Repeated inquiries from clients evidence considerable confusion over the narrow, but important, issue of whether allegations of a violation of the Foreign Corrupt Practices Act (FCPA) by a non-public company can lead to payments of bounties under the recently enacted whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
Generally, the answer is no.
This is because both the governing statute and SEC regulations provide that a bounty payment can only follow a successful SEC action “under the securities laws.” Since the FCPA bribery statute regarding non-issuers [Securities Exchange Act, Section 30B] is not part of the “securities laws,” as defined in the Dodd-Frank Act, and the books and records provisions [Section 13], which are part of the securities laws, apply only to issuers (that is, public companies whose shares are registered with the SEC), reports of direct FCPA violations by non-public companies should not lead to whistleblower awards pursuant to the Dodd-Frank Act.
Yet risk remains for private companies under the whistleblower provisions:
- Whistleblower provisions apply to securities law violations, even if not the FCPA;
- Some whistleblowers may not distinguish between the securities laws and the FCPA coverage, and once the SEC has received a tip, it can be expected to pass it on to other law enforcement authorities;
- Private company conduct in some circumstances may indirectly lead to FCPA liability; and
- Whistleblower anti-retaliation provisions may not be limited to actions of public companies.
The Bounty Provision in the Dodd-Frank Act
Section 922 of the Dodd-Frank Act, entitled “Whistleblower Protection,” amended the Securities Exchange Act of 1934 [15 U.S.C. §§ 78a et seq.] by inserting a new Section 21F, entitled, “Securities Whistleblower Incentives and Protection.”
Section 21F(b)(1) [15 U.S.C. § 78u-6(b)Awards)] provides:
In any covered judicial or administrative action, or related action, the Commission … shall pay an award … to … whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action, in an aggregate amount equal to [10 to 30% of any “monetary sanctions,” meaning “any monies, including penalties, disgorgement and interest ordered to be paid” in any judicial or administrative action] (emphasis added).
Section 21F(a)(1) [15 U.S.C. § 78u-6(a)(1)] in turn provides that: “The term ‘covered judicial or administrative action’ means any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000” (emphasis added). The term “securities laws” is defined to include various statutes, but the listed statutes do not include the FCPA bribery prohibitions applicable to private companies.1 Thus, since a “covered … action” does not include whistleblower complaints with respect to private companies under the FCPA, there can be no award based on an SEC action to a whistleblower from a private company regarding that company’s FCPA conduct.
A Successful SEC Action Is a Predicate for An Award Based on a “Related Action”
Section 21F(b) of the Dodd-Frank Act makes whistleblower awards available not only as a result of an “action brought by the Commission under the securities laws,” but also as a result of any “related action.” The Department of Justice (DOJ) and certain other, specified law enforcement entities may bring such a “related action” based on a tip first made to the SEC.2 Companies may therefore inquire whether a bounty could be paid to a whistleblower from a private company based only on a monetary sanction in a case brought by an agency other than the SEC, such as DOJ. In other words, there is a question whether the second action must be “related” to an existing SEC action, which under the portion of the FCPA incorporated into the securities laws can be brought only against a public company, or whether the second action must only be “related” to the whistleblower’s information. The conjunction used is “or,” not “and,” so it might be argued that the Dodd-Frank Act provides for awards based on successful actions by other agencies, even without an SEC enforcement action.
However, the term “related action” is also a defined term in the Dodd-Frank Act, Section 21F(a)(5): The term ‘related action’ … means any judicial or administrative action brought by an entity described in subclauses (I) through (IV) of subsection (h)(2) (D)(i) that is based upon the original information … that led to the successful enforcement of the Commission action.
This definition of “related action” expressly provides that the whistleblower information must have “led to the successful enforcement of the Commission action.” See also H.R. Rpt. 111-517, at 870 (2010) (Conf. Rep.) (“The subtitle further enhances incentives and protections for whistleblowers providing information leading to successful SEC enforcement actions.”) Since the Commission has authority over, and therefore can bring actions against, only public companies and regulated entities, or those who aid and abet securities law violations, bounties are not generally available for FCPA tips on private companies.3
Moreover, the SEC adopted this same construction in its enacting whistleblower regulations, expressly limiting awards to situations where the tip has led to the “successful enforcement by the Commission” of “more than $1,000,000.”4
Accordingly, no bounties are available for FCPA tips alleging direct violations by private companies of the FCPA bribery prohibition or the recording of such transactions on the private companies own books and records.
Private Companies Should Not Ignore the Whistleblower Provisions
While bounty awards generally are not available for tips regarding alleged FCPA violations by non-issuer companies, private companies may still feel the effects of the Dodd-Frank Act whistleblower provisions.
First, there are additionally securities laws which apply whether the company involved is public or private. Most importantly, the Securities Exchange Act Section 10(b) and Rule 10b-5 provisions apply to anyone – a public or private company or an individual – who fraudulently buys or sells a security. Similarly, either a public or private company may be charged with selling unregistered securities in violation of Securities Exchange Act Section 5.
Second, just as many companies are unsure of the applicability of the whistleblower provisions to private companies (hence, this advisory note), individuals in a position to provide tips may not understand that they are not eligible for an award. Once they have provided credible evidence of an FCPA violation to the SEC, that agency likely will forward the information to an authority which does have jurisdiction, whether it be, for example, the U.S. Department of Justice or a foreign regulatory or enforcement agency. Moreover, with all of the publicity as to how to submit tips, employees and others who do not believe that their internal complaints have received appropriate consideration may use the whistleblower route to tip off authorities even without the promise of a monetary award.5
Third, there are two apparent situations where bounties may be available regarding alleged, indirect FCPA violations involving private companies. First, where an issuer includes in its consolidated financial statement financial information from a private company subsidiary, courts may conclude that an FCPA violation of that subsidiary leads to a violation of the books and records provision of the Securities Exchange Act, and thus a whistleblower award may be available.6 Second, where a private company “knowingly or recklessly provides substantial assistance” to an issuer in violation of either Section 30A (bribery) or Section 13 (books and records), this conduct may violate the aiding and abetting prohibitions of Section 20(e) of the Securities Exchange Act.7
Finally, with regard to the Dodd-Frank Act, there are also provisions for the protection of whistleblowers that permit a whistleblower to bring suit where it is alleged that an employer discharged or discriminated in any manner against the whistleblower in retaliation for protected whistleblower actions. [Section 26F(h)] While arguments can be made that these protections only apply where the whistleblower would have been eligible for an award, that is not so clear as to make it indisputable. No court has yet ruled on this issue.
An employee of a private company has no valid claim under the Dodd-Frank Act for an award for a tip of an alleged direct violation by a nonpublic company of the FCPA bribery or record keeping requirements. Nonetheless, for legal and practical reasons, all employers should take seriously and thoroughly investigate complaints from employees and others concerning allegations of FCPA, securities and other law violations.