The Sweeping Whistleblower Provisions Tucked Inside
Dodd-Frank: Why And How Companies Should Prepare
For a New Era of Corporate Whistleblowing
November 30, 2010
In announcing their blockbuster $750 million settlement with GlaxoSmithKline last month,federal officials described the case as proof that the Department of Justice is committed to
cracking down on health care fraud.1 What the official announcement left out was that theinvestigation into drug safety concerns at Glaxo began more than six years ago not with asubpoena or a customer who fell ill, but when a former Glaxo employee blew the whistle on
quality control problems at a Glaxo plant. In return for that information, the former employee
will receive $100 million from the government — the largest whistleblower award ever paid inthis country. But the record set by the Glaxo award might not last long.
Tucked in the middle of the recently-enacted 848-page Dodd-Frank Wall Street Reform andConsumer Protection Act (“Dodd-Frank”) is a series of groundbreaking whistleblower
provisions. They dramatically expand the incentives and protections offered by the federal
government to tipsters with information about a broad array of corporate wrongdoing – fromaccounting fraud in the home office to bribery in a remote location. Combined with thegovernment’s renewed focus on punishing corporate misconduct, Dodd-Frank is a signal tocompanies in the United States to brace themselves for an era of increased whistleblowing togovernment regulators. And this is not just speculation: tips under Dodd-Frank reportedly
have already begun rolling into federal office buildings.2
By enticing tipsters with a share of up to 30 percent of any future judgment, Dodd-Frank has
put federal regulators in direct competition with efforts by companies to self-police forwrongdoing through corporate compliance programs and internal whistleblower hotlines. Selfpolicing and self-reporting misconduct to the government, however, remain critical factors indetermining whether federal regulators extend leniency to companies for corporate misconduct.
To address this new challenge from Dodd-Frank’s bounty program, management should
redouble its efforts to identify, investigate, and remediate wrongdoing internally — before atipster seeking a large bounty approaches the government.

1

Tony West, Assistant Attorney General, Civil Division, Department of Justice, Speech at the GlaxoSmithKline
Press Conference (Oct. 26, 2010),
http://www.justice.gov/civil/opa/pr/speeches/2010/civ-speech-101026.html.

2

Ashby Jones & Joann S. Lublin, Critics Blow Whistle on Law, WALL ST. J., Nov. 1, 2010, available at
http://online.wsj.com/article/SB10001424052702304879604575582603173894296.html.

Memorandum – November 30, 2010

1.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

The whistleblower provisions of the Dodd-Frank Act, which amended both the Securities
Exchange Act of 1934 and the Commodity Exchange Act, are broad. They extend to people whoshare information with the Securities and Exchange Commission (“SEC”) or Commodity
Futures Trading Commission (“CFTC”) about any misconduct that falls within the jurisdictionof these agencies.3 Dodd-Frank’s financial rewards and other incentives cover information
about virtually every type of financial fraud and bribery of foreign officials.4
The rewards for information that proves useful are large as well: whistleblowers are eligible forbetween 10 and 30 percent of any penalty recovered in a judicial or administrative action as aresult of the whistleblower’s information (provided the penalties exceed $1 million).5 A key
condition, however, is that the tip is “derived from the independent knowledge or analysis of
the whistleblower” and was not known to the government from any other source.6 The SEC
and CTFC have discretion to decide the exact amount of the award based on the “significance”
of the information and the level of assistance provided by the whistleblower.7 Because the“significance” of the information in part drives the amount of a reward, the act incentivizes
people to disclose the most serious conduct about which they have information. Dodd-Frankalso enables whistleblowers to report misconduct under the cloak of anonymity by reporting
tips through their lawyers and not disclosing their identities unless and until it has been
confirmed that they will receive an award.8
Like the scope of wrongdoing that is covered, the class of people eligible for financial rewards
under Dodd-Frank is sweepingly broad. With few exceptions, anyone is eligible for DoddFrank’s bounty program and anonymity protections.9 That means anyone who has dealt with acompany — including employees, suppliers, and customers in far-flung parts of the world —could be a potential Dodd-Frank whistleblower. Even officers, directors, and others withfiduciary duties to a company are potential whistleblowers under Dodd-Frank, although the
SEC’s proposed rules, issued on November 3, 2010, would exclude individuals with legal,
compliance, supervisory and audit responsibility from receiving awards based on information

3

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §§ 748, 922, 124 Stat. 1376,
1739–46, 1841–49 (2010).

