Phillips & Cohen whistleblower lawyers warn House bill would kill SEC program

WASHINGTON, DC, Jan. 24, 2012 -- A House bill that would make major changes to the Securities & Exchange Commission's new whistleblower program would essentially kill an important enforcement tool for protecting shareholders, says Phillips & Cohen LLP, a law firm that for nearly 25 years has specialized in representing whistleblowers.

"A more accurate title of the so-called 'Whistleblower Improvement Act' would be the 'Whistleblower Discouragement Act' because it requires whistleblowers to report fraud or other securities law violations to their employer - which is often undertaking the fraud -- before going to the SEC," said Erika A. Kelton , a Washington, DC, attorney with Phillips & Cohen. "Anyone who has experience with whistleblower cases knows that such a requirement is unrealistic. This legislation would simply propagate a culture of silence, since the most significant frauds are typically directed at or near the top of an organization and reporting internally would be futile. "

The Chamber of Commerce and many corporations tried to convince the SEC to adopt a rule that would have created a similar internal reporting rule requirement, but the SEC withstood the intense pressure to do so.

"The SEC struck the right balance in its rules, a San Francisco attorney with Phillips & Cohen. "To encourage internal reporting, the SEC will give a whistleblower a larger reward if the whistleblower reports the violations to the company's internal compliance program before going to the SEC. But the SEC wisely leaves the decision about internal reporting to the whistleblower, who would know better than anyone whether he or she would suffer retaliation."

Other sections of the proposed bill -- which also would cripple the new Commodity Futures Trading Commission's whistleblower program -- would eliminate the requirement for a mandatory award and the minimum whistleblower reward requirement of 10 percent. The results of other government whistleblower programs have proven that whistleblowers are much more likely to risk their livelihoods to report fraud if there is some assurance they will be rewarded for doing so.

Before Congress created the SEC whistleblower program as part of the Dodd-Frank Act in 2010, the SEC received about two dozen "high-value" tips on fraud and other securities law violations each year, an SEC official said last year. Now the SEC gets one or two each day.

"Why mess with success?" said attorney Kelton. "The whistleblower program is one of the most important and innovative fraud-fighting tools the SEC and CFTC now have, and this legislation would cripple it. Investors should be deeply concerned by this assault on efforts to enforce federal securities and commodities laws."

The House Financial Services Committee now is considering the bill, H.R. 2483, which the House Subcommittee on Capital Markets and Government Sponsored Enterprises passed last month. The bill was introduced by Rep. Michael Grimm (R-NY).