Last month we reported about the impact the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) will have on sentencing in federal fraud cases.
By: Houston Criminal Lawyer John Floyd and Paralegal Billy Sinclair
In an effort to prevent fraud and other improper activities in the nation’s larger financial institutions, Dodd-Frank also established a “watchdog agency” which utilizes “whistleblowers” to not only detect but report criminal conduct by providing them with substantial compensation for their willingness to expose the kind of Wall Street-like corruption that nearly brought about the economic collapse of this country in 2008. Rewarding informants has long been a highly suspect law enforcement tool which has taken on new, questionable dimensions in the wake of the 9/11 terror attacks. There is no way to accurately gauge the billions of dollars spent each year on informants by the FBI, CIA, DEA, Homeland Security, and Customs agencies in investigations of narcotics trafficking, human trafficking, terror plots, and counterfeiting products—to name a few. But Dodd-Frank places “snitching” in whole other atmosphere.
Heidi L. Hansberry is a J.D. Candidate, May 2012, Northwestern University School of Law and who received a B.A. degree from Yale University in 2006. She recently published a piece in The Journal of Criminal Law & Criminology (Vol. 102, No. 1) titled “In Spite Of Its Good Intentions, the Dodd-Frank Act Has Created an FCPA Monster.” She points out that the Foreign Corrupt Practices Act (“FCPA”), which was created as part of the Securities Exchange Act of 1934 (“SEA”), has the primary purpose of “deterring corporations and individuals from engaging in corrupt dealings with foreign officials.” Ms. Hansberry noted that the SEA was amended by Dodd-Frank to protect “whistleblowers who report Securities Exchange Act violations.” This can lead to significant payouts to “white collar” snitches as exampled by the top ten FCPA “settlements” over the past three years in the amount of more than $3.1 billion. Effective August 12, 2011, Dodd-Frank made whistleblowers entitled to cash rewards for information leading to these kinds of settlements—a lot of incentive to “get down first” as they say on the streets. In fact, as pointed out by Ms. Hansberry, Dodd-Frank snitches are entitled to 10 to 30 percent payouts on FCPA-like settlements involving a wide range of financial institutions in this country and around the globe.
The Securities Exchange Commission (“SEC”) has put some rules and prerequisites in place to regulate these Dodd-Frank payouts. Modeled after the IRS’s successful 2006 Whistleblower Program, the Dodd-Frank bounty/reward regulations include but are not limited to:
- The monetary sanctions/settlements must exceed $1,000,000.00;
- Employers are prohibited from retaliating against whistleblowers;
- Whistleblowers are not required to first report securities wrongdoing internally;
- Whistleblowers who elect to report the violations internally and then to the SEC within 120 days are still entitled to his/her payout regardless of whether the employer reports the same violations to the SEC;
- Only whistleblowers who report “original information” (information based on the whistleblower’s independent knowledge or analysis not already known by the SEC) are entitled to the snitch reward;
- Dodd-Frank not only covers FCPA but the Sarbanes Oxley Act (“SOA”) [requires corporations to adhere to specified accounting rules) settlements;
- The $1,000,000.00 threshold can be achieved through criminal fines, civil disgorgement, prejudgment interest collected by either the SEC or Department of Justice, or penalties; and
- The whistleblower information must be specific, credible and timely enough to trigger an SEC investigation or contribute to an existing investigation;
Individuals not entitled to whistleblowers bounties are:
- Those with a pre-existing or contractual duty to report wrongdoing to the SEC;
- In-house counsel, officers, directors, trustees, or partners who learn about wrongdoing through internal reporting, compliance or auditing procedures unless they meet specific criteria; and
- Foreign officials or individuals who obtained their information through criminal activity.
The SEC is extremely satisfied with the Dodd-Frank whistleblower provisions. “For an agency with limited resources like the SEC, it is crucial to be able to leverage the resources of people who may have first-hand information about violations of the securities laws,” Chairperson Mary L. Schapiro said recently. “While the SEC has a history of receiving high volume tips and complaints, the quality of the tips we have received has been better since Dodd-Frank became law. We expect this trend to continue, and these final rules to map out simplified and transparent procedures for whistleblowers to provide us [with] critical information.”