4

By contrast, the False Claims Act, 31 U.S.C. §§ 3729–3733, which has long authorized whistleblowers to filelawsuits on behalf of the federal government in return for some or all of the recovery, is far narrower: it applies
only to wrongdoing that involves fraud on the government.

5

Dodd-Frank Wall Street Reform and Consumer Protection Act §§ 748, 922.

6

Id.

7

Id.

8

Id. Dodd-Frank also prohibits retaliation against an employee-whistleblower for providing information to the
SEC or CFTC, and creates a federal cause of action under which an employee who has suffered retaliation can sue
his or her employer for reinstatement, back pay with interest and special damages. Id.

9Id. (“The term ‘whistleblower’ means any individual who provides, or 2 or more individuals acting jointly who
provide, information relating to a violation of the [law] to the [government].”).

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Memorandum – November 30, 2010

communicated to that individual for the purpose of responding to wrongdoing.10 Until thoserules are final, however, few limitations restrict who is eligible to collect for reporting
information.
Despite a growing chorus of requests from companies that the SEC require employees to reportproblems internally to management before qualifying for rewards under Dodd-Frank,11 thecurrent proposed rules do not include any provision requiring internal whistleblowing.12
Nonetheless, the rules do modestly encourage internal reporting by making internal
whistleblowers eligible for a reward under Dodd-Frank as long as they report wrongdoing to
the SEC within 90 days of their internal complaints.13 In addition, when deciding the size of awhistleblower’s award, the proposed rules would allow the SEC to assign credit to tipsters who
first reported the matters internally.14
2. Competing With Dodd-Frank: How Companies Can Position Themselves To Obtain
Leniency From The Government When Misconduct Does Occur
Two years ago, an attorney for a whistleblower who collected $67 million for disclosing
improper marketing at a pharmaceutical company made a prediction: that his reward marked
the dawn of a new “collaborative investigation model” in an “age of shrinking government
budgets” — a model in which tipsters collaborate with government investigators to build cases
against corporations.15 That attorney might not have appreciated how prescient his comment

10

Securities and Exchange Commission, Proposed Rules for Implementing the Whistleblower Provisions of Section
21F
of
the
Securities
Exchange
Act
of
1934,
ProposedRule
21F-4(b)(4)(iv),
http://www.sec.gov/rules/proposed/2010/34-63237.pdf. Internal legal, compliance and audit staff would be
able to act as a whistleblower, and receive an award, if the company does not disclose the information to the SEC
within a reasonable time or if the company otherwise acts in bad faith. Id.; see also Jessica Holzer & Ashby Jones,
SEC Proposes Rules for Bounty Program, WALL ST. J., Nov. 4, 2010, available at
http://online.wsj.com/article/SB10001424052748703506904575592533100919998.html?KEYWORDS=ashby+jones.
The SEC is required to issue rules for the whistleblower program within 270 days of the act’s July 21, 2010
enactment. SEC Enforcement Director Acknowledges ‘Challenges’ in Writing of Whistleblower Rules, BNA SECURITIESLAW DAILY, Oct. 27, 2010.

11

Ashby Jones & Joann S. Lublin, Critics Blow Whistle on Law, WALL ST. J., Nov. 1, 2010, available at
http://online.wsj.com/article/SB10001424052702304879604575582603173894296.html.

12

Kaja
Whitehouse,
Whistle-blahing,
N.Y.
POST,
Nov.
4,
2010,
available
http://www.newyorkpost.com/p/news/business/whistle_blahing_N0PUUJnzMBTEkcJMOLW2wO.

