A look back at how whistleblowers have benefited from Dodd-Frank since 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act became U.S. law on July 21, 2010 in response to the Great Recession of 2008. The law was a broad and sweeping change that affected all federal financial regulatory agencies. Its aim was to encourage financial stability by protecting the American taxpayer and consumers from abusive financial practices. The bill is named after U.S. Rep. Barney Frank and U.S. Sen. Chris Dodd.

The act’s whistleblower provisions (known by some as the “Wall Street Tip-Off Law”) give whistleblowers incentives to report fraud to the SEC (Securities and Exchange Commission) and CFTC (Commodity Futures Trading Commission) and give protection against retaliation and disclosure of their identities. Given widespread fraud in the areas of securities and commodities, this law has provided enormous benefit to the public since it was passed under both the Dodd-Frank SEC Whistleblower Program (15 U.S.C. § 78U-6 ) and the CFTC Whistleblower Program, (7 U.S.C. § 26).

Dodd-Frank’s Whistleblower Success

Five years later, all evidence strongly supports the conclusion that the law is working especially well when it comes to successful SEC and CFTC whistleblower actions. The SEC and CFTC whistleblower programs both started in 2011. The expectation that the agencies would develop robust whistleblower programs and develop significant enforcement cases as a result of whistleblower reporting has come to pass. And large awards have been provided to whistleblowers under these Dodd Frank programs.

Our firm, Hagens Berman, represents several whistleblowers in actions before both the SEC and the CFTC and our firm’s experience with these programs further confirms their success. In fact, our firm represents the two most prominent Dodd Frank whistleblowers: one under the SEC program and the other (proceeding anonymously) under the CFTC program. One has helped to expose securities violations at financial exchanges and various market structure problems; the other developed a complaint that ultimately led to the so-called “Flash Crash” enforcement actions against a foreign market manipulator.

SEC SUCCESS

In its 2014 Annual Report of the SEC Office of the Whistleblower, Sean McKessy, Director of the Office of the Whistleblower, noted several significant whistleblower events:

• The SEC issued whistleblower awards to more individuals in Fiscal Year 2014 than in all previous years combined.
• The magnitude of the award payments was record-breaking. On Sept. 22, 2014, the commission authorized an award of more than $30 million to a whistleblower who provided key original information that led to a successful enforcement action.
• Whistleblower claims have a broad range and often cover multiple enforcement actions. In 2014, some individuals saw their awards increase from prior years. One whistleblower saw his original award of $50,000 grow to more than $385,000.
• Several awards confirmed that corporations must do more than utilize internal reporting procedures. Companies must also respond to credible wrongdoing allegations voiced by their employees.

CFTC SUCCESS

In 2014, the CFTC acting chairman Mark Wetjen announced that the agency was making its first whistleblower award to a person who provided valuable information about violations of the Commodity Exchange Act. The whistleblower received approximately $240,000.

Christopher Ehrman, Director of the Whistleblower Office at the CFTC, said that the number of high quality tips, complaints and referrals received continues to increase. Our firm knows this first hand, and works with the CFTC on significant fraud matters on behalf of our whistleblower clients.

DODD-FRANK SEC AND CFTC WHISTLEBLOWER LAWS EXPLAINED

The Dodd-Frank Law created SEC and CFTC whistleblower programs based on similar and highly successful qui tam whistleblower provisions in the federal and state False Claims Act laws and IRS whistleblower program enacted by Congress in 2006. Dodd Frank and the SEC and CFTC whistleblower laws and corresponding regulations set forth incentives for whistleblowers to report fraud and thus help enforce standards of honesty and fair dealing in the securities markets, commodity futures, options and swap markets.

MONETARY INCENTIVES

Both the Dodd-Frank SEC Whistleblower Program (15 U.S.C. § 78U-6 ) and the CFTC Whistleblower Program, (7 U.S.C. § 26) provide substantial monetary rewards to whistleblowers provided the following core requirements are met:

1. The information has to be provided voluntarily to the SEC or the CFTC.
2. It must be original information about fraud in the relevant markets.
3. The information must result in a successful enforcement action of monetary sanctions totaling more than $1 million.

The whistleblower award is an aggregate amount between 10 and 30 percent of the money collected by the SEC or CFTC as monetary sanctions. The whistleblower award includes recoveries for any “related actions” that might be brought by certain other federal or state authorities, including the Department of Justice.

How Whistleblower Law Firms Make SEC and CFTC Claims Successful

One key to the success of these programs often involves whistleblowers retaining experienced financial fraud attorneys who routinely work with the SEC and CFTC, litigate financial fraud cases, and know how to investigate, develop and submit proper whistleblower claims.

