Congress’s passage of the Dodd-Frank Act in July 2010 raised many concerns that its whistleblower program would harm hedge fund internal compliance programs by giving incentives for employees to bypass internal compliance and instead report wrongdoing directly to the SEC for a whistleblower award.  But the recent case Sullivan v. Harnisch has bolstered internal compliance programs by confirming that a hedge fund can require its compliance officer to internally report fraud, and even validly fire him in retaliation (under New York law).  See “Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager’s Principal, CEO or CIO?,” Hedge Fund Law Report, Vol. 4, No. 2 (Jan. 14, 2011).  Similarly, the SEC has proposed new rules making legal, audit and compliance employees effectively ineligible for a whistleblower award unless they first report internally and their employer fails to respond properly, without clarifying whether there is a federal remedy for retaliation.  These developments will certainly bolster hedge fund internal compliance programs, but leave key employees in a Catch-22 of being required to report wrongdoing internally while having no legal remedy for retaliatory firing.  In a guest article, Samuel J. Lieberman and Jennifer Rossan, Of Counsel and Partner, respectively, in the Litigation Group at Sadis & Goldberg LLP, detail: the facts, holding, context and implications of Sullivan v. Harnisch; the mechanics and consequences of the proposed whistleblower rule for hedge fund compliance, legal and audit employees; case law interpreting a relevant provision under the False Claims Act; the dynamics of the Catch-22 created by Sullivan and the proposed whistleblower rule; and how that Catch-22 will impact internal compliance programs at hedge fund managers.