13

Securities and Exchange Commission, Proposed Rules for Implementing the Whistleblower Provisions of Section
21F
of
the
Securities
Exchange
Act
of
1934,
ProposedRule
21F-4(b)(7),
http://www.sec.gov/rules/proposed/2010/34-63237.pdf; Jessica Holzer & Ashby Jones, SEC Proposes Rules for
BountyProgram,
WALL
ST.
J.,
Nov.
4,
2010,
availableat
http://online.wsj.com/article/SB10001424052748703506904575592533100919998.html?KEYWORDS=ashby+jones.

atSecurities and Exchange Commission, Proposed Rules for Implementing the Whistleblower Provisions of Section
21F of the Securities Exchange Act of 1934 at 51, http://www.sec.gov/rules/proposed/2010/34-63237.pdf; see also
Jessica Holzer & Ashby Jones, SEC Proposes Rules for Bounty Program, WALL ST. J., Nov. 4, 2010, available at
http://online.wsj.com/article/SB10001424052748703506904575592533100919998.html?KEYWORDS=ashby+jones.
15 Merck Pays More Than $400 Million to Settle Federal, State Medicaid Fraud Investigation Sparked by Qui Tam
Whistleblower Case Detailing Marketing Schemes for Vioxx, Zocor, Several Other Drugs, PR NEWSWIRE, Feb. 7, 2008,
available at http://www.prnewswire.com/news-releases/merck-pays-more-than-400-million-to-settle-federal-

14

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Memorandum – November 30, 2010

was.
After all, it was made before Congress adopted Dodd-Frank’s unprecedented
whistleblower program. It was made before the Internet was plastered with advertisements forlawyers claiming specialties in whistleblower reports under Dodd-Frank.16 And it was madebefore headlines publicized the record-breaking $100 million award to a woman who simply
blew the whistle on GlaxoSmithKline.
So what can companies do today to fortify themselves against this risk of increased
whistleblowing to the government? The best strategy for avoiding regulatory enforcement
actions has always been and remains the same: maintaining a culture of integrity andaccountability. Training and compliance programs that emphasize the importance ofconducting business lawfully and ethically remain critical to discouraging employees frombreaking the law while on the job. When employees do not engage in wrongdoing, a company
has little need to seek leniency from the government and even the most determined
whistleblower will have little to report – no matter how lucrative the potential reward.
Of course, the reality is that even in companies with the strongest commitment to lawful andethical business practices, misconduct by employees is not always possible to prevent. So
companies need to prepare for the day when wrongdoing does occur. In addition to
encouraging whistleblowers to report misconduct internally instead of to the government,
companies must seek to minimize the fallout when people pursuing large financial bounties
blow the whistle externally. A company remains best positioned to obtain leniency from the
Department of Justice, the SEC, and other government agencies when it discovers a problem
through self-policing, remediates it, and then self-reports it to the government — all before awhistleblower does. As one senior DOJ official recently reiterated, companies that self-report
receive “very real credit” from the government: “If you self-report, you will be treatedsignificantly and materially differently. And if you do not self-report and we learn about it
through undercovers, through your competitors, all of which are happening and will continue
to happen, you will be treated very, very differently.”17 In addition, the United States Attorney
for the Southern District of New York recently emphasized that Dodd-Frank’s whistleblower
regime makes self-reporting even more important, suggesting that, in deciding whether toprosecute a company, the government might take into account how much time has elapsed
between when a whistleblower reported information and when the company self-reported to
the government.18
Above all, companies should ensure their compliance programs are functioning as effectively as
possible. By helping ferret out wrongdoing internally, compliance efforts can enhance acompany’s ability to self-police and self-report to the government, positioning the company tostate-medicaid-fraud-investigation-sparked-by-qui-tam-whistleblower-case-detailing-marketing-schemes-forvioxxr-zocorr-several-other-drugs-56862087.html.
16See, e.g., http://www.whistleblowerlawyerblog.com/ (last visited Nov. 22, 2010).

17

DOJ Gives ‘Real Credit,’ Treats Companies Who Self-Report Very Differently, Breuer Says, SECURITIES REGULATION &LAW REPORT, Nov. 8, 2010 (quoting Assistant Attorney General Lanny Breuer, Criminal Division, Department ofJustice).

18

DOJ to Prosecute Whistleblowers Who Fabricate Information, Bharara Says, SECURITIES LAW DAILY, Nov. 15, 2010.

