Whistle While You Work: the Fairytale-like Whistleblower Provisions of the Dodd-frank Act and the Emergence of "greedy," the Eighth Dwarf - Lucienne M. Hartmann

• Publication year: 2011

Comment

Whistle While You Work: The Fairytale-Like Whistleblower Provisions of the Dodd-Frank Act and the Emergence of "Greedy," the Eighth Dwarf

I. Introduction

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act)¹ is arguably the most sweeping and significant expansion of financial regulatory reform since the Great Depression.² The Act, stimulated by Congress's perceived failures of government banking regulations, is intended to promote financial stability in the United States.³ Amidst the Act's thousands of pages are a handful of sections that significantly enhance the awards and protections available to whistleblowers.⁴ Among other things, the Dodd-Frank Act's whistle-

1. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

2. John L. Ropiequet, Christopher S. Naveja & Jason B. Hirsh, An Introduction to the Dodd-Frank Act—the New Regulatory Structure for Consumer Finance Emerges, 29 No. 8 Banking & Fin. Services Pol'y Rep. 1, 1 (2010).

3. 124 Stat. at 1376.

4. See §§ 748, 922, 1057, 124 Stat. at 1739-46, 1841-49, 2031-35.

1280 MERCER LAW REVIEW [Vol. 62

blower bounty provisions and protections gives a hefty award to whistleblowers, strengthens and expands the whistleblower protections of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley),⁵ creates an entirely new retaliation-protection regime, and provides for new private rights of action for whistleblowers under the Securities and Exchange Act of 1934 (SEA)⁶ and the Commodity Exchange Act of 1936 (CEA)⁷ going forward. These whistleblower provisions will have both immediate and long-term effects on employees, companies, lawyers, and federal courts.

This Comment's purpose is threefold. First, this Comment canvasses the history of federal law whistleblower provisions and discusses the financial climate that stimulated the passage of the Dodd-Frank Act. Second, this Comment considers the whistleblower provisions and protections afforded by the Dodd-Frank Act and compares them to prior legislative provisions. Third, this Comment explores the likelihood that the Act's whistleblower provisions will achieve their intended goals and the potential for unintended and undesirable consequences.

II. Whistleblower Protection Prior to the Dodd-Frank Act

The term "whistleblower" originated from the practice of English constables, or bobbies, who blew their whistles to alert other constables that help was needed.⁸ over time this simple concept has grown into an omnipresent force within government or corporate walls governed by federal statutes to now describe an employee externally reporting fraudulent actions ofthe employer-company to the federal government.⁹ While blowing the whistle on a company affects all parties involved, it is nevertheless an "individual decision" and "[a] corporate employee who discovers ongoing fraudulent conduct (either by accident or through deliberate search) must make an affirmative choice to blow the whistle."¹⁰ Accordingly, this choice has proven to be difficult; however, with the financial incentives and protection that the Dodd-Frank Act provides, the choice will now likely be an easier one to make.¹¹

5. Sarbanex-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 15 and 18 U.S.C.), amended by §§ 922, 929A, 124 Stat. at 1842, 1852.

6. 15 U.S.C. ch. 2B (2006 & Supp. 2009), amended by § 922, 124 Stat. at 1841.

7. 7 U.S.C. ch. 1 (2006 & Supp. 2008), amended by § 748, 124 Stat. at 1739.

8. Who Qualifies as a SEC Whistleblower?, SEC Whistleblower Program, http://www .secwhistleblowerprogram.org/SEC-Whistleblower-Qualifications (last visited Apr. 2, 2011).

9. Black's Law Dictionary 1734 (9th ed. 2009).

10. Geoffrey Christopher Rapp, Beyond Protection: Invigorating Incentives for Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers, 87 B.U. L. Rev. 91, 111 (2007).

11. Id. at 113.

2011] DODD-FRANK ACT 1281

The Dodd-Frank Act is not the only legislation enacted by Congress protecting whistleblowers. Some federal statutes award the whistle-blower with a percentage of the monetary sanction imposed on the violating agency.¹² other federal statutes award successful whistle-blower retaliation claims to reinstatement, back pay, injunctive relief, and compensatory damages,¹³ and still some provide for punitive damages.¹⁴ This dichotomous protection leads to two main goals of federal whistleblower statutes.¹⁵ First, whistleblower protection should "'serve a truth-advancing function' ... to encourage . . . employees to share [information] about . . . fraud committed by their respective agencies."¹⁶ And second, whistleblower protection serves a "democracy-advancing function" to make the government "more transparent" and therefore "more responsive to the people."¹⁷

However, to completely understand the effect of the whistleblower provisions of the Dodd-Frank Act,¹⁸ it should be viewed first in light of the protections that prior statutes afforded whistleblowers. Some of the most notable whistleblower incentives or protections that were existent prior to the Dodd-Frank Act were included within the SEA,¹⁹ the False Claims Act,²⁰ and Sarbanes-Oxley.²¹

