In its three years of existence, the Securities and Exchange Commission’s (SEC) whistleblower program has produced only one $50,000 payout.
But within the next couple of months, it will produce “incredibly impactful cases” with “some extremely significant whistleblower awards.”
That’s the take of Stephen Cohen, Associate Director of the SEC’s Division of Enforcement.
“There will be a likely change in the discussion about the magnitude of some of these awards over the next six to twelve months,” Cohen said.
Cohen appeared on panel at the Corporate Crime Reporter conference last month at the National Press Club.
The panel on SEC whistleblower cases was moderated by Neil Getnick of Getnick & Getnick in New York.
Joining Cohen and Getnick were Linda Chatman Thomsen of Davis Polk & Wardwell, Lawrence West of Latham & Watkins and Jordan Thomas of Labaton Sucharow.
Getnick asked the panelists whether the SEC’s whistleblower program will turbocharge the SEC’s enforcement program.
“The proof on how successful the program is going to have to wait five or ten years,” Cohen said. “But the question on whether it turbocharges the enforcement program or makes the program more successful to me is undeniable because of the type of information we are receiving and how we are using it in some of our investigations.”
“Speaking for myself and my own group, it clearly turbocharges the program,” Cohen said. “We are receiving information from individuals much closer in time to the misconduct, in some instances during the misconduct, and these individuals are often insiders, which is very unusual, are in a position to point us precisely to where the useful information is and save us extraordinary resources.”
“There are people out there in the world who are not employed by the SEC who are in a position to do a fair amount of work and bring us information that is either too costly or impossible to obtain. The net effect of this is that whistleblowers and in some instances counsel are putting together information for us, sometimes in huge reports with evidence, with documents, bringing it to us, and giving us sometimes a roadmap, sometimes a starting place for us to do an investigation, at least pointing us in the right direction — sometimes helping us all along the way to the end.”
“In that regard, that goal is being met. Whether it’s being met a little or a lot, we’ll let people judge after they have an opportunity to see. But I expect you will see a lot more impact from the program publicly in the coming months and years.”
Cohen said that in 2012, the SEC received 3,001 tips from whistleblowers from every state in the country, Washington, D.C. and Puerto Rico and 49 other countries.
“The takeaway is that word is out,” Cohen said. “People across the world are aware of this program. And they are providing us information. The most common complaints that we received related to corporate disclosures and financials (18 percent), offering fraud (15 percent) and market manipulation (15 percent).”
Cohen said that “there has been somewhat of a cultural shift at the SEC about whistleblowers arising out of the events over the last couple of years.”
“The culture at the SEC has become increasingly welcoming of whistleblowers,” Cohen said. “And I am participating in numerous cases where we are working very closely with whistleblowers. You will see an increase over time with more cooperation with whistleblowers. And I am seeing it every day.”
Getnick asked Cohen what portion of the SEC whistleblower caseload now involves the Foreign Corrupt Practices Act (FCPA).
“It’s not one of the top categories, as many people had anticipated,” Cohen said. “But there is no question that we are getting a fair number of whistleblowers in the FCPA space, particularly from foreign whistleblowers. And we have a number of investigations involving foreign whistleblowers in the FCPA space. It’s a fertile ground for whistleblowers because it’s an area that we don’t have any natural visibility into.”
Getnick asked how an SEC whistleblower different from a False Claims Act whistleblower and what is the significance of the absence of a qui tam provision.
“The lawyers who seemed to have entered this space are heavy participants in the qui tam space,” Cohen said. “So, we are actually seeing that the market has brought into our whistleblower space the experience and perspective of qui tam whistleblower programs.”
“From my perspective, the qui tam provisions would not fit well into the SEC’s program. The laws that are being vindicated in these two programs are very different. While each of them to some degree are aimed at rooting out fraud, the qui tam provisions are in some regards a simpler, more straightforward harm that is sought to be prevented — basically people ripping off the federal government.”
“The victim, although it is all of us, is the government. And the money that is sought to be recouped is on behalf of the United States.”
