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Dodd-Frank provisions encourage whistle-blowing


Observers say the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act's whistle-blower provisions are particularly problematic for firms.

Kevin LaCroix, an attorney and executive vice president of RT ProExec, a division of R-T Specialty, based in Beachwood, Ohio, said under rules adopted by the Securities and Exchange Commission in 2011, whistle-blowers are entitled to an award of 10% to 30% of the monetary sanctions collected in actions brought by the oversight agency if they exceed $1 million.

The bounty program has been “slow to get off the ground,” with just one award of $50,000 granted last year, said Mr. LaCroix. However, he pointed out that in its annual report to Congress in November, the SEC has posted 143 “Notices of Covered Action for enforcement judgment and orders,” which could ultimately result in additional bounties.

The suggestion, “reading between the lines,” is “we're going to see a lot more bounty payments,” Mr. LaCroix said.

Meanwhile, the SEC has received more than 3,000 phone tips to its whistle-blower office (see chart above). “The first time somebody scores big on these, it's just going to bring people out of the woodwork,” said Mr. LaCroix. According to the SEC, as of November, there was $453.4 million in the whistle-blower fund.

Trevor Howard, New York-based senior vice president, U.S. management liability for Liberty International Underwriters, said, “Once you see large payouts made because of a whistle-blower, the publicity is going to drive more people to go directly to the SEC, rather than their own companies first.”

Jack Flug, New York-based managing director at Marsh Inc.'s FINPRO unit, said companies “need to revisit some of the language issues in their policies to make sure,” if there are whistle-blowers, “certain coverage exclusions may not be triggered.”

Meanwhile, many plaintiffs firms have set up procedures to help whistle-blowers claim awards. In addition to helping whistle-blowers win a bounty, this also could lead to securities class actions lawsuits or other litigation. It is a “potentially fruitful area,” from the plaintiffs attorneys' perspective, said Mr. LaCroix.

Furthermore, “You can credibly imagine a situation where somebody might try to use the whistle-blower provision to his own advantage,” including disgruntled employees, said Carl E. Metzger, a partner with law firm Goodwin Procter L.L.P. in Boston.