Celebrating the first five years of Dodd-Frank

July 21, 2015 will mark the fifth anniversary of the passage of the Dodd-Frank Act – one of the most celebrated and maligned pieces of legislation in recent times, not to mention the most significant whistleblower law enacted since the False Claims Act.  The statute has done wonders in forcing Wall Street to clean up its act and has been responsible for extracting large penalties from public companies and banks behaving badly.  And it has provided strong protections – and sizable awards – to whistleblowers.  Despite its success, it has been a controversial law since its inception and its fifth birthday is stirring up the dissenters once again.  But given its strong track record, and the SEC’s very vocal support of whistleblowers, Dodd-Frank will undoubtedly be around for many birthdays to come.   

The quick success of the program is unprecedented.  The SEC’s annual Dodd-Frank Whistleblower Report reflects huge annual leaps in both the rewards the agency has paid and the quality and quantity of tips it has received.  The program had a record year in 2014, issuing whistleblower awards to more people than in all previous years combined.  The report detailed the nine whistleblower awards it made that year, highlighting the largest reward it has ever made – $30 million to a foreign whistleblower who provided key original information on an ongoing fraud that would otherwise have been very difficult to detect.  The report also trumpeted that the SEC Whistleblower Office received more than 3,500 tips from whistleblowers, up by 20 percent from prior years, receiving tips from every state and from 83 countries. 

{mosads}The SEC has made clear its commitment to encouraging whistleblowers to come forward by providing hefty awards and using them as a carrot to encourage others to follow suit.  The SEC has also been liberal in its approach as to who may qualify as a whistleblower.  Last year, for example, the SEC made significant awards that were firsts of their kind, including roughly half a million to a former company officer who learned about a fraud through another employee rather than firsthand.  And the SEC announced two separate awards totaling $1.3 million to two compliance officers who believed reporting to the SEC was necessary to prevent imminent harm to investors.   

Among the most important components of Dodd-Frank are its anti-retaliation provisions, which the SEC vigorously enforces.  The Whistleblower Office recently made its first award in a retaliation case to a whistleblower who suffered “unique hardships, including retaliation” as a result of blowing the whistle on misconduct at a hedge fund.  And the SEC has thrown the gauntlet at companies who stifle whistleblowers through overly restrictive confidentiality agreements.  In this vein, it brought its first enforcement action against Houston-based global technology and engineering giant KBR Inc. for forcing employees to sign confidentiality agreements that had the potential to stifle whistleblowers.  The SEC has also filed amicus curiae briefs in several private cases to reinforce the broad scope of Dodd-Frank’s anti-retaliation protections.

With Dodd-Frank being so new, the related case law is developing in an erratic fashion.  One of the few issues brought before the courts is whether an employee is covered under the anti-retaliation provisions of Dodd-Frank when the employee only reports the conduct internally rather than to the SEC.  In 2012, the Fifth Circuit in Asadi v. G.E. Energy (USA), LLC ruled the whistleblower retaliation protections of Dodd-Frank apply only to those who actually provide information to the government. If a whistleblower merely reports within the company, to a supervisor or through an internal compliance program, the court ruled there is no coverage.  Since then, there have been several decisions both pushing back on and adopting the ruling, leaving whistleblowers with no clear guidance.  For example, just last fall a California court found, in Connolly v. Wolfgang Remkes, that a whistleblower is not required to report to the SEC in order to qualify for protection.  Just as the law was moving in the right direction, a month later a New York judge in Berman v. Neo@Ogilvy LLC relied on Asadi in throwing out a whistleblower retaliation lawsuit because the employee did not report his concerns to the SEC before the retaliation.  Berman is currently on appeal to the Second Circuit where the SEC has filed a brief arguing that individuals who report misconduct internally are covered by Dodd-Frank’s anti-retaliation protections, regardless of whether they report the information to the SEC.

The courts are not the only place where Dodd-Frank is in danger of being weakened.  The House Committee on Financial Services and the Senate Banking Committee have attempted to chip away at several of Dodd-Frank’s provisions over the years.  In “honor” of Dodd-Frank’s fifth anniversary, the House Committee is holding three meetings this month to examine the law and will deliver an address on Dodd-Frank’s actual anniversary with its conclusions.  According to Committee Chairman Jeb Hensarling (R-Texas), “never before has more unchecked discretionary authority been given to unaccountable government bureaucrats.  Regrettably, the result is less freedom, fewer and more expensive choices, and reduced upward mobility for low and moderate income Americans.”

But it is hard to argue with the clear success of the program: the large recoveries, the support for and increase in quantity and quality of whistleblowers, and the significant boost in successful enforcement actions against financial fraudsters.  Despite any of Dodd-Frank’s real or perceived shortcomings, it remains an immense achievement in consumer protection and in advancing Congress’s goal in using whistleblowers to supplement the government enforcement regime.  It remains to be seen where Dodd-Frank will be in another five years, but given its first five, it will undoubtedly continue to secure financial reform and make a real difference to consumers for years to come.

Koury is an associate in the New York office of Constantine Cannon LLP, specializing in whistleblower law, consumer protection and antitrust.