SEC - Proposed rules to implement whistleblower incentives
- Source: SEC - Proposed rules to implement whistleblower incentives and protection provisions Federal Reserve Bank of St. Louis
The SEC is proposing rules and forms to implement a whistleblower incentives and protection program. The SEC will pay an award to eligible whistleblowers who voluntarily provide original information about a violation of Federal securities laws that leads to the successful enforcement of an action brought by the SEC that results in certain sanctions.
- Federal Register Document
- Sean McKessy Rejoins SEC as Head of New Whistleblower Office Securities Docket, February 18, 2011
Whistleblower protection in Dodd-Frank
- Source: So You Want To Be A Whistleblower---Navigating The New SEC Whistleblower Law Daniel Hurson, July 19, 2010
Unable to land many of those big international contracts, your company has just been acquired by a more successful multi-national competitor. Luckily, you are considered a rising star and have been named assistant manager in a major foreign branch. During your first week at the new firm you notice substantial "consulting fees" being paid to a mysterious middleman who seems to know every government official in the capital city where the big contract decisions are made. You make inquiries, are introduced to the guy (who never really explains what he does for those hundreds of thousands in fees) and start asking around within the company.
Soon, you are called into the division manager's office and told to stop asking questions. Then, an acquaintance in the accounting department tells you "in confidence" that this relationship has been going on for years, is done in other branches around the world as well, and that the consultant is little more than a cash conduit and most of the money ends up with local government officials influential in the award of contracts to the company. You review his invoices and see they have elaborate, but apparently false, explanations of the consulting services. You are not a lawyer, but you have reviewed company ethics bulletins and are convinced these payments are probably violations of the Foreign Corrupt Practices Act (FCPA).
Your dilemma is clear. You can ignore it and do your job (which fortunately does not involve making or accounting for the payments yourself). You can go above the local manager to the compliance office back in the U.S. with the real risk of losing your job if the information turns out to be false (or, you fear, even if it's true). You can call the anonymous tip line but fear you may be identified as the tipster. Being a genuinely honest person, you are alternately disgusted and terrified. Should you become a whistleblower? You have read about the usual fate of whistleblowers, loss of job, reputation and career. But can you live with yourself if you stay silent?
AN ALTERNATIVE—THE NEW SEC WHISTLEBLOWER LAW
Buried within the thousands of pages of the new Dodd-Frank financial regulatory reform act is a marvelous little section 922, "Whistleblower Protection." But it is more than just protection, which is clearly needed, but in fact an opportunity to profit handsomely from being honest (and how often does that happen in real life). Whistleblowers who provide "original information" leading to successful SEC enforcement actions can be awarded from 10 to 30 per cent of the "monetary sanctions exceeding $1,000,000."
What this means, as a practical matter, is that a whistleblower who threads his way through the law's technical hurdles can be on track to become wealthy, without many of the obstacles facing whistleblowers in current law and with far stronger protections against retaliation. It almost makes it worth it to be honest and do the right thing. I say "almost" because historically whistleblowing has never been an easy path to riches and unless one follows the law very carefully the old adage that "no good deed goes unpunished" may still hold true for most of the new class of wannabe whistleblowers.
ASSESSING YOUR CHANCES OF SUCCESS UNDER THE NEW LAW
Some would say that deciding to blow the whistle should not be about money or fame, but about basic honesty and doing the right thing. Many former whistleblowers end up saying they were mainly motivated by that admirable goal. In reality, however, one is making a cold career choice in deciding to break ranks and expose fellow employees, including superiors, and the organization itself, to potential criminal prosecution. This is serious business, and no one should assume others will be similarly motivated to do the "right thing." What is far more likely is that you will be met by resistance at every level. Regardless of what they may say for the record, you will be viewed by many as a weasel who is looking for little more that to profit for yourself. The new law creates significant redress for proven retaliation, but you still have to go to court to prove it, and you will still suffer the inevitable stigma that forever follows a whistleblower in many quarters. So, as they say, if you set out to bring down the king you have to kill him.
DO YOU HAVE A SOLID CASE THAT CAN BRING IN A LARGE PENALTY?
