In what is by far the largest whistleblower bounty under the Dodd-Frank Act’s whistleblower provisions, the US Securities and Exchange Commission (SEC) on 22 September 2014 awarded more than US$30 million to a whistleblower who provided information that culminated in a successful SEC enforcement action. In the SEC’s order, the names of the company involved and the award recipient were redacted to protect the whistleblower’s identity.
Section 922 of the Dodd-Frank Act envisages paying awards to whistleblowers who provide the SEC with original details about a securities law violation that leads to a successful SEC enforcement action resulting in monetary sanctions over US$1 million. The award may range from 10% to 30% of the amount recovered in the enforcement action.
The section also protects whistleblowers from retaliation by ensuring that the SEC maintains the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. The Dodd-Frank Act defines whistleblower to include “any person”, implying that anyone from the general public having crucial information about a possible securities law violation may approach the regulator and supply information.
Interestingly, the whistleblower in this case was a foreign resident. Though the award is one of only a handful of payments made to a person outside the US, it reflects the increasing lure for tipsters beyond the country’s borders. According to the press release from the SEC’s whistleblower office accompanying the order, the award “shows the international breadth of our program as we effectively utilize valuable tips from anyone, anywhere to bring wrongdoers to justice”. The press release goes on to state that “whistleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws”.
While the US has implemented a proactive bounty system to provide monetary awards to whistleblowers, the Indian securities market regulator, the Securities and Exchange Board of India (SEBI), has not shown the same vigour.
The focus of the whistleblower provisions in the Companies Act, 2013, is on protecting a company against fraud and having an effective corporate vigilance mechanism within the company. Section 177(9) of the act provides that: “Every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.” However, the Ministry of Corporate Affairs has yet to notify what exactly a “genuine concern” entails.
Under section 177(10) of the act, the “vigil mechanism” provides for adequate safeguards against victimization of persons who use the mechanism and provides for direct access to the chairperson of the audit committee in appropriate or exceptional cases.
On 17 April 2014, SEBI released a circular to amend clauses 35B and 49 of the SEBI Equity Listing Agreement. In terms of clause (49)(II)(F), companies are required to devise a whistleblower policy enabling directors and employees to report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. However, it is unclear what “unethical behaviour” means – fraud, embezzlement or securities violations?
There are several pros and cons to implementing a bounty scheme for whistleblowers in India.
Pros: Firstly, awarding of large rewards encourages others to come forward. As a domino effect, it may encourage prospective or “on the fence” whistleblowers to come forth with disclosures. Secondly, whistleblower programmes lead to enforcement activity. The press release on the SEC award quotes an agency spokesperson as saying that in the absence of the whistleblower’s information, the underlying fraud would have been very hard to detect. Thus, it can be inferred that the programme is promoting additional enforcement activity.
Cons: The Dodd-Frank whistleblower bounty’s requirement that the whistleblower’s disclosure must result in a successful enforcement action for the whistleblower to be eligible for the bounty means that only a small number of whistleblowers may actually receive payments. Thus, the bounty scheme rewards a few individuals significantly, but provides little or no reward to whistleblowers whose information does not lead to an enforcement outcome. Further, financial incentives could result in malicious reporting from opportunistic and uninformed parties passing on rumours which could result in innocent parties being unfairly damaged.
As a final thought, one may question whether a “whistleblower bounty” programme (with the potential rewards going to those who report first) undermines internal reporting mechanisms for persons associated with the securities market and frustrates their ability to address problems internally.
Suhail Nathani is a partner and Yogesh Chande is an associate partner at Economic Laws Practice. Malek-ul-Ashtar Shipchandler, a trainee, assisted with research. This article is intended for informational purposes and does not constitute a legal opinion or advice.
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