New York Attorney General Proposes New Financial Frauds Whistleblower Program

Nicholas Fortuna, March 2, 2015

 New York Attorney General Eric Schneiderman announced last week he intends to submit to the state legislature proposed new laws creating a program to protect and reward employees who report information about financial frauds in banking, insurance, and the financial service industry. Currently, New York does not have a law to protect or encourage whistleblowers who report securities and other financial fraud. The program is modeled after the whistleblower programs at the Securities and Exchange Commission (S.E.C.) and U.S. Commodity Future Trading Commission established by the 2010 Dodd-Frank financial overhaul.

 Dodd-Frank requires the S.E.C. to pay awards to whistleblowers who voluntarily provide original information to the S.E.C. that leads to the successful enforcement of a violation of federal securities laws resulting in sanctions exceeding $1 million. By statute, the awards must range from at least 10% to a maximum of 30% of the sanctions collected.

 The information must be original. That means it must be based on the whistleblower’s independent knowledge or analysis, not already known to the S.E.C., and not derived exclusively from public sources.

 Dodd-Frank also prohibits retaliation. An employee who proves a retaliation claim is entitled to reinstatement and two times back pay, with interest. Even employees who provide immaterial leads to the S.E.C. are protected by the statute’s anti-retaliation provisions.

 The criteria for award amounts paid to whistleblowers are set forth in the S.E.C rules implementing the statute. The factors considered by the S.E.C. in determining whether to increase or decrease a whistleblowers award generally weigh the value of the whistleblower’s assistance and his or her culpability in the wrongdoing reported.

 New York’s proposed legislation, called the Financial Frauds Whistleblower Act, would pay out awards to tipsters who turn over original information leading to successful cases. Similar to the federal program, the tipsters would get awards between 10% and 30% of the amount of penalties recovered if their information leads to sanctions of more than $1 million dollars. The Act would also protect the confidentiality of the whistleblowers and make it illegal for employers to retaliate in response. Additionally, employers could not fire, demote, suspend or otherwise harass workers who report suspicious activity or fraud to their supervisors or internal compliance staff.

 The plan announced by New York’s attorney general will set itself up to be in competition with the S.E.C. for tipsters under their respective whistleblower programs. New York may have a few built in advantages. New York’s jurisdiction would be focused on its Wall Street and banking rich state as opposed to the S.E.C that must deal with the whole country.

If enacted, New York’s program would not have the same limitations on bank cases imposed by Dodd-Frank. Federal authorities are often limited on the amount they can offer whistleblowers in bank cases to $1.6 million. U.S. Attorney General Eric Holder has criticized the federal cap.

 Also, the S.E.C. has been slow to pay out on the tips it has received. Relatively few awards have been given compared to the thousands of tips, complaints, and referrals it has received since its whistleblower office opened in 2011. The agency did, however, bestow a monster $30 million award on a single overseas tipster last year. But that was the last award it gave out.

 Although a number of states have whistleblower programs, none pay the kinds of awards New York’s would. Most state programs are similar to the False Claims Act which aim to discover fraud against the state. New York would go even further and pay awards to tipsters whose information leads to action by the state’s banking and insurance regulator.