Whistleblowers are often motivated by some personal grievance that probably does not have much to do with fraud or the securities laws. Maybe the boss has told you to cover up a safety issue, or changed a report you wrote, or accepted free lunches from vendors, or some such clearly improper behavior. Maybe you have complained to others and have been demoted or otherwise suffered retaliation. These are often legitimate issues, but are not the grist for the kind of high stakes whistleblowing the SEC law is designed to reward. To meet the $1 million threshold you have to be on to what will amount to a significant case. To be sure, those cases are out there. Recent SEC cases under the FCPA, for example, have brought in enormous sanctions. The recent Bonny Island Nigerian cases, involving a joint venture of international companies to bribe officials through agents to get contracts to build natural gas facilities in that county, have resulted in almost $1.3 billion in penalties so far. Cases netting over $1 million are becoming routine, but not all enforcement actions bring that much, especially if they target only individuals, not the company. A gripe against your boss for covering up some minor infraction will not qualify. Check out the press releases on the SEC's website to get a feel for the kinds of cases the agency brings and the amount of recoveries involved. In more than a few instances, 10 to 30 percent of the cut is serious money. But for that money, you have to pick the right horse.
TO WHOM SHOULD YOU FIRST BLOW THE WHISTLE?
Under the new law, the most crucial decision you may make will come at the beginning: who do you talk to. Contrary to what you may have been instructed by the compliance department, or the method set forth in your corporate Code of Ethics, you should not call the hotline or the compliance or legal department. On its face, the law appears to provide rewards only to those whistleblowers "who voluntarily provided original information to the [SEC]." Even if your information causes the company to make some disclosure to the SEC, you may not get the credit, even if you are clearly identified as the source (which of course carries its own set of risks). Nor should you discuss the matter with your best friend in the next office, or post something on line. The best way to assess the "value" of the case is to go to someone outside the company who is legally obligated to keep the information confidential, and who is qualified to evaluate your evidence and assess the potential monetary sanctions that might be imposed. In my view, self-serving as it may be, the best guarantee of keeping it confidential is to consult a lawyer knowledgeable in the securities laws and enforcement actions who will keep your information confidential. She can evaluate with dispassion whether you are sitting on a case that may generate large penalties. In general, any case involving FCPA violations, accounting fraud, or material misrepresentations in SEC filings, particularly in a large public company, is a potential winner.
Another substantial benefit of getting a lawyer involved early is the fact that the new law explicitly protects the identity of whistleblowers who come to the SEC through counsel. Whistleblowers who act through counsel are entitled under the law to submit information anonymously. In effect, the lawyer becomes the liaison between his unnamed client and the government, and can advocate for his client and take actions designed to enhance the chances of a reward without exposing the client's identity. Having counsel also sends a message to the company that any acts of retaliation may be met with legal action.
CAN YOU PROVE YOU ARE THE ORIGINAL SOURCE OF THE INFORMATION?
The new law requires you to provide "original information" to the SEC to get an award. This means you have to be able to prove you were the first in the door with the information that led to the case. If the SEC already knows about it from any other source, you probably lose. My prediction is the SEC will resist making awards in any case in which the agency was already investigating your company for the activity, even if they had not yet found the information you bring them. The key issue in close cases will become whether your specific information "led to the successful enforcement...action." You also must be able to prove the information "is derived from [your] independent knowledge or analysis." Water cooler hearsay will not get you the prize. Nor, in my opinion, will information that consists solely of what someone else told you, even if it is true, be deemed "original information." With potentially millions on the line in a big case, the SEC may well look for any loophole to deny or reduce an award, particularly if there are others claiming an award as well. If the information comes from a news report or government investigation, you will have to prove your information was not "exclusively" derived from such report, or that you were in fact an original source of the information in the report. None of this will be easy, and do not blithely assume the SEC will give you the benefit of the doubt.
Again, if you play by company "rules" and go first to the compliance officer or general counsel with your information, they may report the allegations to the SEC almost immediately, and will be prompted by SEC staff to give them your name as a potential witness. You will be fully debriefed by company or outside counsel. At that point, you have effectively lost control of your information. Sooner or later, you may also get an SEC subpoena or, in a serious case of on-going fraud, an after-dinner cold call at home from two FBI agents. At that point, it's a little late to start talking about a cash award for yourself. One thing is certain: if there is a successful enforcement case and millions are recovered, you have better already nailed down a clear case for your being the original source. In short, the best strategy is to consult counsel and no one else, have your lawyer go directly to the SEC, play it close to the vest, and get the staff to verify in writing if at all possible that his client X (you) has given them "original information" which meets the criteria set forth in the law.
HOW SHOULD YOU GO ABOUT PROVING YOUR CASE?