“Our world is much more complicated. The potential victims are disparate. They are private, by in large. I should note that there are qui tam lawsuits that involve securities — government pension funds and the like are at issue.”
“But in our world — we deal with private parties. From our perspective, deputizing people to bring lawsuits in this space against private citizens, is a much more complicated regime.”
“Whistleblowers and the SEC’s incentives are entirely aligned. If they bring us a good tip of a substantial violation, we have every incentive and reason to want to bring that case and see the whistleblower be rewarded. The incentive shifts slightly in a qui tam space where we as a regulatory agency make a determination that a tip is not something that we should either investigate or prosecute. Having private citizens make those decisions in a highly regulated environment, in a broad one at that, is very complicated and brings with it some potentially significant unintended consequences.”
West raised what he called “the dangers of having this money enter into the system the way it has.”
“If everybody at the SEC were like Steve and all of the whistleblower attorneys were like Neil and Jordan, I would have little concern,” West said. “But if you look at the securities class action world, you see some plaintiffs firms with integrity and you see a lot firms that know how much money is there and the value they bring to the system is questionable. I don’t know what is going to happen when the amount of money in the whistleblower award program galvanizes those sorts of people to get involved.”
“And just so you know where I’m coming from, I think I was involved, when I was on the SEC staff, with the first combination False Claims Act, securities fraud case.”
“It was a complicated matter involving yield burning in the municipal bond business. It turned out that securities firms were making more money than they should. And it had an impact on the price they were paying the Treasury.”
“We worked that case and we were making progress.”
“And then one of the bankers from one of the large Wall Street firms flipped from being a heavily prepped witness by counsel for the firm to being represented by a False Claims Act firm. He turned into a whistleblower. We worked through the credibility problems and worked very closely with this False Claims Act firms — one of the ones that I’m sure Steve is seeing in the whistleblower award area now. And we brought very successful cases – a couple of hundred million dollars was collected in those cases.”
“I believe that in that case the monetary incentives that came from the False Claims Act that might have inspired this particular individual that got him to this law firm, which brought in experts, and we worked together — that was an excellent example of how it works well.”
“But I’ve seen recently examples that may indicate that there may be problems. I’m not hearing enough from the staff to know what’s going on. I believe what might be going on in a particular case is that there are people at the company who actually don’t understand what’s going on who continue to come up with allegations that the company and their counsel would be very happy to run down efficiently that are now getting cycled through the staff, which is not confident enough in their own abilities, or maybe they just don’t want to make a mistake and they don’t communicate. And it is becoming a very inefficient investigation. I’m worried that when more money comes in, the balance that I think Steve would like to see would be harder to maintain.”
Thomsen contrasted Sarbanes Oxley with Dodd Frank.
“Sarbanes Oxley spent a lot of time and attention on companies encouraging them to self police, provide ways to do self reporting — to essentially to build the ethical culture that Neil has been talking about, probably more narrowly than he would like or that might be ideal,” Thomsen said.
“Dodd Frank shifted that and instead said — report out, don’t report up or in, report out. And that creates a variety of tensions and issues for companies. Companies rightly want everyone rowing in the same direction. It’s fair for a company to say — if you work here, it is part of your job to tell us when things go awry. We expect people to raise their hands when they see something that bothers them, that troubles them, that they think violates our code of conduct.”
“By and large, you are dealing with presumptively legitimate organizations. They are in the business of doing legitimate work. And they don’t want to have and shouldn’t want to have illegal behavior going on within their walls.”
“I think it is okay to say — you should and we encourage you to report. Then you run into someone who hasn’t reported a problem that you have seen and know about. What do you do about it? Historically, a company could terminate someone for that. And at some level, the Steves of this world would want you to. For example, if your head of compliance knew about illegal activity and decided to either eat bon bons or wait until it was a catastrophe and then he’d go to the New York Times because then it would be more fun, I think Steve would want the company to react negatively, to fire that person.”
