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The U.S. Securities and Exchange Commission’s whistleblower program, and the costs accused corporations face when they are investigated, are unlikely to disappear under the new administration despite President Donald Trump’s criticism of the law that created the program, experts say.
During the campaign, President Trump said he would “dismantle” the DoddFrank Wall Street Reform and Consumer Protection Act of 2010, which was passed in response to the Great Recession that followed the financial crisis of 2007-2008.
Among other items, Dodd-Frank created a program where individuals who provide the SEC with information that leads to a successful enforcement action yielding sanctions of over $1 million are entitled to an award of 10%-30% of the total monetary sanctions collected.
SEC enforcement actions from whistleblower tips have resulted in more than $904 million in financial remedies as of Jan. 6 the commission said. The SEC’s whistleblower program has awarded about $142 million to 38 whistleblowers since issuing its first award in 2012.
Laura Coppola, regional head of management liability commercial, North America with Allianz Global Corporate & Specialty S.E. in New York, said the actual dollar amount awarded to a whistleblower isn’t necessarily insurable under the typical directors and officers liability insurance policy, yet the costs associated with any potential enforcement action related thereto may be.
She said there are costs during an investigation, whether such investigation is formal or informal, that may be covered under a D&O policy, such as reasonable and necessary fees, costs, charges and legal expenses.
“Just like any other claim, most claims against directors and officers that come under the D&O policy allege fraud, and unless and until there’s a final adjudication in the underlying proceeding, the policy should provide a defense,” said Thomas H. Bentz Jr., a partner with Holland & Knight L.L.P. in Washington.
Mr. Bentz added that “the first issue is when you find out about it. A lot of these things are done under seal, and that can be a real problem because these policies are all done on a claims-made basis.”
“Right along with that is the definition of what constitutes a claim, because while some policies will cover informal actions, most of them don’t,” Mr. Bentz said. “So, until there’s a formal investigation, which is usually where an individual is under investigation by whatever government entity is acting, they’re typically isn’t coverage.”
The new administration will likely make changes at the SEC, although how this might affect the whistleblower program is still unknown.
Earl “Chip” M. Jones III, co-chair of the whistleblowing and corporate ethics practice group at Littler Mendelson P.C. in Dallas, said “it’s a little too early to tell” if the program might be altered under the Trump administration. He said that payment of bounties like the whistleblowers awards are a typical tool of the criminal justice system and that the IRS has had a similar bounty program for a long time.
“One thing the new administration could do,” Mr. Jones said, “is appoint more conservative judges throughout the Department of Labor, which is a pretty common change when there’s a change in administration. You see it agencies like the National Labor Relations Board, where that agency would become more employer-friendly than union-friendly when there’s an administration change.” However, Mr. Jones added, “I just don’t see them pulling the plug on the entire bounty program at all.”
“No one is going to say they want to see fraud in the workplace,” he said. “Why would you want to dial back a bounty program in the workplace? That’s kind of a hard position to take. You haven’t seen big reports of the bounty program being abused, so there’s a not a lot of tangible evidence that program is creating a negative drag on business.”
Margaret H. Campbell, a shareholder with Ogletree, Deakins, Nash, Smoak & Stewart P.C. in Atlanta, said that while the new administration may want to repeal or roll back some aspects of DoddFrank, eliminating the whistleblower program is probably not a priority.
“It hasn’t been articulated as a priority,” she said, “but more importantly, I don’t think they would have the same prospects of success and that’s because whistleblower protections do have a fair base of bipartisan support. And not only do they have bipartisan support, but in the courts, even with what would otherwise be considered conservative judges, there is a general aversion to retaliation cases.”
Sean McKessy, a partner with Phillips & Cohen L.L.P. in Washington, is a former chief of the SEC’s whistleblower program, said he believes “there are a number of things that speak to the long-term viability of the program.”
“It starts with, I believe immodestly, a very extraordinary early track record of success,” he said. “In my 5½ years, we were able to get more than $100 million paid to whistleblowers. More importantly, over $350 million was returned to investors who were wronged by the entities that the whistleblowers reported on.”
Jordan Thomas, a partner with Labaton Sucharow L.L.P. in New York, said the whistleblower program not only paid awards to whistleblowers, but investors came away better off.
Mr. Thomas also is a former assistant director with the SEC’s Division of Enforcement who played a leadership role in developing the whistleblower program.
“At the Department of Justice and the SEC, I’ve witnessed changes in administration several times and what I found is that law enforcement is a bipartisan priority,” he said. “So I don’t anticipate the whistleblower program being appealed or something like that, because it has been highly successful and it is a low-cost form of law enforcement.”
Directors and officers liability insurance policyholders are continuing to enjoy lower rates, increased capacity and broadening terms and conditions in their programs.