Page 4

Memorandum – November 30, 2010

receive as much leniency as possible from regulators for misconduct that has not been avoided.
It is equally critical, however, for companies to investigate every report of illegal or unethicalbehavior promptly — no matter the source. While every publicly-traded company is required
under Sarbanes-Oxley to maintain anonymous and confidential procedures — generally in theform of “hotlines” — for employees to report compliance concerns,19 now is the time forcompanies to breathe new life into these procedures and ensure that employees feel as
comfortable and confident as possible with them so that they actually use them. That means
making the hotlines easy to use and reminding employees that reports can be madeanonymously.
Another way for companies to encourage hotline use is by making sure that all internallyreported tips are taken seriously and promptly investigated. In addition to fostering employee
confidence in hotline programs, this is important because even when a complaint is madeinternally, nothing prevents the employee from reporting the very same complaint to thegovernment. In fact, under proposed SEC rules, internal whistleblowers remain eligible forbounties under Dodd-Frank as long as they contact the SEC within three months of making
their internal complaint. The more companies can do to treat every internal complaint with careand sensitivity, the less likely the whistleblower will be inclined to take the same tip to thegovernment.
Last month’s massive Glaxo settlement paints a cautionary tale for companies that do notrespond to internal reports of possible wrongdoing. Beginning in 2002, a longstanding Glaxo
employee, Cheryl Eckard, notified Glaxo management about quality control problems involving
several Glaxo-manufactured products.20 Eckard repeatedly told her superiors about theseissues, which the FDA had not discovered in a recent inspection.21 Eckard recommended that
Glaxo notify the FDA of these problems and temporarily stop producing certain products.22
Glaxo management failed to act on any of Eckard’s concerns23 and ultimately terminated her —ostensibly as part of a head-count reduction.24 Instead of walking away quietly, she prompted afederal investigation into Glaxo by filing a whistleblower lawsuit against the company under
the False Claims Act. That litigation culminated last month with the Department of Justice’s$750 million settlement with Glaxo.25 The Glaxo lawsuit and settlement are stark proof that theconsequences of ignoring an internal complaint can be tremendous.

19

Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, §301, 116 Stat. 745, 775–77 (2002).

20

Third Amended Complaint at 5, 34–35, United States ex rel. Eckard v. SmithKlineBeecham Corp., No. 04-cv-10375(JLT) (D. Mass. Oct. 17, 2008).

21

Id. at 32–36, 39–40.

22

Id. at 34–35.

23

Id. at 36.

24

Id. at 45.

25

See United States Notice of Intervention at 1, United States ex rel. Eckard v. SmithKlineBeecham Corp, No. 04-cv-10375(JLT) (D. Mass. Oct. 26, 2010).

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Memorandum – November 30, 2010

And now that Dodd-Frank has given potential whistleblowers a powerful new set of tools,
some observers in the corporate governance field have asked whether companies should begin
trying to entice employees to report misconduct to management in the same way as thegovernment — with money.26 On the one hand, offering financial rewards to internal tipsters
might not discourage everyone with information about wrongdoing from contacting thegovernment. But to the extent that they incentivize even some tipsters to report wrongdoing
internally instead of to regulators, an internal reward program could improve management’s
ability to investigate and remediate problems and then decide whether to self-report to thegovernment.
Conclusion
Almost overnight, Dodd-Frank’s expansive whistleblower program has imposed newchallenges on the ability of companies to identify wrongdoing within their ranks and position
themselves for leniency from the government when misconduct does occur. Beyond enhancing
internal compliance measures designed to identify misconduct, companies should promptly
investigate all claims of wrongdoing and reinvigorate their internal whistleblower procedures.
That way, companies can have the opportunity, after remediating any problems, to self-report
to regulators — all before a Dodd-Frank whistleblower gets to the government first.
***

This memorandum is for general informational purposes and should not be regarded as legal advice.
Furthermore, the information contained in this memorandum does not represent, and should not be
regarded as, the view of any particular client of Simpson Thacher & Bartlett LLP. Please contact yourrelationship partner if we can be of assistance regarding these important developments. The names andoffice locations of all of our partners, as well as additional memoranda, can be obtained from our website,www.simpsonthacher.com.

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rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to
any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability inconnection with the use of this publication.

26

See Ashby Jones & Joann S. Lublin, Critics Blow Whistle on Law, WALL ST. J., Nov. 1, 2010, available at
http://online.wsj.com/article/SB10001424052702304879604575582603173894296.html.

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Memorandum – November 30, 2010

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