New Law Creates Private Whistleblower Rights to Help Fight Securities Market Fraud

In the wake of devastating financial fraud scandals over the past several years, Congress recently created a securities fraud whistleblower program.  This new program will encourage private citizens to stem the rising tide of financial and securities market fraud.

The Securities Exchange Commission (SEC) must establish a separate office specifically for administering and enforcing the new securities whistleblower provisions.  Under the SEC administered program, whistleblowers can receive between 10 and 30 percent of government recoveries exceeding $1 million.  They are also protected from employer retaliation.

However, the securities whistleblower program still has a long way to go before it can become as significant a fraud-fighting tool as the False Claims Act (FCA).  Unlike FCA whistleblowers, SEC whistleblowers currently do not have any way to pursue claims the government declines to investigate.  Furthermore, the program’s categorical exclusion of certain types of whistleblowers—including anyone who uncovers securities law violations while conducting a required audit— may discourage many would-be whistleblowers from taking the risk of reporting securities fraud.  We expect to see Congress and SEC regulators strengthen this law so that the new program can truly live up to its potential as another powerful weapon to combat fraud in the capital markets.