Dodd-Frank or SarbOx? Comparing Two Federal Anti-Fraud Toolkits

August 2010

IN THIS ISSUE

— Key Anti-Fraud Provisions of the Dodd-Frank Bill
— Dodd-Frank: Better Anti-Fraud Tools Than SarbOx?
— In the next issue

GREETINGS!

Welcome to the August 2010 edition of our newsletter! In this issue, we’ll examine the anti-fraud measures enacted as part of the so-called “Dodd-Frank” financial regulation bill, and see how they compare with the Sarbanes-Oxley provisions implemented in 2002.

KEY ANTI-FRAUD PROVISIONS OF THE DODD-FRANK BILL

The recently enacted “Dodd-Frank Wall Street Reform and Consumer Protection Act,” whose title hints at its length of 2,319 pages, contains many provisions meant to protect consumers from perceived and actual tactics meant to defraud and mislead them. But what does this bill do to address systemic risk detection and abuse?

One key provision, which mirrors many state securities or banking anti-fraud statutes, is to hold persons who “knowingly provide substantial assistance” to a fraudster as culpable as the fraudster himself. The bill grants the Federal Deposit Insurance Corporation (“FDIC”) greater powers to act as a receiver for “covered financial companies”, defined in part as a financial institution not covered by traditional deposit insurance. But the FDIC’s powers in receivership to avoid the financial consequence of fraudulent transfers are somewhat limited: all such transactions must have occurred within two years of the FDIC’s appointment of receivership, which in principle would leave the receiver responsible for liabilities from long-term fraud schemes.

DODD-FRANK: BETTER ANTI-FRAUD TOOLS THAN SARBOX?

Although the enforcement and recovery powers provided under Dodd-Frank seem somewhat limited in certain instances, it provides enhancements to one key tool in the fraud examiner’s arsenal: whistle-blowers. The new legislation codifies monetary rewards for accurate tips that lead to successful; enforcement actions, with amounts pegged to a range between 10 percent and 30 percent of the civil monetary penalty collected. The bill also enhanced legal protections for whistle-blowers who may fear the threat of retaliation by their employers after the information becomes part of a broader inquiry. No award can be given to a whistle-blower who was criminally complicit in the action in question, who served as an auditor on the matter, or who acted as a enforcement agency official overseeing the company in question. These conflict of interest safeguards help to protect the integrity of the whistle-blower process.

The question has arisen in the time since the bill’s passage: how does this improve upon the post-Enron Sarbanes-Oxley bill passed in 2002, and is it redundant in any way? While time and experience may provide the most objective assessments, others have weighed in, including some of the regulators themselves. The Public Company Accounting Oversight Board, created as part of the Sarbanes-Oxley bill, issued a statement lauding the Dodd-Frank bill for its additions to the existing framework allowing the board to share information with foreign authorities, seemingly a nod to a globalized marketplace.

History will be the final judge of the effectiveness of this massive new regulatory structure, but whistle-blower protections at home and regulatory information-sharing both home and abroad provide key tools to regulators and to private-sector fraud examiners who act as a first line of defense against abuses in the corporate environment.

IN THE NEXT ISSUE

In the September issue, we’ll look at how the ruling concerning former Enron Chief Financial Officer Jeffrey Skilling affected investigation and prosecution of financial fraud.