Whistleblowing 101

Serious risks for an uncertain reward

In 2009, Linda Almonte, a division vice president at JPMorgan in San Antonio, TX, discovered substantial errors and omissions in the paperwork supporting almost $200 million worth of credit card judgments the bank was selling to a debt collection agency. Nearly half the files were missing proofs of judgment and almost a quarter of the debts were overstated.

When she told her boss of her discovery, Almonte got no kudos for spotting the problems and was told instead to keep the file defects to herself. On principle, she refused to go along with the sale and was subsequently fired.
Standing up to JPM cost Linda Almonte more than her job. She spent the next two years trying unsuccessfully to interest any bank regulator in her case against JPM and to find work at other banks in the San Antonio area. She eventually lost her house and had to move her family to another town. To this day, Almonte has not come close to matching her salary at JPM.

What she has done, however, is file a claim with the SEC under its new whistleblower program, which offers bounties to employees who expose suspected violations of federal law by their employers that eventually lead to settlements of $1 million or more. Almonte’s case is now under SEC investigation.

Linda Almonte’s whistleblowing experience is not uncommon. Anyone contemplating reporting a suspected violation of federal law by his employer to the SEC should be aware of the legal uncertainties inherent in the Dodd-Frank bounty program and the nearly unavoidable risk of career dislocation.

The Dodd-Frank bounty can range from 10-30% of any qualifying settlement. It is available to whistleblowers who alert the SEC to suspected federal violations either initially or within 120 days after they first notify their companies. The latter option is designed to prevent bounties from entirely discouraging internal reporting. An employer’s officers, directors, attorneys, compliance personnel and internal auditors are not eligible for bounties unless their tips are necessary to (i) prevent injury to the financial interests of the company or its investors or (ii) facilitate a federal investigation.

To qualify for a bounty, a whistleblower must provide information that is sufficiently specific, credible and timely to cause the SEC to open a new investigation or re-open a closed one. The information must make a meaningful contribution to the eventual settlement, be volunteered rather than provided in response to an agency request, be independently developed and not be derived from public sources or legally-privileged communications. If the whistleblower’s information meets these criteria, the size of the bounty will then depend upon the significance of the violation to the SEC, the whistleblower’s involvement in the commission of the offense and whether the whistleblower initially notified his employer of the suspected violation or interfered with internal compliance reporting.

Since the Dodd-Frank bounty program went into effect last August, the SEC has reportedly averaged almost 50 whistleblowing tips a week. By April of this year, about 1 in every 6 of those tips (more than 240 in total) resulted in a qualifying settlement, but the SEC has not yet awarded a bounty in any of those cases.

Should a whistleblower remain with his employer after reporting a federal violation, he may expect to be treated as a persona non grata by his colleagues and his job responsibilities to diminish over time. In either of those events, or if the whistleblower is subsequently fired, he may also be sufficiently resentful of his former employer to sue for retaliation. Dodd-Frank prohibits employer retaliation against whistleblowers.

To prevail on a retaliation claim, however, a whistleblower must prove that he honestly and reasonably believed that his employer was engaged in a violation of federal law (even if no violation ever actually took place) and that it was his whistleblowing and not other legitimate factors that precipitated his adverse treatment by the company.

Whether a whistleblower exposes his employer on principle or for the bounty, the act itself is likely to be a life-changing event, and a potentially very public one at that. As Linda Almonte told The Huffington Post recently, “blowing the whistle can be career suicide. Google me . . . and you’ll see why.”