Sunday, October 24, 2010

Dodd-Frank Rules Could Create Multiple Corporate Headaches

Guest Blogger - Philip Hilder

Critics are complaining that a likely downside to the Dodd-Frank Wall Street Reform and Consumer Protection Act will be a tsunami of complaints from gold digging bounty hunters in the workplace, including many false allegations.

Certainly the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission will have a lot more work. Dodd-Frank also means they will have a lot more help in finding fraud and insider trading.

A bigger problem may be that empowered whistleblowers will be encouraged to ignore their corporate ladder, ignore their internal rules and rush to the government with any perceived problem they hope will be the “original information” that can be the foundation of an enforcement action. This race for cash rewards could conflict with internal company compliance and ethics programs, which encourage employees to internally report wrongdoing.

It also could be good for lawyers who get paid to help clean up the mess, but bad for companies that may lose the opportunity to self-correct before a government investigation is launched.

It is foreseeable that such an investigation could trigger shareholder or derivative lawsuits against the company as well.

My client Sherron Watkins, a former Enron vice president, reported accounting problems at that now-dead company by following the internal rules. Under Dodd-Frank, the next person in Watkins’ position will more likely become a true whistleblower, bypassing internal protocol and heading outside the company to grab for the golden ring.

Just as Congress created Sarbanes-Oxley protections in response to Enron, in part because of Watkins' testimony, Congress also created Dodd-Frank in reaction to the Bernie Madoff scandal. Congress created more lucrative bounties and effectively deputized millions of Americans to skip company protocol by telling the government about insider trading, securities fraud, bribery of overseas businesses and governments, and a host of financial crimes that employees may see on the job.

The stakes are higher than when Watkins warned her bosses in 2001. She was rewarded with inquiries about how to fire her. Dodd-Frank would help in that scenario, too. It not only beefs up the payment to those who reveal real crimes, but it also strengthens the protections against retaliation, and doubles the amount someone can recover in a successful retaliation lawsuit.

Before this Act, total awards to whistleblowers were discretionary and only rewarded for certain insider trading tips. Now, successful enforcement exceeding $1 million could bring a whistleblower between a mandatory 10 percent up to 30 percent of what is government recovered.

Now corporations need not worry only about current and former employees but also about folks at subsidiaries and affiliates of publicly traded companies. Even contractors, consultants and sales agents can blow whistles for cash. Those who can’t reap the rewards include someone convicted of a crime related to the information provided to the government, certain auditors and employees of the SEC, CFTC and U.S. Department of Justice.

Prior to Dodd-Frank being passed, the Department of Labor was barely pursuing whistleblower retaliation complaints. It denied awards in about 98 percent of cases and tossed out more than 1,000 claims. Whistleblowers can now skip over the DOL and proceed directly to federal court where they can double their back pay with interest if they prevail in a lawsuit.

Now we’ll see emboldened employees along with companies who need to be more careful with compliance and self-policing. Congress’ empowerment of employees may create a litigation rich environment where a lot more dirty laundry is aired. 

Philip H. Hilder is a former federal prosecutor and founder of Houston-based Hilder & Associates, P.C., who focuses on white-collar criminal defense and whistle blower lawsuits. [email protected]


Civil Enforcement, Civil Litigation | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Dodd-Frank Rules Could Create Multiple Corporate Headaches :


You remark about dirty laundry getting aired as if such were a bad thing. Hmmmm.

Would not worry too much though, the tools of the powers that be (DOL, OSC etc), will keep on being tools of the powers that be. Making a new name of a new entity, will still be the same old formula = Buried Evidence!

We know from personal experience, sitting on one of the biggest scandals of all time, how monopoly of the entire retail toy industry transpired through fraudulent federal court crimes.

No need to worry, same story, different people!

Posted by: Laser Haas | Oct 25, 2010 8:15:19 AM

Post a comment