In an article published November 2, the D&O Diary pointed out that the Dodd-Frank Wall Street Reform and Consumer Protection Act adopted last July encourages employees and others to report securities law violations to the SEC.
The SEC voted 5-0 in support of this new regulation. While there is some concern about frivolous whistleblowing, I can assure you that the number of real fraud cases uncovered will rise dramatically under this new scenario.
First, the regulations provide the potential for a substantial payoff for “original information” that leads
to an enforcement penalty of $1 million or more.
Second, the concept of “original information” is broadened to include fraud cases well beyond insider trading.
Third, the law provides substantial protection from retaliation.
The SEC has already begun financing a reserve of $450 million for future payments to whistleblowers under the Investor Protection Act. I believe, perhaps naively, that the SEC has taken the issue of whistleblower reform seriously.
What does this mean for stakeholders? It strongly suggests that stakeholders may be in for some serious negative consequences. Fraud charges, or even fraud investigations, have a strong negative impact on stock prices. D&O insurance costs will rise for many corporations, particularly those that may be deemed to be skating on thin ice. D&O insurance companies will be hit with more claims to defend, whether the complaint ends in an indictment or not.
I caution stakeholders to pay careful attention to corporate cultures of the companies in which they invest. This is a time to err on the side of caution and stick with transparent companies that treat their shareholders with the respect they deserve.
The Table below is a list of companies that, according to Audit Integrity’s forensic model, are more
likely than their peers to be the subject of securities litigation.