The sweeping financial reform bill that President Obama signed into law last month included one key provision that has gone largely under the radar. According to Section 748 of the bill –entitled “COMMODITY WHISTLEBLOWER INCENTIVES AND PROTECTION” — employees at financial institutions and businesses on Wall Street can now be awarded large sums of money by the federal government in return for informing the Securities and Exchange Commission (SEC) of internal fraud and abuse.
For the whistleblower to qualify for the reward, he or she must only do one thing: provide the SEC with original information that leads to a successful enforcement case. Then, the SEC is required to reward the informant with up to 30 percent of any company payout over $1 million.
But that’s not exactly a high mark to reach. In December 2008, for example, Siemens Corp. paid the U.S. government $800 million in a settlement. Earlier this summer, AstraZeneca settled for $520 million and in 2009, Pfizer Corp. paid a record $2.3 billion. The last two cases were both started because of whistleblower testimony.
And it looks like those kinds of cases are going to become a lot more popular. Or at least, the SEC thinks so.
“We’re expecting a tremendous response,” SEC official Stephen Cohen told the Financial Times.
Some are warning, however, that this incentive program may have some negative unintended consequences because it creates a sort of dysfunctional race between employees and employers. For instance, the provision now gives companies reason to go to the SEC first when problems are discovered — which, of course, can be a positive. But because of potential multi-million dollar rewards, employees have plenty of motivation to beat their employer to the punch, potentially creating a bizarre race.
“It puts companies in a strange, high-stakes game with future whistleblowers,” Mike Koehler, business law professor at Butler University told The Daily Caller. “The SEC dangles carrots for companies and whistleblowers, and the race is to see who bites first.”
“It used to be the norm that those who would come forward would be company employees who wanted to do the right thing,” Koehler continued. “But there was concern that once the employee alerted the company, the company would not do anything.”
Hence the large monetary incentive. Koehler pointed out that the IRS implemented a whistleblower program in 1996 where employees received a maximum of 10 percent of the payout, but it has been largely ineffective. Since the program’s inception, only five or six cases were brought about because of informants.
In a recent client alert report, the law firm Morrison and Foerster warned the corporations it represents to expect a race to the SEC.
“The new whistleblower provisions could lead to more and/or earlier voluntary disclosures of potential securities law violations, as companies hoping to obtain the benefits of voluntary disclosure must move quickly, before the whistleblower makes his or her disclosure,” says the report.
It continues: “They could also lead to more reports of minor violations previously deemed not significant enough to report.”
But the broader issue, according to Koehler, and what most people fail to realize, is that the majority of cases brought against publicly-traded companies are usually settled even if they have a valid defense and the whistleblower’s “original information” could eventually be proven false.
“The undeniable truth is that high-profile, publicly-traded companies like Bank of America and Goldman Sachs settle with the SEC because it’s more cost effecting than litigating a case,” said Koehler. The question then becomes, under those circumstances, why should whistleblowers receive any money at all?”
Regardless, this new program is going to change the way Wall Street does business — which is exactly what the president and the bill’s proponents in Congress want.
Firms will, in a way, become more transparent and SEC payouts will be monitored through an annual report to Congress. But businesses are bound to be confronted with a new environment marked by increased government involvement in the employee-employer relationship.
The SEC did not return requests by TheDC to comment.