[Editor’s note: This article, by a principal architect of the SEC’s whistleblower program, takes a much stronger stance against the Supreme Court’s recent whistleblower-case ruling than did an article we published in February.]

Jordan A. Thomas

Here’s the thing about corporate fraud: It’s kind of like trying to play hide and seek in a yurt. There’s really nowhere to hide. Someone has their eyes on the situation, and often, that someone is a gatekeeper.

At least, that’s how things are supposed to work. Now, given a recent decision from the United States Supreme Court, those watchdogs are in an impossible position. That’s good news for fraudsters and bad news for everyone else.

Before the Dodd-Frank Act was passed, “gatekeepers” — auditors, lawyers, officers and directors, and others who have a duty to act on misconduct — often failed to report bad actors. That was particularly true with respect to the most devastating accounting frauds and securities schemes.

Holding back the gatekeepers were antiquated professional conduct rules on the one hand, and tremendous corporate pressure on the other. The stakes were simply too high and the specter of retaliation and blacklisting too real.

Dodd-Frank changed that. For the first time, gatekeepers were not only encouraged to blow the whistle on corporate wrongdoing, they were given the tools to do so. The SEC Whistleblower Program and the similar CFTC Whistleblower Program provided gatekeepers with the ability to report anonymously while securing significant employment protections and monetary awards.

Responding to corporate America’s concerns that the new programs would undermine existing internal compliance and reporting systems, the Securities and Exchange Commission and the Consumer Financial Protection Bureau incentivized whistleblowers to report violations internally.

Gatekeepers were a bit different. With few exceptions and special requirements, they were actually required to report internally in order to be eligible for whistleblower awards.

But the SEC mitigated the risk of internal reporting with its interpretation that Dodd-Frank’s employment protections were triggered when the wrongdoing was first reported — whether internally or externally. That put gatekeepers’ ethical, professional, and personal interests in perfect alignment with the health and wellness of the company, investing public, and law enforcement.

And it worked. Spectacularly. While gatekeepers do not represent the majority of SEC and CFTC whistleblowers, their information is often of the highest quality.

Among its earliest awards, in March 2015, the SEC announced its first monetary award to one of our clients, an officer of a public company, who reported to the SEC more than 120 days after other responsible individuals at the company were in possession of the intelligence and failed to appropriately address the problem.

This early and public success sent a powerful message to companies to listen to, not marginalize, gatekeepers. In the process, it shored up the compliance function more broadly by encouraging knowledgeable employees to break their silence with new assurances that reports of misconduct would be swiftly and appropriately addressed.

Suddenly the “nervous Nellie” in the conference room, who might have been ignored in the old days, was a force to be reckoned with, a courageous truth-teller with the support and protections of the United States government.

Unfortunately, those protections didn’t last.

Last month, in a decision that sent shockwaves through boardrooms and breakrooms alike, the U.S. Supreme Court ruled in Digital Realty Trust v. Somers that the employment protections available under Dodd-Frank do not extend to internal reporting, but only to whistleblowers who report directly to the SEC.

While the Court’s plain-language interpretation of the statute was vigorously debated, it is now the law of the land. Ironically, the corporate community may have won this legal battle but is likely to lose the war.

In the wake of Digital Realty, with little to gain from reporting internally and a whole lot to lose, sophisticated whistleblowers won’t stop reporting to the SEC. They will instead report to the SEC earlier, bypassing internal mechanisms.

By not protecting internal whistleblowers, employers lose the opportunity to meaningfully address reports of misconduct before law enforcement is notified and on the scene. Corporate America not only made the bed, it put the monster under it.

And the challenges get even more complicated with respect to gatekeepers. Remember their special whistleblower eligibility rules? With few exceptions, to qualify for a whistleblower award, a gatekeeper generally must report internally in the first instance and then wait 120 days — praying the employer doesn’t engage in retaliation or blacklisting — before going to the SEC.

Keep in mind that for these senior professionals with a low risk tolerance, any unprotected waiting period is too long. The alternative is to go directly to the SEC to secure employment protections and lose a chance at a monetary award. That’s one of the very incentives that has inspired numerous gatekeepers to blow the whistle in the first place.

This is a mortal blow because we need the gatekeepers — whose positions often provide access to the high-quality and original intelligence that law enforcement and regulatory authorities need — to effectively detect, investigate, and prosecute violations. And history has shown that without Dodd-Frank’s whistleblower protections and incentives, gatekeepers will not break their silence.

There is no good news here. Our financial watchdogs lose. Corporations lose. Investors lose.

Our last hope sits in Washington D.C. As Congress considers reforming Dodd-Frank, they have the opportunity and the authority to clarify the SEC whistleblower rules in a way that fulfills the program’s original mandate, affirms the important role of internal compliance systems, and provides critical safeguards to the employees who may just be the sharpest tool in the enforcement arsenal and the greatest steward of internal compliance.

In reviewing more than 2,000 pages of investor reform, one clarifying sentence is all it would take to resolve this dilemma for gatekeepers by protecting all whistleblowers and, in turn, investors and the public at large.

Jordan A. Thomas chairs the SEC whistleblower representation practice at Labaton Sucharow LLP. Prior to entering private practice, he was an assistant director in the Division of Enforcement at the Securities and Exchange Commission and had a leadership role in developing the SEC Whistleblower Program.