I once worked on a proxy contest to take over the board of a company that cooked its books. Members of management of the company were so awful that they fired the accounting department lackey who found the cooked books and reported them to his supervisor. After management fired the accountant, they sued him for breach of something, putting him completely on the defensive. He was a nice, suburban father of three who then couldn’t get a job, but had to fend off a lawsuit against a public company. This is not an unusual story: whistleblowers often get buggered.

But, now federal law is giving whistleblowers not just a bodyguard, but a profit motive.

Under Dodd-Frank, the SEC has to reward whistleblowers who give substantial assistance in identifying and prosecuting illegal conduct. The reward could be up to 30% of the take from the bad guy in fines and penalties. However, in order to tamp down what could become a free for all, the SEC has proposed these rules:

  • An employee should first approach internal compliance folks – this affects whether he gets credit for blowing the whistle, but also his share of the take.  After the whistleblower reports internally, he may have to wait 90 days to tell the SEC.
  • At the end of the 90 day period, the employee can report; the company needs to decide if it should stay silent or race to the SEC to report first.

This is not a first time thing. American citizens can sue people who defraud the government and collect and keep part of the penalties. These suits, called “qui tam” cases, can be brought under the same rules that Abe Lincoln put in place to get private individuals to take down all the war profiteers that proliferated during the Civil War. The law is just glorious, don’t you think?

If you think you see fraud and you are intrigued by this new business opportunity, take a deep breath – the laws are complex and are written to weed out dishonest or weak charges. Like all things, qui tam cases carry risks and if you are wrong or inappropriately vengeful, you’ll get hurt. The smartest thing is to consult an experienced qui tam lawyer and take things cautiously and honorably.

Companies who discover that an employee believes he saw stock or accounting fraud would be smart to quickly engage experienced counsel and immediately begin an investigation, documenting its procedures, staffing and policies, as well as the facts uncovered.

1 Comments

  • February 26, 2011 Reply

    L. Peterson

    As the owner of a computer security firm, this scares me. A lot. Thanks for posting.

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