Whistleblowing in the US: a case of schizophrenia?
November 2015 | SPOTLIGHT | FRAUD & CORRUPTION
Financier Worldwide Magazine
The US appears to have a somewhat schizophrenic approach to whistleblowing. While whistleblowers in the US have had a host of federal and state protections and incentives dating back to the 1863 False Claims Act, the fact is that whistleblower protections in the US represent a patchwork of ill-implemented and ill-understood enforcement schemas that practically result in most whistleblowers’ claims going uninvestigated and whistleblowers never fully recovering their prior earnings potential after they become informant.
Even the most touted Dodd-Frank provisions, related to protecting informants of fraud in publicly held companies, have practically resulted in minimal government activity – with a 4 May 2015 Wall Street Journal article indicating that of the 297 whistleblowers who actually applied for awards since 2011, 247 (83 percent) had received no decision from the SEC. Similarly, from 2011-2014, the SEC received over 10,000 whistleblower tips, yet finished investigating only 50 and made only 17 payouts under the relevant statute through the spring of 2015.
So it is not surprising that there is actually a split of authority in the US courts with respect to whether a whistleblower who reports violations of the securities laws to his/her own company without reporting those violations directly to the SEC is protected under Dodd-Frank.
There would seem to be a simple, equitable position to take in this instance – that is, the government should protect employees who altruistically report internally for the good of their company and without the expectation of payment through the SEC reporting process. Certainly, the chief compliance officers of most publicly-held companies would prefer an employee who reports within the company’s compliance programme without simultaneously involving outside regulatory agencies of the federal government in investigations of company conduct.
However, the US Federal Court for the Fifth Circuit of the US (overseeing appeals from the federal courts of Louisiana, Mississippi and Texas) has previously ruled that because a whistleblower can report both to an employer and the SEC, failing to report to the SEC removes the informant from the exact language, and protection, of Dodd-Frank (Asadi v. G.E. Energy, 720 F.3d 620 (5th Cir. 2013)). The Fifth Circuit decision was based upon a strict reading of the US statute, without reference to an SEC statement in its implementing rule that whistleblowers who report violations covered by Dodd-Frank, but who do not report to the SEC, are still covered under its protective provisions.
Most recently, the US Federal Court for the Second Circuit (overseeing appeals from the federal courts of Connecticut, New York, and Vermont) took the opposite position in Berman v. Neo@Ogilvy LLC, No. 14-4626, 2015 WL 5254916 (2nd Cir. Sept. 10, 2015). In Berman, the Second Circuit acknowledge that there were ambiguities in who should be protected under the exact statutory language of Dodd-Frank, but deferred to the SEC’s discretion in interpretation that would allow whistleblowers protection under the federal statute to those that report violations to people and entities other than the SEC.
Procedurally, the split of opinion between the US Circuit Courts sets the stage for consideration of the issue by the US Supreme Court. A less likely alternative would be for the US legislative bodies to amend the underlying federal statute to explicitly include whistleblowers that report prohibited conduct under Dodd-Frank, but do not report to the SEC within the time requirements.
But practically, the dilemma still remains. The state and federal laws regarding whistleblowers overlap, have stringent reporting deadlines and requirements (and vague definitions of protected parties), and operate with the type of opacity that discourages the investigative oversight that the laws were intended to facilitate (e.g., the SEC denied three public-records requests by the Wall Street Journal in support of its May 2015 story for data regarding the number of tips it received and what was done with such tips). The vast majority of whistleblower claims and tips are never resolved, and of those that are, even fewer get the economic incentives provided by the laws. And for those that can weather the arduous process to a successful conclusion, the stigma attached to being an ‘informant’ ripples across future job-searches, advancement, lifetime income and industry mobility.
Will an eventual US Supreme Court decision favourable to Dodd-Frank whistleblowers that use their companies reporting system rather than a direct report to the SEC help the situation in the US? It will certainly add protections for the individual whistleblower, and viable options to SEC reporting companies in encouraging internal investigations prior to involving regulatory agencies. But the heart of the problem seems to be our duality in the US with respect to informants. We both praise those who stand up against corruption, waste and illegal activities and despise those that ‘tattle’ – and we seem to have no underlying system to adequately rationalise this ambivalence.
Kelly L. Frey is a member at Frost Brown Todd LLC. He can be contacted on +1 (615) 251 5554 or by email at: firstname.lastname@example.org.
© Financier Worldwide
Kelly L. Frey
Frost Brown Todd LLC