Canadian Lawyer InHouse

'' The reason i think Dodd-Frank has been so effective is that the financial incentives are so substantial that they have the effect of compensating whistleblowers not just for a loss of job, but for a loss of career, because that's often what happens. that emerged in the case law that was developing under Sarbanes-Oxley. For example, courts determined that Sarbanes didn't apply to subsidiaries, despite language in the legislation suggesting it did. Dodd-Frank clarifies that. But more importantly, what Dodd-Frank does is allow a whistleblower to claim between 10-39 per cent of any penalty meted out by the U.S. Securities and Exchange Commission that exceeds US$1 million, provided the activity is reported to the securities regulator. "That's a game changer," says Clark, adding that Dodd-Frank has "broader and more vibrant protections" for whistleblowers. For example, they can remain anonymous, at least up to the point that they collect a reward. The Dodd-Frank program is garnering tips, Gray notes. According to the annual report of the chief of the office of the whistleblower, which was set up under the SEC and is now in its third year, the office paid 32 February 2014 INHOUSE '' PrOF. KaTHLeeN CLarK, Washington university Law out more than $US14.8-million in its fiscal year 2013, which ended in August. The number of tips under that legislation has increased to 3,238 from 3,001 in 2012 and 338 in 2011. While a typical award has tended to be small — in the $50,000 range — that is expected to rise as the SEC secures hefty penalties stemming from the financial meltdown of 2008. In September of 2013, it paid $14-million to a "whistleblower whose information led to an SEC enforcement action that recovered substantial investor funds." The money comes out of a separate $US439million whistleblower war chest that the OWB oversees. Interestingly, no single category of tip dominates. The three largest are corporate disclosures and financials, which accounted for 17.2 per cent of tips or complaints, next was offering fraud (17.1 per cent), and manipulation (16.2 per cent). Other categories include things like insider trading, pricing and trading, and complaints under the U.S. Foreign Corrupt Practices Act. Most tips come from California, followed by New York and Florida. The SEC received 62 tips from Canadians, Gray says, making it the second most active country behind the U.K. That was up from 46 Canadian tips last year. But it's not just Dodd-Frank and Sarbanes that can trip Canadian companies up when it comes to whistleblowers. Gray notes there is also the U.S. False Claims Act, which allows whistleblowers to file what's called a qui tam lawsuit against a party that has financially defrauded the federal government. "It can actually reward hefty payments to whistleblowers and impose pretty hefty fines for companies that are offside," Gray says. Lawyers say companies need to start taking whistleblowers seriously, especially with the incentives in place for people to come forward to the SEC. However, it's retaliation against whistleblowers that often leads to a company becoming embroiled in litigation and getting splashed on the front page. "From a company perspective, what you want is the person to report internally," says Richard Moberly, an associate dean and law professor at the University of Nebraska College of Law, who has studied 10 years of whistleblower cases brought under Sarbanes. He says the "common misconception is that whistleblowers are troublemakers or snitches. They see themselves as loyal to an organization and are stunned when retaliated against. They think they are reporting something the organizations wants to know." In fact, he says, whistleblowers don't normally report incidents to outside authorities unless they have been ignored or retaliated against. Riyaz Dattu, an international trade l awyer at Osler Hoskin & Harcourt LLP in Toronto, says: "We are seeing a number of our clients be very proactive when they get whistleblower reports. They want to take whistleblowers seriously. If they don't engage, there's a chance of the whistleblower going to the regulators." Lawyers say companies that are serious about dealing with whistleblowers, and not just sweeping their allegations under the rug, need to build a formal, steadfast whistleblower program to encourage reporting. It should have the following seven components: clear rePorTing Moberly advises general counsel "put a real system in place where people are trained to receive whistleblower complaints and know what to do with them when they get them." He calls toll-free numbers or hotlines "window dressing," where complaints often

• Cover