Whistle-blower Debate Heats Up

The SEC's proposed rulemaking on the Dodd-Frank whistle-blower provisions has drawn passionate proponents and critics alike.

You might expect someone like Sherron Watkins, the famous Enron whistle-blower, to be an outspoken supporter of the proposed whistle-blower-friendly rules mandated by the Dodd-Frank Act.

You would be wrong. The ex-Enron accountant predicts that the forthcoming final rules fleshing out Congress’s intentions for the 2010 law will have no effect on whistle-blowing unless they are significantly different from the preliminary rules proposed last November. And she opines that the culture of the Securities and Exchange Commission, which will issue and enforce the rules, “is not one that will make this provision effective one iota.”

Speaking recently at a meeting of the New York State Society of CPAs, Watkins accused the SEC of putting a priority on handling the “easy” cases whistle-blowers bring in so as to enhance its case-disposal rate. She also criticized the commission for, she suggested, lazily assuming that companies are “doing it right” and for not having the “bad-cop attitude” of the Justice Department. (SEC spokesman John Nestor declined to respond to those statements when contacted by CFO.)

Regardless of whether such opinions are typical of those held by other whistle-blowers, clear-cut battle lines are being drawn over the question of whether the proposed rules are what’s needed to rein in corporate fraud at publicly traded companies.

Under the proposal, whistle-blowers who voluntarily provide original information leading to the recovery of more than $1 million from accused companies would be eligible to receive 10% to 30% of the amount.

For the first time, those reporting alleged violations of any securities laws would be eligible for an award. An SEC program in effect since 1989 has provided cash awards to those who expose insider trading, but only a handful of awards have been made. In fact, until a $1 million payout in July 2010, a total of only $159,000 had been paid out over 21 years.

But insider trading is difficult for co-workers to detect, since they don’t have access to the offender’s brokerage accounts. Perhaps offering better testimony to the effectiveness of cash awards for whistle-blowers is the False Claims Act, which enables private individuals to sue government contractors they believe are cheating the government and collect 15% to 25% of recovered funds. Whistle-blowers would not have the right to such a “private cause of action” under Dodd-Frank. Still, the fact that some $28 billion has been recovered for the government through the False Claims Act since 1986, when the Lincoln-era law was first amended, is proof enough for some that the proposed payouts will work.

“The evidence is clear that providing a financial incentive for people to report corporate fraud has worked very well,” says Jason Zuckerman, a principal of The Employment Law Group, which represents whistle-blowers. At the same time, there is plenty of concern that the enticement of riches will lead to a flood of tips that the SEC — which even before Dodd-Frank was signed into law last July was inundated with whistle-blower tips — will not be able to handle. “My fear is that these rules are going to spur many specious claims,” said former SEC commissioner Paul Atkins during the same program where Watkins spoke. “The SEC has been trying for years to deal with all the tips it gets, and it is also a real [corporate] management headache dealing with them.”

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