LEGAL
Insights & Trends
IntroductionScandals such as Enron, WorldCom, Arthur Andersen, and the Bernie Madoff Ponzi scheme have cast the whistleblower as a type of David – a principled warrior defending the values of justice – against Goliath, the arrogant, proud behemoth.
Yet, as with most fables of an apocryphal nature, the reality is a more complex intrigue – and there are many cases of senior executives turning a blind eye, or choosing to take their leave of the denigrated company before any such indiscretions are brought to light.
And so there might be; instances of whistleblowers suddenly finding themselves unemployable or blacklisted from an industry are not uncommon and, on the more dramatic side, suicides and unexplained deaths are, to the glee of national reporters, occasional corollaries.
That said, the Dodd Frank Act, set up in the wake of the financial crisis of 2008, created the Office of the Whistleblower to reward and protect individuals who report violations of regulations governing a range of activities in the financial markets and in the activities of U.S. companies doing business abroad.
It began operating in August 2011, and has received over 10,000 tips since its inception – a number of which have led to significant rewards to the informing whistleblower and to large fines against the delinquent company.
Evidence means “original information,” which must be derived from “independent knowledge.”
“Original information” is defined by the SEC as information:
“Independent knowledge” is defined as information that is not obtained from public sources, although a whistleblower need not have direct, first-hand knowledge of potential violations. Independent knowledge can include information from experience, observation, or even communications with other employees, clients, vendors, or nonparties.
The whistleblower should make sure the evidence is “specific, timely, and credible” and provide examples and details of transactions. The more information the better, and if more details or evidence comes to light during the course of the investigation, the whistleblower should submit those too.
Not everyone is eligible for an award, even were the case to prove successful and the company found liable. With significant exceptions, the following categories of individuals are generally excluded from obtaining a whistleblower award under Dodd Frank:
For the most part, yes (although this should also be considered on a case-by-case basis), and the SEC rules are intended to provide some incentive to whistleblowers to report the violation through internal company channels first.
From the company’s perspective, clear policies, procedures, and training of employees should be of critical importance if that company has exposure to federal securities law, but if these controls are not in place or are unclear to the whistleblower, then his hand may be forced.
That said, the rules provide that an internal whistleblower may be eligible for an award where the company reports information received from the whistleblower; and an individual would be deemed to have reported directly to the SEC at the same time as they have reported internally, so long as he voluntarily reports original, independent information to the SEC within 120 days of having first reported the information internally to the company.
To submit a tip, you should fill out Form TCR (Tip, Complaint or Referral), from which you will be assigned a TCR submission number. The form contains declarations of eligibility, and you can submit your tip anonymously, although you must be represented by counsel if you choose to do so.
You should use your TCR submission number to provide further evidence and details after you have submitted the TCR Form, and you should note that it can take months or years to determine a case. If the case is litigated, it could take even longer.
Once a case in which over $1 million is final, a Notice of Covered Action will be posted on the SEC website. You should hear from the Office directly, but if you don’t and you recognize the case you brought, you will have 90 days to submit a Form WB-APP to apply for an award.
It’s possible for whistleblowers to be caught up in the punishment that comes with the crime. Often whistleblowers have to face charges of their own for being part of the crime in the first place, which can make them even more reluctant to say something (even though blowing the whistle may result in a lighter sentence). A whistleblower may violate a contract or professional obligation and there may be civil penalties for breaching agreements and confidences.
One of the main reasons for whistleblowing is the potential financial reward at the end of the case.
The SEC rewards whistleblowers 10-30% of any monetary recovery of over $1 million that the SEC obtains from the offending party through enforcement actions, and the information provided by the whistleblower must lead to a successful enforcement action.
In order to make a calculated decision here, note that 80% of claims are not pursued by the Justice Department program, and the average penalty is $2m to $3m, which works out to be about $330,000 to $500,000 before taxes and lawyer fees are deducted.
Another reason for whistleblowing is, assuming the case is successful, to enhance one’s status in the industry.
A successful investigation will put the whistleblower directly in the spotlight and he will be placed in a unique position where he can help the SEC (or any other relevant regulatory body) draft appropriate regulations and procedures to change corporate culture at the highest level.
A successful whistleblower can also be regularly sought out for speaking engagements and consulting projects.
The key consideration here is to be sure (as far as you can be) that you know what you’re getting yourself into. There are numerous cases of whistleblowers who immediately lose or leave their job and even more dramatic cases where the case leads the whistleblower to bankruptcy, divorce, depression, or suicide.
Make sure that your partner is fully supportive of what you are doing. It also is wise to share what you are about to do with friends and (potentially) colleagues who have a similar value system as yourself so that you gain some perspective.
By going to the SEC, a whistleblower is putting himself in a somewhat awkward position with his employer and, keeping in mind that most cases are not settled in the whistleblower’s favor, may find himself with a somewhat frosty reception.
Dodd-Frank does prohibit employers from retaliation against employees by preventing any demotion, suspension or harassment of a whistleblower, but employers are capable of circumventing such prohibitions – you could be passed over for promotion, ignored by colleagues, or handed the least satisfying projects with the most demanding deadlines.
One reason for whistleblowing is the inability to change jobs easily and, upon finding himself in this position, the individual opts to try to change the culture and behaviors of his employer instead.
A risky strategy to be sure – calling to mind the David and Goliath metaphor in the introduction – being that the company so charged may exemplify industry-wide behaviors, whereupon the whistleblower could find himself at the top of said industry’s blacklist of unemployable individuals.
At its most dramatic, this may mean leaving your field entirely, and in extreme cases, you will simply not be able to find a new job wherever you look.
A decision to blow the whistle on a company is one that can have profound consequences for the whistleblower, yet the consequences on the company (and the industry) can be equally profound. After all, just one person is capable of bringing companies to their knees, and entire industries have to be more diligent than ever to ensure they are operating lawfully.
Companies should ensure that their policies and procedures are regularly updated and that their employees are trained regularly and kept informed of any changes. They should encourage employees to report any perceived indiscretions internally and be clear that any such reporting will not occasion any negative repercussions to their career.
The key takeaway is transparency: The company’s leaders, mission, personalities, competition, failures, and successes should be easily identifiable, and a trusting and supportive culture will be generated, leading to bigger profits and happier employees – and regulation of any injustices can be taken care of from within.
Reprinted with permission from the Association of Corporate Counsel 2016 All Rights Reserved
http://www.acc.com/legalresources/publications/topten/whistleblowing-under-the-dodd-frank-act.cfm
-->
