Thursday, May 26, 2011

Investor and Consumer Groups Oppose House Legislation Amending Dodd-Frank Whistleblower Provisions

Groups representing consumers and investors urged the House Committee on Financial Services today to oppose draft legislation introduced by Rep. Michael Grimm (R-N.Y.) that would amend the whistleblower provisions of the Dodd-Frank Act to, among other things, require prospective whistleblowers to initially use the company’s internal compliance program before going to the SEC. In a letter to Financial Services Committee Chair Spencer Bachus, the groups said that the legislation would undermine investigations and hamstring the SEC and undo many of the whistleblower protections called for in the Dodd-Frank Act. The letter was signed by 22 organizations, including the Project on Government Oversight (POGO), the Government Accountability Project, Taxpayers Against Fraud, and Americans for Financial Reform (a coalition of more than 250 national and state organizations working together for strong Wall Street reform).

The letter said that the whistleblower programs the Grimm draft seeks to upend are based on America’s most effective anti-corruption statute, the False Claims Act, which has returned more than $27 billion taxpayer dollars since 1987. Under sections 748 and 922 of the Dodd-Frank Act, the CFTC and the SEC can compensate whistleblowers whose disclosures lead to enforcement actions with penalties of $1 million or more. Like the False Claims Act right to file lawsuits on behalf of taxpayers to challenge fraud in government contracts and share the recovery, these programs are designed to allow the enforcement agencies to create partnerships with insiders with critical knowledge of large-scale corporate misconduct to better protect taxpayers.

The groups noted that the draft legislation would tip off lawbreakers by requiring whistleblowers to report internally before going to the SEC or CFTC, and requiring the SEC to provide notification before taking enforcement action based on a whistleblower disclosure. This would permit lawbreaking companies to thwart SEC enforcement actions by intimidating witnesses and destroying or altering evidence. Most companies acting in good faith with strong compliance programs can expect employees to report internally first without such requirements.

The draft would also disqualify many would-be whistleblowers by denying incentives and awards to any whistleblower with a contractual obligation to cause the employer to investigate or respond to the misconduct or violations. This provision would allow employers to deny access to the incentives and awards created by the new law to any and all employees simply by having them sign an employment agreement containing language stating this obligation.

It also would give the SEC and CFTC the ability to claim a whistleblower was culpable and deny an award without any specific criteria or due process for making that determination. The groups also said that the draft would deny anonymity and counsel by prohibiting contingency fee representation of whistleblowers. According to Dodd-Frank, anonymity is only an option if the whistleblower is represented by counsel, and most whistleblowers cannot afford representation unless it is on contingency. Therefore, the groups reasoned that the Grimm draft bill would deny anonymity to nearly all whistleblowers, and severely undermine the efficacy of the program.

In addition, the draft would remove the incentive to inform regulators by eliminating a minimum award requirement and giving the SEC and CFTC the discretion to give whistleblowers nominal awards. The letter said that whistleblowers put their livelihoods at great risk and make enormous personal and financial investments in revealing the wrongdoing to regulators. The incentive to do so must be at least the minimum award of 10 percent already in the law, noted the groups, which is still below the 15 percent minimums which have created adequate incentives for whistleblowers to use the successful False Claims Act and IRS programs.

Even more, the groups believe that the measure would strip protections for whistleblowers facing retaliation for contacting the SEC or CFTC. The Dodd-Frank Act includes protections against retaliation that are consistent with several other laws that protect a host of private sector employees, including those in financial services, manufacturing, and healthcare. The Grimm draft would legalize retaliation whenever a company’s employment agreements, policies, or company manuals bars employees from communicating with the government. In the view of the investor and consumer groups, this would give corporate criminals a blank check to gag employees and eliminate whistleblowers at will.

Finally, the letter to Chairman Bachus points out that the draft would create an accountability loophole by allowing special treatment for self-reporting if a firm does an internal investigation and makes some corrective action once notified by the SEC and CFTC of the whistleblower tip and pending enforcement action. Under the Grimm draft bill, said the groups, this is a complete loophole for lawbreakers. They would be granted special treatment under the law with reduced penalties, as though they had self-reported, just by virtue of conducting an internal investigation and taking appropriate corrective action. Although this subsection comes under the title “Good Faith,” said the groups, the loophole would in fact allow firms with bad faith to whitewash any allegations of misconduct and instantly reduce their liability.