THE EUROPEAN LAWYER

ISSUE 99 SEPTEMBER 2010

POWER PLAY
LARGE NATIONAL LAW FIRMS
POSITION THEMSELVES TO
TAKE OVER SMALLER RIVALS
LEADING THE BUSINESS OF LAW

LLP MODEL CCBE ANNIVERSARY

AVOIDING RISK GROWING UP

BEATING PIRATES CONTRACT HIT
SEPTEMBER 2010 ISSUE 99

COPYRIGHT UPDATE CROSS-BORDER DEVELOPMENTS

COMMENT 5 KNOWLEDGE ZONE 31
NEWS ROUND-UP 6 FOCUS EUROPE 39
TRANSATLANTIC DIALOGUE 10 LAST WORD 51

EL_08.10.COVER chess.indd 4 02/09/2010 13:03


Giving whistleblowers bite
Andrei Rado
Signing the Dodd-Frank Wall
Street Reform and Consumer
Protection Act in July, US
President Barack Obama
described the law as ‘the
strongest consumer financial
protections in history’.
Among its reforms are the
creation of cash rewards for
corporate employees who expose
securities fraud and measures to
protect them from retaliation.
Most significantly, the new
law promises whistleblowers
10 to 30 per cent of penalties
obtained by the US Securities
and Exchange Commission (SEC)
for information that contributes
to the recovery of at least
$1 million.
The legislation could be a
great step for investors, corporate
whistleblowers and global
economies. Imagine the damage
that might have been avoided
or reduced had insiders at
Lehman Brothers, Bear Stearns,
or AIG warned regulators early
that the companies were hiding
snowballing risks from mortgage-
backed securities and swaps
derivatives.
Feelings of déjà vu
Indeed, the new law may induce
feelings of déjà vu. Just eight years
ago investor advocates hailed
legislation that promised to
protect corporate whistleblowers.
The Sarbanes-Oxley Act 2002,
passed following the Enron
and Tyco scandals, included
provisions enabling employees
of public companies to report
fraud anonymously. It prohibited
retaliation and created a process
for whistleblowers to petition
the Department of Labor for
reinstatement of employment, an
award of back pay, and recovery
of attorneys’ fees.
Notwithstanding, few
whistleblowers came forward as
the Sarbanes-Oxley provisions
lacked practical effectiveness, in
no small part because the law
did not reward whistleblowers,
who risked much for no tangible
www.europeanlawyer.co.uk The European Lawyer September 2010
EL_08.10.TransatlanticD.indd 11
Transatlantic dialogue
WASHINGTON DC
benefit. And although the
Securities Exchange Act of 1934
has long empowered the SEC to
award whistleblowers in insider
trading cases, bounty payments
were capped at 10 per cent
and the commission had ‘sole
discretion’ in deciding whether,
and how much, to pay. Indeed,
less than $160,000 in total was
paid under the old provision.
The new law speaks more
commandingly. A whistleblower
must receive 10 to 30 per cent
of a fine levied by the SEC. As is
apparent from the commission’s
recent $550 million settlement
with Goldman Sachs, such
incentives could dramatically
skew a potential whistleblower’s
risk-reward analysis.
Denial of an award may
be appealed immediately to
a US Court of Appeals. And
provisions in the new act – such
as establishment of an SEC
whistleblower department and a
dedicated SEC fund for payments
– create a framework that was
lacking in the prior legislation.
Perhaps not coincidentally, in
early August, just weeks after the
provisions took effect, the SEC
awarded $1 million to an insider
trading whistleblower under the
old provision, an amount that
eclipsed the totality of the prior
payments.
Retaliation protection
The Dodd-Frank Act’s
whistleblower provisions also
apply to more companies
than the old Sarbanes-Oxley
law. That legislation shielded
whistleblowers from retaliation
by public companies, contractors
and subcontractors. The Dodd-
Frank Act expands coverage
to ‘any subsidiary or affiliate
whose financial information is
included in the consolidated
financial statements of such
company’ – an astute recognition
of the corporate shell game that
accompanies many frauds.
The Dodd-Frank Act also better
protects whistleblowers from the
very real threat of retaliation.
Whistleblowers may now lodge
retaliation complaints directly
with a federal district court,
avoiding what was previously a
bureaucratic grievance process.
Under the old regime, retaliation
claims had to be filed with
the US Department of Labor.
Although that administrative
option remains (and the time
to file a Labor Department
retaliation complaint has been
extended to 180 days from 90),
whistleblowers can now elect to
fight retaliation directly in federal
court, where they would be
entitled to a jury trial.
The Act Whistleblowers who win
voids pre- retaliation cases also stand to
dispute collect more under the new
law, as the Act doubles back
arbitration pay. Importantly, the Act also
agreements, voids pre-dispute arbitration
a powerful agreements, a powerful tool that
once kept employees from ever
tool that reaching a courtroom.
once kept These changes should
employees encourage more corporate
from ever whistleblowers to come forward.
But the details of regulatory
reaching a implementation will profoundly
courtroom impact on the efficacy of the
law. Although the whistleblower
provisions took effect with the
signing of the Act, the SEC has
nine months to enact regulations.
The legislation mentions several
areas in particular that the
SEC must fine-tune, including
guidelines for determining the
amount of a whistleblower’s
reward, the ‘manner’ in which
a whistleblower must report
fraud allegations to the SEC,
and whether a contract with
the SEC will be necessary for a
whistleblower to collect a reward.
It is now up to the SEC to
adopt regulations that will
truly protect and encourage
individuals to expose corporate
misbehaviour in furtherance of
the ultimate goal – protection of
our capital markets.
Andrei Rado is a partner at the New
York office of US law firm Milberg
11
31/08/2010 10:28