Whistleblowing - A New Dimension

In January this year, the US Securities and Exchange Commission (“SEC”) implemented the Cooperation Initiative. It involves a series of measures aimed at encouraging individuals and companies to cooperate and assist the SEC with investigations and enforcement actions. The SEC also established a framework to evaluate cooperation by individuals and introduced new tools to aid enforcement.

Following this theme, in May, the US Senate passed the proposed Restoring American Financial Stability Act 2010 (“the Bill”). The Bill contains new whistleblower protection provisions. Section 922 provides that individuals who provide “original information” to the SEC resulting in successful enforcement of a judicial, administrative or related action, leading to a monetary sanction exceeding USD1 million, are entitled to an award of 10% to 30% of the monetary sanction collected. 

The actual amount awarded to whistleblowers is subject to the SEC’s discretion. In determining the amount the SEC will take into account the significance of the information provided to the success of the action, the degree of assistance provided by the whistleblower and their legal representatives, the programmatic interest of the SEC in deterring violations, and any additional relevant factors the SEC may establish by rule or regulation.

Section 922 prohibits the SEC from paying an award to whistleblowers in certain circumstances including where the whistleblower is an employee of a regulatory agency or the Department of Justice, is convicted of a criminal violation related to the action for which they provided information, gains the information through the performance of an audit of financial statements required under law and for whom such submission would be contrary to section 10A of the Securities Exchange Act 1934 (which requires an auditor to notify management as well as the company's audit committee on a timely basis of an illegal act), or who fails to submit information in the form required by the SEC.

It also prohibits retaliation against whistleblowers by preventing employers from firing, threatening or otherwise discriminating against whistleblowers for any lawful act they have done, and creates a right for whistleblowers to bring an action in the appropriate US district court for relief against employers if this occurs.

The SEC needs information and witnesses to build successful cases against companies and individuals within those companies who are engaged in suspected wrongdoing. The prospect of a monetary award and protection from retaliation are incentives being used by the SEC to encourage individuals to come forward with information. 

The provisions will no doubt cause companies to evaluate the way they treat whistleblowers and how they approach suspected wrongdoing. They may also cause companies to more hastily inform the authorities of any suspected wrongdoing so the company can report its version of events to limit the risk of an individual first approaching the authorities with a conflicting version of events. 

A recent example of the US approach (prior to this legislative measure) is the reward made to a Pfizer employee following a US$2.3 billion settlement which Pfizer, the world’s largest drug company, entered into with federal prosecutors in 2009 for illegally marketing a drug for unapproved purposes. John Kopchinski, a Pfizer sales representative, blew the whistle on Pfizer's conduct and commenced a “Qui Tam” suit against Pfizer which was then acted upon by the US authorities following the US$2.3 billion settlement. Mr Kopchinski and five other Pfizer employees received payments totalling $102 million from the federal share of the civil recovery.

US enforcement trends are often adopted in other jurisdictions. In the UK the FSA (who introduced a whistleblower hotline in 2002) and the SFO have encouraged direct reporting by whistleblowers - albeit no prospect of reward has been raised to date. 

Sam Eastwood is a litigation partner and Head of the Business Ethics and Anti-Corruption Group and Carey Lynn is a litigation senior associate at Norton Rose LLP, http://www.nortonrose.com/. Sam can be contacted on +44(0)20 7283 6000 or by email: sam.eastwood@nortonrose.com.

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