Initial expectations that the Dodd-Frank whistleblower bounty program would have broad reach have been tempered by SEC rule making and recent court cases.
While current whistleblower data are too scarce to draw meaningful conclusions about trends, legal developments suggest that would-be foreign whistleblowers face a host of impediments to collecting a bounty, which may reduce the number of foreign tips received by the SEC.
Number of foreign whistleblowers reported by the SEC
Thus far, approximately 10 percent of SEC whistleblower activity in 2011 and 2012 has come from abroad. For both years, by far the largest number of foreign tips came from the UK and China. In terms of subject matter, the single biggest category of tips involved claims of financial reporting misconduct. Whether foreign based tips will continue to comprise 10 percent of the total may turn in part on the ability of foreign whistleblowers to actually collect bounties.
Growing impediments to foreign whistleblowers
Since adoption of the Dodd-Frank Act in 2010, impediments to foreign whistleblowers collecting rewards have increased. Though some restrictions are the result of SEC rule making, others have recently been imposed by developments in case law.
SEC rules restrict foreign bounties. The SEC rule-based restrictions on foreign whistleblowers obtaining awards are as follows:
- First, reporting violations of foreign laws will not result in payment. The SEC limited its program to those laws it had jurisdiction to enforce. Therefore, “the submission must relate to a violation of the federal securities laws, or a rule or regulation promulgated by the Commission.”
- Second, foreign whistleblowers who first respond to requests by foreign officials before reporting to the SEC may not be eligible. Thus, where the SEC requests assistance of a foreign authority to obtain information, and the foreign authority in turn sends a request to one of its residents, the SEC will not treat the submission as “voluntary.”
- Third, foreign whistleblowers who provide information to the SEC may risk criminal penalties for unlawfully disclosing information to authorities outside their own borders. For example, under the China state secrecy laws, a Chinese citizen who provides whistleblower information to the SEC may be subject to punishment “in accordance with the law.” Other jurisdictions, such as France, have so-called “blocking statutes” prohibiting disclosure of financial, commercial or economic information that might constitute evidence in a foreign proceedings, including SEC investigations.
- Fourth, the SEC may provide the whistleblower’s identity to foreign officials without notice to the whistleblower. The SEC notes that “Congress expressly authorized us to disclose whistleblower-identifying information subject to the limitations . . . in Section 21F(h)(2)” and concludes that it would be inconsistent with Congressional intent or “the proper exercise of our enforcement responsibilities to require by rule that [the SEC] staff notify a whistleblower before any authorized disclosure . . . .”
- Fifth, foreign officials, and employees of foreign state-owned entities, are ineligible for SEC whistleblower awards. The SEC excluded foreign officials and employees of state-owned entities because whistleblower awards to these individuals might “create . . . the perception that the United States is interfering with foreign sovereignty . . . .”
Recent case law limits the extraterritorial application of US securities laws. To collect a bounty, a foreign-based whistleblower must point to a violation of US federal securities laws. However, the SEC’s ability to successfully allege violations against foreign executives has been limited recently in certain respects.
For example, in February a federal district court judge in Manhattan dismissed the SEC’s complaint against a foreign executive in SEC v. Sharef. The SEC alleged that the executives of a German company paid US$100 million to top government officials in Argentina to win contracts. The court dismissed the executive despite his alleged participation in a telephone call urging others at the company to meet the demands of Argentine officials and make the payments. The judge found that the executive’s role in the bribes was “tangential at best,” because he neither authorized the bribes, directed the cover ups, nor prepared false financial statements, resulting in insufficient “minimum contacts” with the United States to exercise jurisdiction over him.
Another federal district court in February – this time in Chicago – granted defendants’ motion for summary judgment dismissing SEC claims in SEC v. Benger. The SEC charged violations of the federal securities laws against a financial services company’s distribution agents and escrow agents, alleging that defendants hired selling agents who targeted elderly citizens in foreign countries and “scammed them through the use of boiler room tactics.” In dismissing the claims, the court found that all relevant sales were consummated in Brazil, i.e., outside of the United States. The court followed recent Supreme Court rulings that “it is . . . only transactions in securities listed on domestic exchanges, and domestic transactions in other securities” to which the federal securities laws at issue apply. Because all purchase agreements were formed outside of the United States, the court concluded that the share purchases were not domestic transactions and that US federal securities laws did not apply.
Finally, in the Asadi case out of Texas, a would-be whistleblower filed an appeal asserting that he was fired in violation of Dodd-Frank’s whistleblower anti-retaliation protections for reporting Foreign Corrupt Practices Act violations outside the United States. The US District Court for the Southern District of Texas dismissed Asadi’s lawsuit, concluding that a recent US Supreme Court decision precluded application of the anti-retaliation provisions to conduct outside the United States. On appeal, Asadi argued that Dodd-Frank’s anti-retaliation provisions protect employees reporting violations within the jurisdiction of the SEC, including in foreign countries. On April 19, Asadi’s former employer argued the appeal should be dismissed based on the Supreme Court’s April 17 ruling in Kiobel, which held that the presumption against extraterritoriality applied to Alien Tort Statute barred claims. The former employer’s counsel argued that here, “[t]he district court opinion under review in this appeal likewise relied on the presumption against extraterritoriality in reaching its judgment.”
While neither the Sharef or Benger cases involved whistleblowers, both represent instances in which the SEC failed in its attempts to apply federal securities laws outside the United States. The Asadi appeal, which does involve a foreign whistleblower, raises the same issue. If Asadi falls in line with Sharef and Benger, the three may represent a trend that may inhibit the willingness of foreign whistleblowers to come forward and will certainly prevent their ability to collect bounties.
In sum, the exterritorial reach of the SEC’s whistleblower program may be more limited than originally imagined, as a result of the SEC’s own rule making and due to courts’ unwillingness to apply US federal securities laws as broadly as the SEC would like.