sarbanes Oxley.

    Good questions, but my read is that is strictly an SEC whistleblower program and thus not applicable to non-issuers.