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Whistleblowing And The Corporate Officer’s Duty Of Loyalty

After the passage of the Sarbanes-Oxley Act of 2002, many organizations have established procedures, including anonymous hotlines, for the internal reporting of misconduct. Despite these enhanced reporting requirements, there has been a long series of corporate scandals that were not detected or reported to law enforcement authorities. Studies have consistently shown that employees are the most likely group to detect fraud, yet too many are reluctant to report corporate wrongdoing because they doubt that their organizations will act appropriately on internal reports of misconduct and protect them from retaliation.

In response to this serious problem, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the Securities and Exchange Commission to establish a whistleblower program that offers anonymous reporting, employment protections, and monetary awards to individuals who report possible violations of the federal securities laws. Officers, directors, and other corporate employees are eligible to participate in this important investor protection program.
It is well known that corporate officers owe certain fiduciary duties, including a duty of loyalty, to the corporation and its shareholders. What do those duties require when the officer discovers that others within the organization are engaging in possible violations of the federal securities laws? In a recent Risk Management Magazine article, Professor Lawrence A. Hamermesh, a nationally recognized professor of law and the Director of the Widener Institute of Delaware Corporate and Business Law, and I provide practical guidance for corporate officers about their rights and duties when they become aware that their organization may be engaging in unlawful conduct in light of the new SEC Whistleblower Program.

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