King & Spalding Partner Dixie Johnson on Internal Investigations SEC Whistleblowing and Self Reporting

Corporate whistleblower tips are skyrocketing.

Dixie Johnson
King & Spalding
Washington, D.C.

Last year, the Securities and Exchange Commission (SEC) received over 6,900 whistleblower tips – the most ever for any year. 

And more than eighty percent of the tips came from company employees who had previously raised red flags, which typically should have triggered evaluations to determine what sort of internal probe might be necessary. 

Dixie Johnson is a partner at King & Spalding in Washington, D.C. 

Johnson and her colleagues at the firm have produced a General Counsel Internal Investigations Decision Tree that lays out the best practices for in-house teams navigating internal investigations. It includes a section on whistleblowers.

“The SEC has reported record whistleblower tips in 2020,” Johnson told Corporate Crime Reporter in an interview last month. “Anytime you have a lot of whistleblower activity, that creates a lot of enforcement work. And they do triage and only focus on those they think have merit. But increased whistleblower activity leads to increased enforcement.” 

“It is natural for people sitting at home who normally would be in a crowd at work, in a busy office, feeling like they were part of a team and everybody is watching each other. If they are by themselves and they are feeling like their employment is threatened because of changes in business, that is the kind of environment where whistleblowers get more active.” 

“All of that to me suggests it’s going to be a busy few years.”

A company comes to you and says – the SEC has opened an investigation of our company, could you represent us? And you start looking at it. Do you have a sense whether or not a case is being driven by a whistleblower?

“We can have an impression. By law, the SEC is not allowed to reveal the whistleblower who wants to remain anonymous. And often people inside a company, if they are a current employee, don’t want to raise their hand and say they are the whistleblower. Sometimes it’s a former employee or somebody outside of the company.” 

“Although there is often a temptation by company executives to figure out if there is a whistleblower and if so who it is, that exercise is imprecise and unlikely to result in an accurate identification of the whistleblower. And second, it’s fraught with danger. The SEC and other agencies have very strong rules and statutory provisions prohibiting retaliation against a whistleblower. It’s more constructive to focus on the substance of the allegation to the extent you can discern that from the SEC’s request than to try to figure out who may have started the investigation.”

What part of these internal investigations are driven by whistleblowers you know – whistleblowers who work within the company – whistleblowers you know as opposed to whistleblowers you don’t know?

“The statistics I’ve seen indicate that a very significant percentage of whistleblowers who go to the SEC raise their concerns internally at the company first. That is striking because that means they raised their concerns internally within companies but were unsatisfied with the results.”

“Either they still believed the violation occurred and the company is taking a different position, or they feel affronted as though they weren’t really listened to. That is why it is so important to the extent you can to help people who have raised concerns understand the scope of the effort to run those to ground and the results of the effort so they have a sense of what was found in the investigation.”

“That is not always possible. But it is something you want to consider doing because it can help everybody reconcile what the whistleblower thought they were seeing with reality.”

“The other question is – how many are from people you can identify versus people you can’t.” 

“Companies have robust hotlines and multifaceted methods for individuals to raise concerns internally within the company. And they have detailed methods for making sure that information is triaged and addressed appropriately internally. All of that was implemented, if it hadn’t been previously, as a result of the Sarbanes Oxley Act. That requires certain procedures like that when a concern is raised about the integrity of the financial statements of the company, for example.”

“As a result, there are a lot of internal reports. And sometimes those internal reports come from people you know within the company. But I would say that most of the time when you are investigating a claim that the company has violated the law in a way that affects the financial statements, most of the time the whistleblower is not known for sure to the company.”

Both sides on this agree that the vast majority of whistleblower complaints do not end up in government action. When we interview whistleblower attorneys, I ask – what is your filter like? And they say anywhere from one to ten percent of everybody they interview might end up with a follow up interview. A very small percentage of people coming in the door end up with a serious look. Is that your sense from your practice also?

“Yes. And that’s why the guide we put out is so important for in house counsel to have a quick reference to follow up appropriately when they get wind of allegations internally. Most of the time, those allegations are from people who don’t see the full picture. They see a piece of the picture and are concerned about it. But they don’t understand how that piece fits into the broader outcome of the company’s financial statements.”

“It’s fair to say that most of the time the claims themselves don’t end up being valid indications that a violation of law has occurred. That’s why it is so important for a company to get on top of them quickly and have a good thoughtful process for determining whether the claim is or is not something that indicates a problem exists.”

The other side of it, in cases that succeed, the vast majority of whistleblowers were pretty much stiff armed by the company. And that’s what drives them into the arms of the SEC and the Department of Justice.

“That does happen sometimes. That can happen when management is focused on managing potential challenges rather than on a fair review and understanding all of the facts and how those should be addressed.” 

There seems to be over the last couple of years an increasing reluctance of companies to self report to the government. 

Are you sensing that also?

“I am. Another article we published recently is a multi-year study of the SEC’s cooperation program. And what is being rewarded, what is not and how it’s being implemented.” 

“From that study as well as from anecdotal information from our practice, the benefits of self-reporting are often not clear to companies based on what the SEC has announced in terms of cooperation credit. The detriments of self-reporting include very expensive investigations that can take years.” 

“If they are not required to report anywhere, sometimes it is better for companies just to take their own actions to address wrongdoing and document what they have done and then be ready if somebody comes to look at it. And the answer will be – yes, we found it, we addressed it, it is taken care of, we have done everything to learn from what we found in our investigation and we have remediated anything we saw that needed to be upgraded in terms of policies, procedures and personnel. So there is nothing to do here. Thank you for calling.”

“We are encouraging the SEC to be more clear in its articulation of why companies should self report and we are encouraging them to create an amnesty program that will clearly state – not come in and you will get a lighter sanction, but come in and if you clearly help us there is an opportunity for a full pass.”

Usually when the SEC settles a case, it’s with these neither admit nor deny settlements. But there is a policy on admissions where they could be asking companies to admit to wrongdoing. 

“The policy has at least one component where they do encourage entities and individuals to admit violations. And that’s where an admission has occurred in another forum – like where there is a parallel criminal action and an individual has admitted liability in that parallel criminal action. The SEC encourages and the policy requires that if they have admitted somewhere else, they have to admit to us too.” 

“When Mary Jo White and Andrew Ceresney were at the SEC, they were insisting that companies admit factual information or substantive violations where prior to that, companies did not have to admit. I don’t remember seeing those kinds of admissions in the last four years under Jay Clayton. I might have missed it. I wonder whether that kind of requirement for an admission is going to come back under the new administration.”

[For the complete q/a format Interview with Dixie Johnson, see 35 Corporate Crime Reporter 8(13), February 22, 2021, print edition only.]

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