The SEC or CFTC whistleblower who hires an experienced and knowledgeable whistleblower attorney can submit his or her information to the SEC or CFTC with complete anonymity. This anonymity is kept throughout the investigation; but it requires that the whistleblower proceed with counsel.

The SEC and CFTC need to be able to separate the wheat from the chaff. There are several thousand complaints filed with the agencies by potential whistleblowers each year. Most of them will not result in a successful enforcement action, and many lack merit altogether. A high-caliber submission filed by experienced SEC/CFTC whistleblower attorneys with the kind of reputation and expertise that is respected by the agencies helps give a complaint immediate attention and focus and ensure the maximum effect and reward from the whistleblower’s case.

A law firm with broad experience litigating financial fraud can help a whistleblower determine the strength of his or her allegations and help develop the correct legal theories and factual allegations necessary to build a strong case. Such counsel can also advise whether a claim might more properly be, or additionally be, filed under the IRS programs or the False Claims Act.

Types of SEC Fraud

The SEC’s Division of Enforcement investigates and prosecutes a large number of cases across several different areas of securities fraud. By exposing securities fraud and making the wrongdoer pay, these whistleblower actions help to ensure investor confidence and help the securities markets keep their integrity. Areas of focus include:

Foreign Corrupt Practices Act (FCPA) violations: Enforcement against foreign bribery and accounting fraud.

Insider trading: The unlawful purchase or sale of a security in breach of a fiduciary duty or other obligation while in possession of material and non-public information about that security.

Market manipulation: Such manipulation refers to intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. This can range from old-school techniques such as spreading false information to affect a stock price or manipulating volume, to newer, more innovative “spoofing” or other predatory techniques to create an artificial picture of demand or supply for a security.

Unlawful securities schemes: The SEC routinely investigates and prosecutes those who develop Ponzi schemes, pyramid schemes, fraudulent high-yield investment scams and other forms of securities schemes. Some of these are incredibly sophisticated (as was the case with the now-infamous Bernie Madoff scheme) and developed over several years. Others are detected more easily.

Fraud in corporate disclosures and financial statements: The SEC enforces securities laws that prohibit companies from making false statements or material omissions in their corporate disclosures and financial filings.

Fraud in securities offerings: There are several types of fraud that can occur in the offering of securities. Generally this involves material misrepresentation of the terms of the offering or features of the security in question. The SEC enforces laws that prohibit fraudulent activity surrounding the offering of securities.

Fraud in trading and pricing: This often overlaps with various forms of market manipulation. Fraud surrounding the trading and pricing of securities undermines our trading markets and investor confidence in those markets and can cause significant loss to investors and ill-gotten gain to those committing this fraud. This includes potential securities violations by broker-dealers, financial exchanges and traders (including high-frequency trading companies), traders in off-exchange venues such as dark pools and others.

Various other forms of securities violations: The SEC also investigates several other types of securities fraud, including theft and misappropriation of funds or securities, fraudulent conduct in the arena of municipal securities and public pensions, improper fees/mark-ups/commissions by broker dealers and others and other fraudulent sales and financial advisory practices.

Types of CFTC Fraud

The CFTC’s Division of Enforcement investigates and prosecutes a large number of cases across several different areas. These CFTC whistleblower actions help protect the honest investor and restore faith in the markets. Some of the common areas of CFTC enforcement include:

Market manipulation: Market manipulation can occur in any number of ways in commodities and futures trading. One means of market manipulation is through engaging in prohibited trading activity. Prohibited methods of manipulative trading include “spoofing,” which refers to the practice of placing and canceling orders in an effort to move prices without a bona fide intent to trade. Dodd-Frank specifically prohibited this practice, and the CFTC has increased investigation in this area.

Ponzi, pyramid, or other schemes: The CFTC routinely brings actions against those persons and entities that deceptively market and deceive investors into investing money in Ponzi schemes, pyramid schemes and other similar fraudulent scams, and whistleblowers are critical in catching this kind of fraud. Such actors typically solicit investors in a fraudulent manner, misappropriate the invested funds, falsify investment statements and either remain unregistered or fraudulently register with the CFTC. This type of fraud is devastating to the investors who often lose all or much of their net worth as a result.

False or fraudulent statements: Dodd-Frank expanded the definition of false reporting to include actions in reckless disregard of truth even when intent or knowledge cannot be demonstrated, and to include any false statement of material fact made to the CFTC in any context.

Other fraud schemes in connection with commodities, futures and swaps: In addition to market manipulation and various forms of outright theft through fraudulent schemes, the CFTC enforces laws and regulations prohibiting any schemes in connection with commodities, futures and swaps, and whistleblowers are critical to reporting and stopping this kind of fraud. For example, price manipulation of various sorts is unlawful with respect to futures contracts and commodities.