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Criminal Violators Can Be Whistleblowers Under Dodd-Frank

Rejecting the suggestion by some commenters that the rules exclude from “whistleblower” status those who are themselves guilty of violations, the SEC notes that “[i]nsiders regularly provide law enforcement authorities with early and invaluable assistance in identifying the scope, participants, victims, and ill-gotten gains” from fraudulent schemes. Id. at 195. In further support of its position, the SEC states “[t]his basic law enforcement principle is especially true for sophisticated securities fraud schemes which can be difficult for law enforcement authorities to detect and prosecute without insider information and assistance from participants in the scheme or their coconspirators.” Id. at 194-95. However, under the statute itself, a fraud participant cannot be a Dodd-Frank whistleblower if he or she was convicted of criminal conduct relating to the fraud. 15 U.S.C. § 78u–6(c)(2)(B).

In response to public policy concerns about rewarding wrongdoers, the Final Rules provide that the SEC will not count monetary sanctions against the whistleblower or any entity “whose liability is based substantially on conduct that the whistleblower directed, planned, or initiated” in determining whether the $1,000,000 threshold for an award has been met. Final Rules at 195. In addition, any award the whistleblower receives will be decreased by amounts attributable to the whistleblower’s conduct.

The rules also deny whistleblower status to those who obtain information “where a domestic court determines that the whistleblower obtained the information in violation of federal or state criminal law.” Id. at 80. The SEC rejected recommendations to extend this provision to information obtained in violation of civil law. The exclusion also does not apply to information obtained in violation of a protective order.

Hat tip: An outstanding article that covers the law and final regulations in comprehensive fashion is Dodd-Frank and the SEC Final Rule: From Protected Employee To Bounty Hunter, ST001 ALI-ABA 1487 (July 28-30, 2011), which was written by Littler Mendelson, P.C. lawyers John S. Adler, Edward T. Ellis, Barbara E. Hoey, Gregory C. Keating, Kevin M. Kraham, Amy E. Mendenhall, Kenneth R. O’Brian, and Carole F. Wilder. This post is partially derived from that article.