Sort by

Secret Dodd-Frank Weapon: New Whistleblower Law

David Callahan

We hear so many depressing stories of Dodd-Frank rules that haven't yet been written, or are being held up by court challenges, that it is easy to forget that powerful parts of the 2010 reform act are already in effect.

One element of Dodd-Frank that hasn't gotten much attention is the new Whistleblower Program established by the SEC. The program offers big monetary incentives to people who report securities fraud and such reports lead to financial penalties. Whistleblower statutes have played a huge role in exposing malfeasance in other industries, such as defense contracting and pharmaceuticals. The effects could be even bigger in the financial sector, where large-scale settlements with government authorities are already common.

Thanks to Dodd-Frank, everybody who works on Wall Street now has a financial incentive to call out illegal behavior at their firms. In effect, the new rule has deputized an army of would-be watchdogs. And, as we know, those in finance are always looking for ways to score big.

As I have written here before, Wall Street's lobbyists did their best to stop this whistleblowing rule from ever taking effect. But they failed, in an important victory for the public and a reminder that banks don't always get their way in Washingon.

While the law is still new, finance executives are already acutely aware of its potential. A survey last fall of such executives by the law firm Littler Mendelson found that that 96 percent were at least moderately concerned about the potential for whistleblower claims.

They should be. Given the size of potential rewards, would-be whistleblowers can count on plenty of outside help in reporting illegal conduct. An employee who thinks something is amiss is no longer on their own, but can reach out to a whistleblower advocate to help put together a strong claim of misconduct -- an advocate who in turn can get a slice of the settlement.

Among those who have set up shop to assist financial whistleblowers is Jordan Thomas, a former Assistant Director and Assistant Chief Litigation Counsel in the Division of Enforcement at the SEC who helped draft the whistleblower law. Thomas is now with the law firm of Labaton Sucharow, which has a long history of working on securities fraud cases.

For decades, financial reform has been hobbled by the fact that Wall Street has a huge advantage in intellectual firepower and resources. What the whistleblower law has done, though, is incentivize private sector financial lawyers to turn some of their talents to bringing criminal cases against Wall Street firms.

The mere existence of the law may already be spurring reform. According to another survey on its effects, by, some financial reforms are moving to create new or stronger internal reporting mechanisms for employees who see securities violations. That's an important step toward better self-regulation by financial firms, which too often has been lacking.

As Thomas notes, the "tide is changing. . . . to remain successful and scandal-free in this era of increased regulation and law enforcement scrutiny, organizations must be more forward-looking and establish a culture of integrity that deters wrongdoing and promotes early, internal reporting of wrongdoing when it occurs."

A caveat: Both surveys suggest that many financial firms still haven't done much to adopt to the new law. But that will change -- once a few of these firms get hit by big settlements thanks to newly empowered whistleblowers.