“That’s one tension. The other tension I would mention is involves termination decisions. No one weeds out poor performers well. Most people put up with it. The top tolerates it — because it is unhappy to fire people or discipline people or put them on a performance improvement plan. It’s a huge pain and nobody likes it. But you reach the point where you are going to terminate someone. And that individual for the first time in connection with that process will say — I’m a whistleblower. Or could say — I could be a whistleblower. And if you pay me enough in my termination package, I won’t be. Those issues are real. And they are very complicated for companies. When someone says — I am a whistleblower, you now have to stop, pause and think — can I continue with this termination, or this employment action that I was contemplating? Do I have a sufficient record to justify that this isn’t retaliatory?”
“If someone says — sweeten my termination package and I won’t go to the SEC, you have to really pause to think — whether or not you can even do a termination package. I have clients who do a termination package but are explicit in saying — this does not affect anything in terms of your rights to go to the government.”
Getnick quoted a New York Times article reporting that “more than 80 percent of whistleblowers have reported internally first”
Thomas confirmed the report.
“From my time at the SEC, and from my work in private practice with whistleblowers and in surveys, we are seeing that the vast majority of people report internally first,” Thomas said. “When I talk to corporate audiences I say — that is where your focus should be. Too many people are focusing on the latest compliance trends. But the actions in my mind are establishing a culture of integrity within the organization so that people can feel comfortable reporting.”
“One of the things I was struck by when I was at the SEC was a KPMG integrity survey. It found that 74 percent of employees personally observed or had first hand knowledge of wrongdoing during the previous twelve months. Forty seven percent didn’t believe they would be protected from retaliation if they reported misconduct. And sixty one percent didn’t believe they would satisfied with the outcome if they reported the misconduct. In the banking and finance industry, 60 percent reported that the wrongdoing they observed could cause a significant loss of public trust if discovered.”
“Since then, the Ethics Resource Center and my firm have hired polling agencies to poll specific sectors — the hedge fund industry or financial service professionals — and these numbers are consistent. What it tells us is that there is a breakdown in trust between employees and their employers.”
“These organizations are saying — we took SOX seriously. We have the best shiny new compliance reporting systems. and we really want to do it right. But for whatever reason, employees aren’t believing that.”
“In that context, the SEC whistleblower program came out and said — we need an alternative route, more incentives and protections so that people will feel comfortable coming forward.”
“Now, organizations are saying — how do I continue along the journey of getting people to work internally and how do I penalize people either because they have separate performance issues, or because we are not happy because they didn’t come to us?”
“There is nothing in the SEC rules that prohibits a company from taking an employment action that they would otherwise be able to take. If you have a long standing performance problem and it is well documented, the organization should be looking at that in the same way.”
“The more complicated issues involve where people are trying to put into their codes of conduct severance agreements, things to penalize people for not reporting internally but reporting externally.”
“There are just a whole host of problems.”
“There are some agreements that we see that basically say that people can’t report externally. That’s a flat out violation. But then you have other agreements that may be unenforceable because they discourage people from going forward. And that’s where it gets grey. There are some that say — you have to contact the general counsel’s office and you have to provide them with the content of your communications. That’s problematic. You have lesser ones that say — just tell us when you have been in contact with law enforcement authorities.”
“Law enforcement has an interest in knowing about misconduct. Dodd Frank specifically designed an anonymous reporting mechanism.”
“If corporations are allowed to say — you have to report to us, basically undermining that anonymity provision, that runs in conflict with that.”
“Then you have to ask — is that interest stronger than the government’s interest to be able to do investigations?”
On the question of why federal enforcement officials haven’t been more aggressive in pursuing big banks and their executives in connection with the financial meltdown, the panel seemed to agree that it wasn’t for a lack of trying.
“A couple of years ago, there was an academy awards ceremony where the director of the documentary — The Inside Job — which won the Oscar for the best documentary — said that he was troubled that there had been nobody — now three years later — who had been convicted associated with the financial crisis,” Thomas said.
