Word Of The Year For Securities Litigation: 'Whistleblower'

A number of different organizations  generate annual publicity for themselves by designating a word (or words) of the year. We are not yet half way through 2011 but I am already prepared to propose my own candidate for this year's word of the year - the word is "whistleblower." From the provisions of the Dodd-Frank Act and the predecessor provisions of the Sarbanes Oxley Act to the litigation activities of activist investors, whistleblowers' actions and protections are a growing source of attention and concern - and litigation.

Since the Dodd Frank Act's passage last summer, the whistleblower provisions of the Dodd-Frank Act have received a great deal of scrutiny. The SEC proposed rules to implement the provisions last November (refer here). The proposed rules have not yet been enacted by the SEC. However, according to a May 5, 2011 Reuters article (here), the vote on the final rules implementing the whistleblower provisions could come as early as May 25, 2011.

Among the issues surrounding the final rules is the question of whether or not they mandate that would-be whistleblowers must first report wrongdoing internally before reporting violations to the SEC, in order to be eligible for the so-called whistleblower bounty.  According to the Reuters article, the SEC has "no plan to make internal reporting a mandatory first step for whistleblowers." However other alternatives are under consideration, including the possibility of allowing company employees to reap full benefits of the bounty provisions if a combination of the employee's tip and information from a company's internal probe lead to the imposition of fines or penalties for securities law violations.

While the final rules on the whistleblower bounty provisions are pending, there have also been developments related to the other significant components of the Dodd-Frank whistleblower provisions -- the provisions' anti-retaliation protections. A May 4, 2011, order in a case pending in the Southern District of New York took a detailed look at who may invoke the anti-retaliation provisions and what is required to invoke the protection. The order can be found here.

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Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.