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Dodd-Frank increasing whistleblower claims

A recent Reuters article points out that the new Dodd-Frank financial reform measure could mean more qui tam filings and larger payments to whistleblowers.

But companies fear Dodd-Frank payouts could contribute to circumvention of internal anti-fraud systems and undermine company efforts to deal with violations independently.

Dodd-Frank requires the Securities and Exchange Commission to pay awards to whistleblowers reporting violations which result in $1 million or more in sanctions.

Billions of dollars have been paid out since the late 1980s to whistleblowers suing government contractors under the False Claims Act and other federal laws.

According to data provided by the Department of Justice, awards for reporting fraud reached a high of $385 million in the year preceding September 30, 2010. This was a 50 percent increase from the previous from the previous year.

According to some experts, the rules are currently written in such a way as to give workers an incentive to circumvent corporate compliance systems in order to obtain whistleblower payouts.

Critics of Dodd-Frank say workers should be required to report violations to internal company monitors, and feel that the SEC should limit awards to workers who failed to solve the matter internally first.

Supporters of the measure, however, say internal company programs frequently fail to resolve violations, and that workers should have the right to determine where to address the measure. Supporters also feel that large awards are appropriate since workers providing good information to the SEC risk their careers to report those problems.

Whatever side one takes in the debate, it is true that whistleblower cases are on the increase. In 2010, a 573 new qui tam cases were filed, compared to 433 the year before. According to Reuters, false claims cases are also on the increase in state courts.

Payments are also getting larger. Last October, a former employee of GlaxoSmithKline was awarded $96 million, which is the largest payment made in such a case. In total, the pharmaceutical company paid $750 million to settle a manufacturing fraud case.

Source: Reuters, "Backlash brews on whistleblower awards," Ross Kerber, 7 Mar 2011.

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