New Dodd Frank Act Creates Important Rights for Whistleblowers

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Each year, corporate fraud costs the U.S. government millions of dollars. In many cases, the fraud would never be discovered if it were not for the courageous acts of employees and others who come forward and report the fraud to the Securities and Exchange Commission (SEC).

In recognition of the importance of whistleblowers, a recent law passed by Congress includes key provisions to encourage more whistleblowers to report fraud by offering financial incentives to do so. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, those with independent knowledge of a financial fraud committed by a business required to report to the SEC or the U.S. Commodity Futures Trading Commission (CFTC) may be entitled to a percentage, or "bounty," of the money recovered. The Act sets the bounty at 10 to 30 percent of any amount over $1 million recovered in a judicial or administrative action against the wrongdoer.

To be eligible for the bounty, the whistleblower must:

  • Report the information to the SEC or CFTC
  • The information must be derived from the independent knowledge or analysis of the whistleblower
  • The government cannot have known about the fraud from any other source

The final amount awarded to a whistleblower under the Dodd-Frank Act is discretionary; the SEC or CFTC is given the authority to give a bounty according to the "significance" of the information provided and the level of assistance given by the whistleblower.

The Act also includes a provision protecting the whistleblower's identity. Under the law, the whistleblower can maintain anonymity by filing a claim through his or her lawyer. The whistleblower is not required to reveal his or her identity until it is known whether the information he or she provided will lead to a recovery and, subsequently, a bounty.

Act Expands on False Claims Act Qui Tam Actions

The Dodd-Frank Act was modeled after another important law for whistleblowers — the False Claims Act. Under the False Claims Act, whistleblowers who have independent knowledge of a financial fraud perpetrated against the government can bring a special type of lawsuit known as a "qui tam" action. In a qui tam action, the whistleblower is known as a "relator" and brings the lawsuit on behalf of the federal government. Whistleblowers who bring successful qui tam actions are entitled to a percentage of the amount recovered, which is typically 15 to 25 percent.

An important difference between the Dodd-Frank Act and False Claims Act is the scope of the law. The False Claims Act only applies to financial fraud committed against the government. The Dodd-Frank Act, on the other hand, is much broader and applies to any type of financial fraud committed by a company that falls within the jurisdiction of the SEC or CFTC.

The Dodd-Frank Act also broadly defines who is eligible to bring a whistleblower claim. As the law is written, nearly anyone who has ever had dealings with the company may qualify, including current and former employees, customers, suppliers and even board members. The SEC, however, has proposed a rule to limit the right of certain actors to bring claims, including those who received the information as a result of their duties to respond to the wrongdoing.

Wall Street, Other Businesses Worried

Not surprisingly, companies are not very excited about the Dodd-Frank Act. The biggest complaint against the law is that it undermines all of the money, time and resources companies expend creating internal compliance and complaint procedures for reporting fraud and abuse, as required under Sarbanes-Oxley. Companies fear that the potentially large financial incentives provided under the Act will encourage employees to file their complaints directly with their own attorneys or the SEC and not internally.

And, at least initially, it appears they are right: According to a Wall Street Journal report, the number of whistleblower suits filed after the passage of Dodd-Frank increased ten-fold. There also have been huge bounties paid out recently to whistleblowers who filed qui tam actions under the False Claims Act. For example, Cheryl Eckard, the whistleblower in the GlaxoSmithKline fraud case, is set to receive a $96 million payout for her qui tam action against the company. In the 2009 settlement between the government and Pfizer, the whistleblower received $80 million of the proceeds. In the recently settled Allergan case for the drug maker's aggressive off-label marketing campaign for Botox, the whistleblowers received $37 million.

Big business was hoping that the SEC would issue a rule requiring whistleblowers to first file an internal complaint before filing a claim with the SEC. However, the most the SEC was willing to do was propose a rule "encouraging" whistleblowers to first use the company's internal complaint procedure.

The SEC also proposed a rule that if an employee reports information to an internal compliance department first, then the information still will be considered "original" so long as the employee files a claim with the SEC within 90 days. In the past, if a whistleblower gave the information to an internal compliance department first, then the information was no longer considered original and the whistleblower would be ineligible for any cash rewards under the False Claims Act.

Filing a Whistleblower Action

The SEC is still in the rule-making process for implementing the provisions of the Dodd-Frank Act. The last day for public comments on the proposed rule was December 17 and the agency has stated that it expects the final rules to be in effect by the beginning of 2011.

Until these rules are finalized, it is not yet clear what process whistleblowers will have to follow in order to file a claim under the Act. In the meantime, those with independent knowledge of a fraud committed against the government have the option for filing a qui tam action.

Qui tam actions are filed in federal district court. In addition to filing the claim, claimants also are required to include a statement disclosing all of the information the claimant has of the fraud. Once the claim is filed, it is placed under seal for 60 days while the Department of Justice investigates the claim to determine if the government will join the action. The DOJ also may attempt to settle the claim, or in the alternative, also may seek to have it dismissed. The federal government does not have to join the claim for the qui tam action to proceed; however, having the government join the claim can make it stronger.

In general, to be eligible to file a qui tam claim, the information of the fraud cannot have been obtained from a public source or otherwise known to the government. If the information is from a public source, then the claimant still may be able to bring the qui tam action so long as he or she is an "original source" of the information. This means that the claimant has "direct and independent" knowledge of the information and the claimant provided the information to the government before filing the qui tam action.

Some of the most common types of fraud that may form the basis of a whistleblower claim include:

  • Mischarging for goods or services not produced or delivered
  • Off-label marketing of pharmaceuticals
  • False negotiation
  • Defective pricing
  • Product and service substitution
  • False certification of entitlement to government benefits

Current and former employees are the most common people to bring whistleblower claims, but they also may be brought by subcontractors, state and local governments, public interest groups and even corporations.

Conclusion

Those who are considering filing a whistleblower action under the False Claims Act or Dodd-Frank Act should contact an experienced attorney first. A lawyer knowledgeable in bringing these types of claims can help guide the individual through the claims process and explain his or her rights and obligations as a whistleblower.

For more information on qui tam actions and other employment law issues, contact an experienced attorney today.