The SEC issued its first Dodd-Frank whistleblower payout this past August when the commission awarded $50,000.00 to an “anonymous tipster.” The reward could increase substantially as the Government pursues and collects additional court-ordered sanctions. Sean McKessy, Chief of the SEC’s Whistleblower Office, announced after the bounty was paid, “we’re open for business”—encouragement for the average of eight tipsters who provide information to SEC each day. McKessy said the SEC acted so quickly in the August case because the commission wanted to remain consistent with a promise made by the Director of the commission’s Division of Enforcement, Robert Khuzami, to take “early and quick” action to combat corporate fraud.
But, as Ms. Hansberry correctly pointed out, this incentive for substantial financial gain “ … in addition to the benefit of anonymity and the policy to provide financial awards to complicit, but non-convicted, whistleblowers, is dangerous.” Hansberry noted that the “big carrot” of anonymity and a “free pass for complicit behavior that does not result in a conviction” can produce “frivolous claims” or worse, incentivize snitches to “engage in behavior that encourage or brings about” securities fraud violations—a problem routinely encountered with street level “confidential” informants utilized by federal and state law enforcement agencies. Ms. Hansberry then described the unintended consequences of Dodd-Frank in FCPA cases which are equally applicable to other securities fraud cases:
“The Dodd-Frank Act’s whistleblower protections add to the burden on corporations, in particular. Corporations are at an extreme disadvantage because of the financial repercussions if fighting FCPA accusations, and a cost-benefit analysis nearly always results in corporations settling claims with the SEC or submitting to fines and monitoring by the DOJ (Justice Department). Once FCPA charges are brought or an RCPA investigation is initiated, corporations tend to settle or plead rather than litigate. There are several reasons for this tendency. First, the FCPA provides for only two affirmative defenses. Second, the FCPA imposes successor liability—liability for acquired corporations. FCPA violations, in a strict liability manner—for acts occurring prior to the entity’s acquisition by the parent company. Third, the government’s burden of proof has never been tested in court with regard to companies accused of FCPA violations, so companies are unable to benefit from any FCPA precedent. Thus, the ‘feds [have] immense power … [because] they don’t have to prove their legal theories of bribery in court.’
‘The whistleblower provisions will likely increase the number of FCPA investigations and also lessen a defendant’s ability to combat the charges, given the nature of complaints from anonymous whistleblowers. Whistleblower anonymity may prevent a company from conducting a thorough internal investigation of the alleged conduct or exploring a whistleblower’s potential ulterior motives. Thus, companies and individuals may more frequently choose to settle or plead guilty to FCPA charges, regardless of the legitimacy of the allegations, because of the uncertainty resulting from anonymous accusations.”
Well, corporations, welcome to the real world of “criminal justice.” Criminal defense attorneys have long faced the problem of dealing with criminally-inclined informants, anonymous tipsters, and other types of information barters who are motivated by profit or some other personal gain for revealing alleged criminal behavior. White collar attorneys are going to have to quickly come up to speed to fight the Dodd-Frank snitches.
Criminal defense attorneys have long since learned that individuals who trade information for profit or other personal gain are highly unreliable. They will “give up” family, friends, and even loved ones to get the bounty or walk away with a “free pass” from their own complicit criminal behavior. With the Dodd-Frank whistleblower provisions in their brief cases, high-brow federal prosecutors can now leverage their unlimited resources against corporations to secure the largest possible settlement—a nice enhancement to their “convict at any costs” resumes. Justice is actually a dirty business.
Ms. Hansberry proposed four changes to the Dodd-Frank whistleblower provisions:
- Additional language that would warn whistleblowers about prosecution for providing false information;
- Elimination of the anonymity privilege;
- A cap on the whistleblower’s bounty; and
- The creation of additional defenses under statutes like FCPA.
While we agree the propose cap on the whistleblower’s bounty would have the greatest corrective impact, it is not likely to happen. The snitch money is too great. Just last month the IRS announced it had paid convicted UBS banker Bradley Birkenfeld $100 million for the information he sold to the tax collection agency about wealthy Americans who hid their money in the Union Bank of Switzerland to avoid paying taxes. That’s not “chump change,” folks. That’s the new “snitch wealth.” While some may think it’s poetic justice for corporations to now be forced under Dodd-Frank to settle false accusations of securities fraud violations to the tune of hundreds of millions of dollars just to protect their bottom line, we do not. We do not like, or trust, individuals who barter information about criminal wrongdoing for profit or other personal gain. A snitch is a snitch is a snitch. He is not a civic-minded, law-abiding witness trying to protect the interests of community. He is just a snitch.
By: Houston Criminal Lawyer John Floyd and Paralegal Billy Sinclair
John Floyd is Board Certified in Criminal Law by the Texas Board of Legal Specialization