Legal Commentary

As noted in the National Law Journal and in the Workplace Law Prof Blog (which in turn quotes the analysis of the Employment Law Group's Whistleblower Blog), a portion of the Dodd-Frank Act attempts to shore up whistleblowing incentives by offering between 10-30% of the proceeds, at the discretion of the SEC, of any monetary sanctions in excess of $1 million for instances where whistleblowers come forward with "original information" derived from the whistleblower's independent knowledge. [This also applies to the CFTC, but I'm going to refer only ot the SEC for convenience].  

Although the SEC has maintained a whistleblower program until now, it has rarely paid out rewards under that program.  Congress apparentlly assumes that the SEC is not offering enough money for whistleblowers.  Accordingly, it has upped the payout.  This may or may not work, depending on the signal it sends.  See this forthcoming article by Orly Lobel and Yuval Feldman in the Texas Law Review for an experimental and comparative analysis of bounties and other enforcement mechanisms.

It seems to me that bounties, however large, simply do not address the concerns of many employees who are aware of wrongdoing but choose not to report it. 

I would think that the key impediments to whistleblowing are as follows (in rough order):

1. The potential whistleblower is herself responsible for some of the wrongdoing (or believes she will be blamed for it) and fears that she will be punished, potentially with criminal sanction such as imprisonment.

2. The potential whistleblower did not participate in the wrongdoing, but fears that disclosure will result in such harm to the company that she loses her job, or otherwise substantially undermines her future job prospects.  For example, one need not worry about anti-retaliation if and when the company goes out of business.  Similarly, one's boss cannot offer a stellar reference letter for promotion if one's boss is preoccupied with avoiding (or serving) a jail term.

3. The potential whistleblower is afraid of both formal and informal retaliation by her peers.

Theoretically, anti-retaliation laws can curb fears of formal retaliation (such as firings and demotion), but they cannot counteract fears of informal retaliation by peers (although punishment of formal retaliation may create some beneficial spillovers).   Perhaps bounties overcome the sting of isolation from one's peers, but for some employees of particularly close-knit organizations and industries, the bounties will do little to dislodge their well-honed loyalty to their peers.

Nor can bounties solve the problems outlined in #1 and #2.

If, for example, the potential whistleblower has engaged in criminal wrongdoing as part of her job responsibilities, she may so fear criminal prosecution that she decides it is better to stay silent (at least until caught) rather than to confess wrongdoing to authorities.  Moreover, even where the whistleblower has steered clear of personal misconduct, she still may conclude that the result of her intervention will be to harm her company, harm her prospects for future advancement, and possibly harm her friends. Are all of these (rather alarming and seemingly immediate dislocations) worth the potential bounty of 10-30% of the proceeds of an SEC sanction, a sanction (and process) that may be years away and over which the whistleblower has little to no control?  I'm guessing the answer here is "maybe, but probably not."  That is, in most situations -- and particularly in a bad economy, where new jobs are difficult to find -- I would expect employees to say nothing, even with an increased bounty for whistleblowing.   

The caveat to this analysis is that rational employees will come forward and blow the whistle when they feel they have nothing left to lose - ie, when they believe they are about to be fired or that they will never be promoted anyway.  Notice, then, that according to the rational actor account, the whistleblowers most likely to come forward are those that already have personal reasons for wanting to harm the company and the people with whom they work.  Bounties do not solve this brewing conflict; instead, they exacerbate it.