At around the time on Tuesday that the Securities Exchange Commission announced its latest award to a whistleblower – at $14 million, it’s by far the largest of the handful of tipster payments the SEC has made since implementing its Dodd-Frank whistleblower program in 2011 – Andrew Calamari of the SEC’s New York regional office was fielding questions about the program from Susan Brune of Brune & Richard. Brune, who was moderating a panel at the Practising Law Institute’s White Collar Crime conference, asked Calamari whether the commission has any policy on fee agreements between whistleblowers and the lawyers who represent them. Calamari, who had previously said that the tipsters his office sees are typically accompanied by lawyers who’ve whipped up nifty presentations on their clients’ allegations, said the SEC “hasn’t publicly announced a position.”
Brune pointed out that an entire industry seems to have sprung up in the last couple of years to attract SEC whistleblower clients (who can obtain bounties of 10 percent to 30 percent of the sanctions obtained by the SEC in enforcement actions with resolutions of more than $1 million). If whistleblower lawyers can collect big contingency fees simply for working up a presentation and then turning matters over to SEC enforcement, that’s a great business model. “Seems like there’s huge economic potential,” Brune said.
She’s right, but the SEC has no intention of overseeing the burgeoning business of representing Dodd-Frank whistleblowers. It turns out that the commission has already considered implementation of a rule to restrict fees for whistleblower lawyers and has made a policy decision not to impose restrictions. Nor does the agency have authority to solve what two whistleblower lawyers told me Wednesday is actually the biggest concern in their business: non-lawyers misrepresenting themselves in advertising to attract whistleblower clients. Right now, the prevailing rule in the rough-and-tumble market for SEC whistleblower advice seems to be caveat emptor, or buyer beware.
A couple years back, when the SEC was finalizing the rules of the whistleblower bounty program mandated in the Dodd-Frank financial reform law, it specifically solicited comments on whether it should adopt limits on fees for whistleblower lawyers. Such limits were quite a hot topic in Washington in the run-up to the SEC’s final rule. The House Financial Services Committee held a hearing in May 2011 to consider a legislative proposal that would have, among other “improvements” to the Dodd-Frank whistleblower provisions, prohibited contingency fees for tipsters’ counsel. (I can’t find evidence that the bill progressed beyond the committee hearing.) The Washington Legal Foundation was just one of several SEC commenters to send in a letter calling on the agency to restrict payouts to whistleblower lawyers. WLF argued that unless the SEC barred contingency fees for private whistleblower lawyers, they would inundate the commission with claims in the hopes that one case hit it big.
But most commenters on the SEC’s proposed whistleblower rule, according to the commission’s announcement of its final regulation, opposed limits on contingency fees. They offered three rationales: Fee limits would discourage lawyers from representing Dodd-Frank tipsters, thus undermining Congress’s intent in enacting whistleblower provisions; state ethics rules and rules of professional standards already govern fee deals between lawyers and their clients; and any SEC interference with fee agreements would be impermissible meddling with private contractual relationships.