Whistleblowing in the US


Financier Worldwide Magazine

May 2014 Issue

May 2014 Issue

Whistleblowing is a sensitive subject. It has divided opinion the world over, particularly in the US. Not only is the practice of whistleblowing in the US affected by an intricate and complicated network of often contradictory laws and policies, it also splits public opinion.

Whistleblowing can be hugely beneficial to companies. It can encourage corporate social responsibility, increase shareholder confidence and ultimately reduce an organisation’s exposure to damaging risk. But there is also a darker side to the practice. Those that choose to expose fraud and corruption within businesses or governments are vulnerable to retaliation. Whistleblowing can be a life changing experience. To that end, one need only look at the recent cases of US whistleblowers Edward Snowden and Chelsea Manning, which highlight the importance and dangers of whistleblowing in the current political climate.

Aside from issues of national security and data protection, of late there have been serious efforts made to counteract the various dangers associated with the practice of whistleblowing, particularly in the aftermath of the financial crisis.

The US has a number of major precedents for protecting whistleblowers. Many pieces of legislation designed to protect whistleblowers have been signed into law. The Sarbanes-Oxley Act and the No-FEAR Act were designed, in part, to reinforce the principle that retaliation is unlawful. These newer acts have built and expanded on the legacy of previous whistleblower protection legislation. Acts such as the Whistleblower Protection Act and the Lloyd-La Follette Act have done much to insulate whistleblowers from acts of retaliation.

Whistleblowers across many sectors have felt more confident and comfortable about coming forward.

Despite the existence of previous whistleblower protection legislation, it was the onset of the financial crisis, the ensuing recession and the various economic scandals that had a truly lasting and transformative effect on whistleblowing, not only in the US but also internationally. Whistleblowers across many sectors have felt more confident and comfortable about coming forward to report wrongdoing as a result of a tranche of new protective measures.

In the UK, for example, there has been a marked increase in whistleblowing, particularly in the financial services and health sectors, since new legislation was put in place. This rise in whistleblowing coincided with the introduction of the UK Bribery Act in 2010. The Financial Conduct Authority, the regulator in the UK, released figures in early 2014 that confirmed 254 new cases were initiated on the back of information derived from whistleblowing between November 2012 and October 2013. This is a significant increase compared with the 148 cases launched a year earlier.

In the US, securities whistleblowers have been provided with a number of incentives and protections by wide-ranging pieces of legislation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has had the greatest effect, namely through Section 922. Although the provision was only signed into legislation relatively recently, Section 922 has already been the subject of a number of major litigations and payouts. In November 2013 the Securities & Exchange Commission (SEC) made a record breaking $14m bounty payout to an individual whose testimony enabled the Commission to recover $147m defrauded from foreign investors in a Chicago-based scheme. The SEC awarded the whistleblower 10 percent of the recovered funds, a figure which represents the bottom of the range established by the Dodd-Frank whistleblower bounty program. The program gives the SEC the discretion to award a whistleblower up to 30 percent of any recovered sum. The size of the $14m award and the level of publicity that it generated is likely to be a point of interest for potential whistleblowers throughout 2014 and beyond. A payment of that magnitude is likely to lead to an increase in the number and frequency of whistleblowing incidents going forward.

As well as the obvious financial incentives, under the auspices of Section 922 whistleblowers who highlight violations of securities laws are also granted a number of significant protections against retaliation. A whistleblower may receive anti-retaliation protection in connection with any judicial or administrative action brought by the SEC, or specified related actions brought by the Department of Justice and other specified federal agencies, self-regulatory organisations, and state attorneys general. The related actions for which a whistleblower may receive awards and protections under the Dodd-Frank Act include court or agency actions against corporations by the Attorney General of the US, any appropriate regulatory authority, or even a State Attorney General in connection with any criminal investigation.

The SEC is focused on enforcing the anti-retaliation whistleblower provisions of Dodd-Frank. It has reported cases of companies requiring employees to sign confidentiality agreements, appearing to bar them from later becoming whistleblowers. It is believed that any such agreement would violate Dodd-Frank’s prohibition against regulated entities taking action to impede employees from making whistleblower complaints.

