Outsourcing Fraud Detection: The Analyst as Dodd-Frank Whistleblower
Journal of Business & Technology Law, Vol. 6, No. 2
40 Pages Posted: 4 Jun 2011 Last revised: 19 Sep 2011
Date Written: July 25, 2011
The Dodd-Frank Act ushers in a new era of whistleblower law. Congress, for the first time, is rewarding the providers of “independent analysis” that helps the Securities and Exchange Commission (SEC) prosecute fraud. To receive a bounty under section 922(a) of the Dodd-Frank Act, “independent knowledge” of fraud is not required. While the statute recognizes the importance of securities analysts in identifying violations, the rules interpreting this language fall short in considering and accounting for the costs to whistleblowers in the financial services industry.
This Article first argues that if SEC bounties are intended to compensate whistleblowers, the SEC’s decisions as to the size of the bounty should reflect not only the intrinsic value of the information to the SEC, but also the whistleblower’s cost of providing that information. Specifically, Rule 21F-6, which allows the SEC to consider whistleblower costs in determining the size of the award, should be changed to require the SEC to consider those costs.
Second, this Article considers the recent economic research about whistleblowers and concludes that the SEC cannot afford to discourage hedge fund managers and other buy side analysts from participating in the SEC program. To avoid that outcome, the SEC should allow these actors to “double-dip,” or collect bounties despite profiting on short positions. Finally, the SEC should clarify when “independent analysis” qualifies for a bounty.
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