When the Whistle Blows

Sue Reisinger Corporate Counsel November 01, 2010

On August 18 a compliance officer at Interactive Brokers LLC in Chicago called the Securities and Exchange Commission to report that two men in Spain had been trading suspiciously in the stock of a company that had jumped 27 percent the day before. The compliance officer suspected insider trading.

Two days later, the SEC filed an emergency complaint in federal district court in Chicago. It accused the two men of having inside knowledge of a takeover attempt that caused the company’s stock to jump, and it sought to freeze their over $1 million in profits. The case is believed to be the first public legal action to fall under the latest financial reforms, called the Dodd-Frank Wall Street Reform and Consumer Protection Act. And it means that the compliance officer might be entitled to a sizable reward under the act’s controversial whistle-blower provisions.

Though this was one of the first tips since the new law passed on July 21, in-house counsel fret that many more will follow. The SEC sees the whistle-blower law as a way to enhance its enforcement by, in effect, deputizing every employee of a public company to be a watchdog. The law’s whistle-blowing provisions also bar retaliation by employers, and penalize companies that act against whistle-blowers. It beefs up the SEC’s powers to act on complaints. And, among other provisions, it expands coverage to acts that occur outside the United States.

While in-house legal departments are eager to embrace compliance, most GCs are worried about what the law will mean to their companies in the long run.

One of them is David Brooks, general counsel of New York–based Fortress Investment Group LLC. While Brooks believes that better compliance will help restore investor confidence in the financial industry, he admits, “There is a lot of trepidation about the idea of giving [whistle-blowers] a bounty that could incent them to report made-up claims. Investigating claims of this nature is a real burden on resources.”

Other in-house counsel are telling Bart Colli, a partner at Morgan, Lewis & Bockius in Philadelphia, that they are concerned about several aspects of the law. Colli, who retired as general counsel of Aramark Corporation last year, says one worry is a provision awarding double back pay to employees who are retaliated against. It also will encourage more claims, he says.

By all accounts, corporate counsel should be worried. Within weeks of the law’s passage, plaintiffs attorneys across the country reported a surge of calls from would-be whistle-blowers. Erika Kelton, partner at the plaintiffs powerhouse Phillips & Cohen in Washington, D.C., says, “We’re inundated.”

Another lawyer, Rebecca Katz, a partner at Bernstein Liebhard in New York says, “I’ve had many, many more whistle- blowing calls in the last three weeks than I had in the last three years.” And several law firms have created separate Web sites to lure whistle-blower plaintiffs. For example, Stuart D. Meissner LLC in Manhattan just launched its site secsnitch.com.

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