When the US Congress enacted the Dodd-Frank Act in 2010, it provided the Securities and Exchange Commission (SEC) with two powerful tools to encourage whistleblowers to report violations of the Foreign Corrupt Practices Act (FCPA) and other federal securities laws. First, whistleblowers can potentially receive a “bounty” of 10-30% of the monetary damages assessed against a company. Second, whistleblowers are shielded from their employers’ ire via an “anti-retaliation” provision, which affords whistleblowers a private cause of action for wrongful termination, harassment, or other discrimination associated with their report.
While many observers initially believed that these measures applied equally to all whistleblowers, the U.S. Court of Appeals for the Second Circuit recently held in Liu v. Siemens AG that the Dodd-Frank Act’s anti-retaliation provision does not have extraterritorial effect–it cannot be invoked by a foreign whistleblower against a foreign corporation (even though the corporation is listed on a US exchange), if none of the relevant conduct took place in the United States. The Second Circuit is the first Court of Appeals to adopt this position and, as some commentators have noted, this ruling creates an odd imbalance in the Dodd-Frank Act’s whistleblower provisions: in certain cases involving foreign whistleblowers and foreign companies, although whistleblowers might be eligible to receive significant monetary rewards under the Dodd-Frank Act’s bounty provision, they will nonetheless not be able to invoke the Act’s anti-retaliation provisions if their employer takes action against them.
Putting aside the question of whether the Second Circuit’s legal analysis was sound, as a matter of policy this may, at first glance, seem like a perverse result. Yet this seeming disconnect between the reach and scope of the Dodd-Frank Act’s bounty and anti-retaliation provisions may result, paradoxically, in an improvement in both the volume and content of whistleblower reports.
The most obvious consequence of the court’s ruling in Liu is the fact that, for foreign whistleblowers, reporting on FCPA or other violations is now a much riskier proposition. Such employees may run the risk of being fired for reporting potential violations of the FCPA but cannot be sure that they will receive any reward for this loss, as bounties are only awarded when a whistleblower provides “original information” that leads to the SEC’s imposition of a sanction of more than $1 million. Therefore, individuals such as the plaintiff in Liu may be discouraged from becoming whistleblowers. But for precisely the same reason, those foreign whistleblowers who do report on their foreign employers are likely to come forward only when they have very strong evidence of very serious violations–those likely to produce sanctions over $1 million. Thus, while the SEC is likely to see fewer reports from foreign whistleblowers, those it does see are likely to be of much higher quality and seriousness.
Moreover, while the SEC’s goal of encouraging whistleblowers to come forward regarding any and all violations of the FCPA is an admirable one, the potential results of the court’s ruling in Liu — reducing the number and increasing the quality of whistleblower reports in which none of the relevant conduct occurred in the United States – would seem to accord with our natural intuitions regarding where and how the SEC should expend its resources. The US unquestionably has an interest in addressing foreign corruption and fraud, particularly when the company involved has availed itself of US capital markets by listing on a US exchange. However, the US’s interest is considerably stronger when the misconduct was either performed by its own corporations or occurred within its borders. This is not to say that the US could not or should not pursue evidence of corruption in cases involving foreign whistleblowers and foreign companies. Yet a mechanism which serves to filter out all but the most serious of allegations of corruption in light of both the US’s potentially diminished interest in these cases and the presumably disproportionate share of the SEC’s resources required to investigate such claims (due to their tangential relation to the US), may be all to the good.
While these effects might be desirable from the SEC’s perspective, however, it’s important to highlight the fact that it is much too early to tell whether the above empirical predictions about the impact of Liu will be borne out in practice. Moreover, the prediction that this ruling may result in fewer, but higher quality, reports presumes that whistleblowers will be sufficiently familiar with US law to understand the types of violations likely to exceed the $1 million minimum required to receive a bounty (or indeed are aware of the absence of anti-retaliation protections at all). For now, therefore, both whistleblowers and observers will remain in the dark regarding what effect, if any, this ruling will have on the efficacy of the Dodd-Frank Act in the coming years.
GAB | The Global Anticorruption Blog 
I know you didn’t intend to get into the merits of the Second Circuit’s decision but I do question the soundness of its reasoning. The anti-retaliation provision lacks explicit language pertaining to extraterritorial application but, if the bounty provision covers domestic and foreign whistleblowers, I see little principled basis for extending protection to the former but not the latter. It seems that, as you note, the basis for jurisdiction – listing on a U.S. Exchange – establishes a nexus sufficient to warrant SEC interest. Among other things, this connection distinguishes the Dodd-Frank scenarios from the foreign-cubed restrictions in _Kiobel_.
I do agree with Judge Lynch’s sentiment that public trading is an awfully “fleeting connection” upon which to base enforcement of the anti-retaliation provision. But, given the court’s emphasis of the text of the statute and the strong presumption against extraterritoriality, I am surprised the bounty provision can stand. It, too, lacks language about foreign scope. Indeed, Judge Lynch appears to cast doubt on the SEC’s interpretation of the bounty provision’s extraterritorial reach.
The decision is a convenient one – it preserves the important incentive for foreign whistleblowers while striking down the more intrusive, difficult-to-enforce protective measures. I don’t have an in-depth understanding of the issues but it feels like having cake and eating it, too.
So, realizing that this is all just further speculation, I wonder two things: (1) do you see _Liu_ having any impact on the bounty provision? and (2) will other circuits overseeing extensive capital markets (7th, 9th) fall in line with the Second Circuit?
While the idea that removing the anti-retaliation provisions may improve the quality of reports to the SEC definitely tickles my administrative efficiency bone, I worry that it may not only decrease the volume of reports overall, but may actually remove any realistic incentive of a large swath of employees to ever report.
While the receipt of the bounty is an appealing prospect, even if an employee has slam-dunk, original information, the bounty will not be hers for some time. If we assume these incentives are necessary (as we must be; otherwise, why have them?), the removal of the anti-retaliation protections effectively limits the pool of potential whistleblowers to those who can survive both without their current employment and without the bounty (at least for a considerable period). There is a gap in the chain between getting rid of the anti-retaliation protections and improving the quality of reports. What removing the policy really does is encourage high-quality claims to be made by those who can afford to make them, limiting not just the number of reports, but the pool of individuals who may make them.
However, as you hint, from a policy perspective the Court may have been ultimately opting for a pragmatic, more manageable option: it’s far easier to judicially enforce the bounty provision as compared to the anti-retaliation provision.