Eye Spy – Whistleblowing in the Post-Dodd-Frank Era.

30 Sep Eye Spy – Whistleblowing in the Post-Dodd-Frank Era.

Posted at 01:00h in Securities Litigation & Regulation by

 

Five years after the Securities and Exchange Commission (“SEC”) established its Office of the Whistleblower, its whistleblower program has matured and seems rooted for the long term.  Since inception, the Office has received more than 14,000 tips from around the world, which has increased annually (4,000 last year alone), including from all 50 states and 95 foreign countries.    The most obvious driver of tips is the potential to receive a bounty award of up to 30% of any penalty amount over $1 million obtained from a corporate wrongdoer.  To be eligible, a whistleblower must voluntarily provide timely original and specific information to the SEC that leads to, advances or broadens a successful investigation and prosecution.  Even participants in the wrongdoing can receive a bounty, provided their hands are not too dirty.  To date, whistleblower tips have led the SEC to impose more than $500 million in corporate penalties, on which bounty awards totaling more than $111 million have been paid to at least 34 whistleblowers.

A few highly publicized awards, of $30 million, $22 million and $17 million, are enough to train the eyes and ears of all employees and vendors to details of possible wrongdoing.  But not all whistleblowers are motivated by dreams of a lottery pay day.  A desire to clean-up their company is an equally powerful motivator.  As evidence, one whistleblower recently walked away from an $8 million bounty award because no action was taken against the executives he believed should bear the burden of any penalty.    Why this fervent self-righteousness?  Because no one wants to work for a dirty company, where the risk of eventual exposure and government action, or corporate failure or disrepute is a possibility.  Nor does anyone want to work for a dirty boss.  While the SEC built into its whistleblower program an incentive for employees to report potential wrongdoing internally, first, to the company or its compliance department before going to the SEC, courts have split on whether employees who do so are protected from employer retaliation, which, surprisingly, has become a real issue.

A number of federal courts, and at least one federal court of appeals, have found that the Dodd-Frank Act, under which the whistleblower program was authorized, protects employees who report internally from retaliation.  Berman v. Neo@Ogilvy, LLC, 801 F.3d 145 (2015).  Likewise, a number of federal courts, and at least one federal court of appeals, have found the opposite: that employees who report internally, but not to the SEC, are not protected.  Asadi v. GE Energy, LLC, 720 F.3d 620 (5th Cir. 2013).  Until the Supreme Court weighs in to resolve the split, this presents a situation where employees who see something will feel safest saying something to the government first, to ensure they are not retaliated against.

The obvious downside to this instinct for self-preservation is that companies will lose the ability to investigate and correct any problems that might have arisen inadvertently, or as a result of negligent but unintentional conduct before a federal investigation begins.  In these situations, even though knowledge of possible wrongdoing exists within the company, in the form of the employee who ultimately blows the whistle, management’s first awareness of a potential problem may come via receipt of a SEC or Department of Justice subpoena.  This unfortunate state of affairs is the result of corporate imprudence and failure to discourage and punish retaliatory behavior by some companies who, faced with a whistleblower, reacted in the absolute worst way.

The world is fast becoming a place where virtually every act is recorded and little remains hidden for long.  The transformative effect of the SEC’s whistleblower program has given it permanence, enhanced the efficiency of its enforcement program and given employees and vendors powerful incentives to declare open season on U.S. companies, wherever they do business.  (The largest award to date, $30 million, was to a foreign national, who reported on extraterritorial conduct of a U.S. company. )  In this environment, employers would be wise to embrace employees who come forward with knowledge or belief of potential wrongdoing and insulate them from retaliation, so the company – at least those that value an ethical corporate culture – can engage in appropriate self-examination and self-correction.  The alternative is to live daily with the risk of being blindsided from within and become the next enforcement headline and, in the process, lose the respect and confidence of demoralized employees who aspire to be proud of where they work – like the one who declined an $8 million bounty award.

 

Ron Wood

Ron Wood

Ron Wood is a partner with Brown White & Osborn LLP. A former Assistant Director in the SEC's Division of Enforcement, Executive Director in the Law Division at Morgan Stanley, and litigation partner with Proskauer LLP, he practices securities law with a focus on regulatory and enforcement matters. He also conducts internal investigations and complex commercial litigation.
Ron Wood

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