“Having worked in law enforcement, I know that people within these organizations want to do significant cases and want to hold those responsible. The thing that has been lacking, and where the SEC whistleblower law has the potential to help, is actionable intelligence. If you don’t have someone helping you identify where the misconduct is and who is involved, you tend to build circumstantial cases from the ground up.”
“It wasn’t uncommon, when I first came to the SEC, for people to go, wake up early in the morning, read the Financial Times or the Wall Street Journal, New York Times, looking for a reporter to break a story and then open an investigation and then the investigation would work its way up to identify misconduct. The problem is, the trails tend to get cold as you go higher and higher up in the organization. This actionable intelligence is what has been missing.”
“What do people keep focusing on? They talk about leadership, resources, restructurings. Those have happened over and over again within law enforcement organizations, and yet we tend to have a relatively steady trend of success. I suggest that this actionable intelligence will help change the trajectory of the success of the organization.”
Getnick said that making the SEC whistleblower program “fill the void and supplement traditional civil and criminal enforcement has to do with trying to transform it from a tipster program to a public/private partnership.”
“If a whistleblower is going to counsel with a case, before the case gets to the SEC, it has gone through a distillation, vetting and work up process that presents the SEC with a far different package than would be the case if it were just someone calling up on a hotline and providing a tip.”
“And then it’s important for the whistleblower and the whistleblower’s counsel to make themselves indispensable from the standpoint of providing information, analytics, bodies on the ground and a back office to support whatever action is being taken on the governmental level.”
“Companies are better off having a business driven integrity program than a law driven compliance program. If you have a business driven integrity program, it’s part of your corporate mission and it’s something you can embrace as opposed to a regulatory system that’s imposing a brake rather than an accelerator on the company, which is at best tolerated.”
“It is absolutely essential that companies recognize that it is in their own interest to cultivate and embrace whistleblowers. And the best way to take advantage of whistleblowers is to incentivize them to come to the company first, to use those internal reporting mechanisms, and then to favorably respond.”
“The SEC whistleblower law has extraordinary potential, particularly in the international area,” Getnick said. “Our law firm has launched a private global anti fraud and corruption unit focusing on international whistleblower cases. We’re very much committed to this area and in effect have made a big bet that we’re right in terms of its potential.”
“We believe that the whistleblower laws in general and the SEC whistleblower law in particular has the potential to level the playing field against overseas bribery and unfair competition.”
“Beyond reforming companies and industries, we’re now going to aim to reform whole markets. And why must we do that? Because corruption distorts the free market. It rewards dishonesty, opaqueness, inefficiency, and ineffectiveness. And we all know that the anti-corruption laws seek to remedy that. But too often, they come up short.”
“So, we should ask ourselves — why is that? And here’s why, in my view. It’s a lack of information, a lack of resources and a lack of will. And this is particularly true when you get outside the borders of the United States and are relying on international enforcement mechanisms. Whistleblower laws can be the great equalizer. They allow you to develop reliable information, match that up with public resources, and incentivize integrity. That’s exactly what is needed to make economic sense out of our international anti-bribery laws.”
“Perhaps most interestingly, what that will do is help honest companies around the world to compete effectively in the global marketplace and US companies in particular who are adhering to the FCPA.”
“To date, the US Chamber of Commerce has spent its capital opposing whistleblower laws in general and the SEC whistleblower law in particular.”
“But I predict that narrow and shortsighted view is about to be overtaken by events. First, these laws are here to stay. Second, applied effectively, these laws will prove to be the great friend of U.S. business.”
“We’ve seen this before. We’ve seen this with the antitrust laws, we’ve seen this with the civil RICO law. When these laws were introduced, they were not particularly welcomed. But business and industry adapted and realized that these were tools to help fight against unfair competition.”
“We only need to look at Apple’s antitrust case against Samsung to realize that those laws have been incorporated into the weaponry of business to protect themselves.”
“I believe that fight is going to go beyond simply reforming companies or industries. It will settle no less than reforming whole markets. And it will do that by matching up whistleblower knowledge, the private resources of counsel and most importantly leveraging that with the public resources of the SEC.”