New whistleblowing legislation puts US regulators on the back foot

Dodd-Frank Act paves way for a slew of claims and new entrants to the market. By Matt Byrne


Richard Lissack QC
Richard Lissack QC

The Securities and Exchange Commission (SEC) and other US regulators will be unable to cope with the expected flood of fraud-related allegations following the introduction of new whistleblower legislation.

That is the conclusion of one high-profile New York litigation partner, who adds that the ­expected avalanche of new claims will be “a real challenge” for the SEC and the Commodities Futures Trading Commission (CFTC).

“It will make them even more vulnerable to criticism than they are already for missing the worst cases of fraud, such as Madoff,” insists the partner, who prefers not to be named.

According to another high-­profile laywer, the new rules are “bizarre” and “a swing the wrong way”.

The increasingly tough ­regulatory environment is also ­attracting new market entrants from both sides of the Atlantic. This Thursday (23 September) sees the formal launch of Outer Temple International in New York. The timing of the opening, in downtown Battery Park offices over the road from Wall Street, is propitious.

Much of Outer Temple ­Chambers’ US-related work is ­likely to focus on regulatory and criminal matters, an area that looks set to grow significantly thanks to the passing of the Dodd-Frank Act, which introduced the new whistleblower provisions.

The new US rules have been designed to encourage people to report companies they suspect of securities and commodities law violations to the SEC and the CFTC by offering hefty financial ­incentives with added employment protection.

US whistleblowers are now ­entitled to a payment of up to 30 per cent of any fine above $1m (£640,000) levelled against their employer. As an added twist, the Dodd-Frank law makes it illegal for the company to fire the person who has levelled the allegations.

Outer Temple silk Richard ­Lissack QC, who will be in New York this week for his chambers’ launch, says he is currently involved in four cases with US clients, two of which include issues relating to whistleblowing.

“The rationale for it is that too many people were frightened of losing their job if they blew the whistle, but this is a very big shift in the opposite direction,” argues Lissack. “You’ve got a situation now where the whistleblower’s protected and can’t have their employment terminated, where the company that’s been accused of fraud must continue to embrace the person who blew the whistle and, what’s worse, consider the fact that they may have done it quite wrongly, either out of spite or simply for financial gain.”

Shearman & Sterling partner Herb Washer believes that the new rules are likely to yield more ­information and may even prevent the next Madoff, but adds that there will be significant pressure on the regulators to make good use of the information.

“The regulators are already staffing up,” says Washer, “but they’ll have to pick and choose their battles.”

Beneficiaries of the SEC and CFTC opening up a greater number of investigations on which the accused companies will retain counsel will be defence-side firms.

“Dodd-Frank’s dramatically expanded the number of ­companies that are potentially exposed to the new whistleblower provisions,” says Debevoise & Plimpton litigation partner Sean Hecker.

As far as the defence side goes, firms can be reasonably ­confident that any time you ­provide financial incentives as big as this there will be a significant increase in claims. No question.”

In the short term the effect of that will be a campaign of ­educating their clients about the new environment. In the long term the top firms’ litigation departments are already gearing up for
a boom.

In their own way, so too are the US regulators.

matt.byrne@thelawyer.com