A. The Securities and Exchange Act of 1934

The United States Congress created the SEA in order to govern securities transactions on the secondary market.²² In doing so, the SEA rewarded up to 10% of a monetary sanction levied against a company caught in violation of insider trading to an individual who gave information to the Securities and Exchange Commission (SEC) regarding

12. E.g., False Claims Act, 31 U.S.C. § 3730(d)(1), (2) (2006).

13. E.g., Energy Reorganization Act, 42 U.S.C. § 5851(b)(2)(B) (2006).

14. E.g., Toxic Substances Control Act, 15 U.S.C. § 2622(d) (2006); Energy Reorganization Act, 42 U.S.C. § 5851(d) (2006); Clean Air Act, 42 U.S.C. § 7622(d) (2010).

15. Jon Knight, Patrolling the Unfriendly Skies: Protecting Whistleblowers Through Expanded Jurisdiction, 20 Fed. Cir. B.J. 281, 284 (2010).

16. Id. (quoting Jocelyn Patricia Bond, Note, Efficiency Considerations and the Use of Taxpayer Resources: An Analysis of Proposed Whistleblower Protection Act Revisions, 19

Fed. Cir. B.J. 107, 111 (2009)).

17. Id. at 284-85.

18. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,

124 Stat. 1376 (2010).

19. 15 U.S.C. ch. 2B (2006 & Supp. 2009).

20. 31 U.S.C. § 3729-3733 (2006 & Supp. 2009).

21. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 15 and 18 U.S.C.).

22. 15 U.S.C. § 78b (2006).

1282 MERCER LAW REVIEW [Vol. 62

the violation.²³ However, this provision does not require that a whistleblower receive a portion of the monetary sanction recovered.²⁴ Rather, the SEC has complete discretionary authority over whether to provide the whistleblower with an award, if at all.²⁵ The relatively small financial reward combined with the discretionary authority of the SEC to reward the whistleblower has caused the statute to be ineffec-tive.²⁶ During the twenty years that this provision has been enacted, only five individuals have received awards under the program, "totaling a mere $159,537."²⁷ Therefore, while the SEA provides a recourse for whistleblowers, it does not provide an incentive.

B. The False Claims Act

The False Claims Act, however, does provide a stronger incentive to individuals who report fraud.²⁸ Originally enacted in 1863,²⁹ the False Claims Act has been substantially amended on three occa-sions—1943,³⁰ 1986,³¹ and 2009.³² In 1986 Congress created the modern-day False Claims Act by specifically amending the statute to "encourage more private enforcement suits."³³ The False Claims Act, with its reliance on qui tam³⁴ actions, is "used as the primary vehicle by the Government for recouping losses suffered through fraud" and, in 2004, was "the Government's most successful weapon in its legal arsenal to combat fraud."³⁵

23. 15 U.S.C. § 78u-1(e) (2006).

24. Id.

25. Id.

26. Robert R. Stauffer & Andrew D. Kennedy, Dodd-Frank Act Promises Large Bounties for Whistleblowers, Law.Com (Aug. 23, 2010), http://www.law.com/jsp/article.jsp?id=12

02470880915.

27. Id.

28. See 31 U.S.C. § 3730.

29. False Claims Act of 1863, ch. 67, 12 Stat. 696.

30. Act of 1943, ch. 377, 57 Stat. 608 (amending the qui tam provisions of the False Claims Act).

31. False Claims Amendments Act of 1986, Pub. L. No. 99-562, 100 Stat. 3153 (1986).

32. Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat. 1617.

33. S. Rep. No. 99-345, at 23-24 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5288-89.

34. Qui tam, the abbreviation of the Latin phrase "'qui tam pro domino rege quam pro se ipso in hac parte sequitur' . . . means 'who pursues this action on our Lord the King's behalf as well as his own.'" Rockwell Int'l Corp. v. United States, 549 U.S. 457, 463 n.2 (2007) (emphasis omitted).

35. Dan L. Hargrove, Soldiers of Qui Tam Fortune: Do Military Service Members Have Standing to File Qui Tam Actions Under the False Claims Act?, 34 Pub. Cont. L.J. 45, 47 (2004) (internal quotation marks omitted).

2011] DODD-FRANK ACT 1283

A False Claims Act cause of action may be pursued in two ways. First, "the Attorney General may bring a civil action" against a person who defrauds the government.³⁶ The amount of the award given to the whistleblower, based upon the value of the information received by the government and determined as part of a settlement or allocated by the court, is between 15%-25% of any award the government may receive for pursuing the claim.³⁷ Second, any individual (relator)³⁸ may pursue the claim on his or her own, qui tam, if the government chooses not to pursue the claim after sixty days of filing the claim.³⁹ In this case, the relator is entitled to 25%-30% of the monetary sanctions, plus attorney fees and costs.⁴⁰ It is important to note that the award to whistle-blowers under the False Claims Act is not discretionary, but...