The Dodd-Frank Act has also strengthened the whistleblower protection provisions of the Sarbanes-Oxley Act and the False Claims Act, allowing a reward to be granted to any whistleblower who provides information to the Commodity Futures Trading Commission. Although Dodd-Frank and the Volcker Rule are still in their infancy, there is evidence that the protections they afford whistleblowers in the US are starting to have an effect. According to the SEC’s annual report on the Dodd-Frank Whistleblower Program, in the 2013 fiscal year the SEC received 3238 whistleblower tips, complaints and referrals – up from 3001 received in 2012 and 334 in 2011, the year the Whistleblower Office first opened.

According to Kara Brockmeyer, the chief of the SEC’s Foreign Corrupt Practices Act (FCPA) Unit, whistleblower tips now serve as the primary lead for the SEC in identifying potential FCPA actions. Crucially, the SEC has announced that it is utilising these tips as it attempts to identify specific sectors or industries that are not paying sufficient attention to corporate compliance or internal controls. Ms Brockmeyer has also noted that, in 2014 the SEC intends to focus on a number of other priorities as well as its whistleblower program. The Commission will emphasise compliance programs, internal audits and hybrid monitoring – taking in both independent monitors and self reporting on behalf of the company in question and international cooperation.

Despite the work that Dodd-Frank Act has done to encourage and protect whistleblowers, there is a distinct fracture within the federal courts over the extent and scope of the Act’s protections. The question dividing parties is: are whistleblowers who internally report potential securities law violations protected under the Act’s anti-retaliation provision, or must the potential violations be reported to the SEC in order to qualify? While many experts, and the SEC itself, believed those whistleblowers who reported internally were protected, the US Court of Appeals for the Fifth Circuit disagreed in 2013.

The court’s decision was further reinforced in February 2014 when, in the case of Villanueva v US Department of Labour, the Fifth Circuit reached another decision curtailing the reach of whistleblower protection under the Sarbanes-Oxley Act. Considered together, these two decisions will be greeted with open arms by some employers. Essentially, the decisions taken by the Fifth Circuit have served to drastically confine the reach of whistleblower protection. This is particularly pertinent for those employees working outside the US, who may be reluctant to make complaints directly to the SEC, or may be forced to rely on alleged violations of foreign laws in order to make their case.

The first ever Sarbanes-Oxley whistleblower case to be heard by the Supreme Court in the US concluded with the court broadly expanding the scope of protections. In early March 2014 the Supreme Court extended the whistleblower protections offered in Sarbanes-Oxley to employees of contractors of public companies, in a decision supporters say will help to rein in the accountants and other outside contractors who did their utmost to ignore the financial scandals at Enron Corporation and WorldCom. Defence lawyers, however, say this could expose millions of small businesses to opportunistic employee suits.

The Sarbanes-Oxley Act, passed into law in 2002 as a response to the ongoing Enron scandal, was designed to help protect employees of public companies who report corporate wrongdoing. In Lawson v FMR, however, the question posed to the High Court was whether contractors and subcontractors of publicly traded companies are shielded by the whistleblower anti-retaliation provision under the Act. In March the court returned a 6-3 vote, ruling that whistleblower protections established under Sarbanes-Oxley do in fact apply to employees of private firms that contract with publicly traded companies.

While the ruling is obviously good news for prospective whistleblowers, it is clearly a negative for companies. Arguably, the decision to extend the auspices of the Sarbanes-Oxley Act in this way may be contrary to the initial intended scope of the Act. As a result of the Supreme Court’s decision, companies of all sizes will now have to prepare themselves for the eventuality that they too will face Sarbanes-Oxley whistleblower claims simply because they are a contractor or subcontractor of a publicly traded company. Furthermore, firms may find themselves facing up to enormous costs and undue financial burdens as a result of the verdict. Ultimately, the decision could lead to a great deal of litigation being launched which would force hundreds of small and medium sized companies to adapt to unfamiliar securities laws within the confines of tight budgets.

Irrespective of the interpretations of whistleblower legislation in the US, one thing is certain: the price of non-compliance with the government’s whistleblower protection schemes can be extremely high. The SEC’s recent record breaking $14m award and its wider bounty program will have caught the attention of corporate compliance officers. Companies will need to increase their compliance efforts and adopt robust and comprehensive controls to protect against internal fraud and corruption.

© Financier Worldwide 


Richard Summerfield

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