Remember David Welch? The former Cardinal Bancshares CFO instituted a wrongful termination suit under the Sarbanes-Oxley whistleblower provisions after the company fired him for questioning accounting practices and then failing to sign off on financial statements. I followed his long and ultimately unsuccessful journey through the court system.
The last we heard, he had taken a teaching position with Franklin University to help establish a forensic accounting program. A three-judge panel of the U.S. Court of Appeals for the Fourth Circuit determined Welch had not proven an essential element of his case and was not entitled to be reinstated to his CFO post. His story illustrated that it would behoove one who was considering invoking the Sarbanes-Oxley whistleblower provisions to carefully count the costs first. As University of Nebraska law professor Richard Moberly, who studied Sarbanes-Oxley whistleblower cases, told me in a 2008 interview:
[T]he mere fact that no one has actually gone through the process and won, in six years, speaks volumes.
Apparently, when the current Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, it wanted to give employees of companies subject to the act more incentive to report fraudulent activity so that things like Bernie Madoff's pyramid scheme could be caught early, preventing catastrophic losses. To that end, lawmakers included provisions in the Act that allow "successful informants" to receive up to 30 percent of what the government collects in fees and settlements as a result of the fraudulent activity.
But critics are wary the "incentive" may lead to quite a few false claims, which will, in turn, increase the costs of enforcing the act. Advanced Trading writer Justin Grant explains:
Experts predict that the new law also may cause a spike in false claims, raising questions about how regulators should respond to tips. In order to receive a payout, a tipster would have to provide the government with original documents proving fraud has taken place, ultimately leading to a monetary recovery.
Former Securities and Exchange Commission enforcement attorney Jacob Frenkel would add one more step. He told Advanced Trading:
The market would be best served by a few criminal prosecutions of self-acclaimed whistleblowers who provide false information to the government so that it becomes clear that there are adverse consequences for wasting the government's time and a corporation's resources.
Frenkel emphasized that employees should invoke the act's whistleblower provisions as a last resort -- only after the company's internal governance processes have failed to stop fraudulent activity.