In most contested legal matters, the best evidence is usually found in authentic documents. Witnesses can forget, get cold feet, lie or be contradicted. Nowadays, emails are the document of choice for enforcement lawyers. They are usually spontaneous, candid, presumed truthful, and once sent or received can never be hidden, destroyed, denied or erased. There is hardly a big case anymore that does not feature some smoking gun emails. Thus, if you can come to your lawyer with some emails supporting your information you are already at first base. Likewise spreadsheets, accounting documents, secret contracts or side-letters, minutes of meetings, "cya" memos of one kind or another or similar documents can be important. Gather them as quietly as you can before going to the lawyer. Don't get the lawyer involved in any effort to sprit anything out of the company. Don't try to play Sherlock Holmes and conduct your own investigation within the company; you will probably mess it up and expose your identify as the likely tipster when the company ultimately is contacted by the SEC. Let your lawyer figure out how to assemble the information for the SEC. Once they have it, they have the weapons to quickly launch an investigation, and to require the company to provide specific documents and/or testimony. Your counsel can identify potential documents and witnesess for them, while making sure you are getting credit for the leads.
In our case above, the phony invoices submitted by the consultant, and payments made, would be the kind of documents the SEC would focus on, for falsifying books and records alone is an FCPA violation. If some of the documents, including the emails, are ones you sent or received yourself, these should also be given to counsel to help him evaluate whether you have some exposure yourself in the matter, which can change the strategy considerably (see below).
There is always some risk in providing presumably confidential company documents to an outsider, even your own lawyer. The company may consider this a breach of your employment agreement, if you have one, or a violation of some company policy you agreed to uphold. However, once your information comes to the SEC the company would be risking a retaliation claim if it tried to take adverse action against you for providing the documents in confidence to the government. Of course, if you put them on the internet or leak them to a journalist you have no such protections, and may blow your chance later to claim them as part of your "original information" as well.
HOW, AND WHEN, WILL THE SEC DECIDE IF YOU GET AN AWARD?
As with most things involving the government, the process of receiving an award will undoubtedly be frustrating and protracted. The SEC must write regulations to enforce the law, and hopefully they will facilitate, not complicate, the chances of receiving an award within a reasonable time within a few months. The case itself may take months or even years to investigate, and a settlement or successful lawsuit could take even more time. Then the SEC Commissioners have to decide the significance of the information to the success of the enforcement action, the degree of assistance provided by you and your counsel, the "programmatic interest of the [SEC]" (whatever that means) in making such awards (which should be obvious but may provide a loophole to reduce an award), and just about anything else they decide is relevant. Here is where the lawyer will be essential to overcome the traditional bureaucratic resistance to giving large cash awards to real people who have done the right thing, as opposed to keeping the funds for Uncle Sam or for distribution to shareholders in the company.
Getting an award will be particularly difficult if the government suspects you have had any role in the illegal activity. If so, and there is a chance you could be convicted of a crime for your actions, the SEC has a basis to deny an award, at least until it is clear you will not be prosecuted for your actions. In our example, if you knowingly approved some of the commission payments, or falsified any company documents, you have potential civil and criminal exposure and the government will have an entirely different attitude about your effort to become a late-blooming whistleblower. Again, having a lawyer who can argue for some form of immunity or cooperation agreement that will spare you any criminal conviction will be essential to qualify for an award. The SEC has recently established formal procedures for seeking cooperation deals which may involve immunity from criminal prosecution. Even with exposure, it may still be possible to cut a deal early on if the information is good enough and you hold the key to cracking a big case. Of course, having potential exposure is a good reason to consult a lawyer anyway.
WHAT ABOUT RETALIATION?
Retaliation, being part of our base human nature, will always be with us. Even if your identity as whistleblower remains officially anonymous, chances are someone at the company will figure out the source. You must assume going in that somehow, in some form, there will be retaliation. Whether it is just some residual stigma that follows your career, or something more serious, remains to be seen. The new law contains strong retaliation provisions, including a long statute of limitations for bringing claims, immediate access to federal court without plodding through an administrative morass at OSHA, and a new double-back pay remedy. But one must accept the fact that once the whistleblower has crossed the Rubicon and gone to the SEC, his career, and his life, will probably never be the same. If fear of retaliation is your overriding concern, you should just call the company hotline, or the SEC's hotline, give them the information, do not leave your name, and see what happens. If you chose to call the company line and it becomes clear later that the company has taken no action, you can then consider going (through counsel) directly to the SEC.
IS IT ALL WORTH IT?
There is no easy answer here. In truth, most of us would probably look the other way, or quietly ask for a transfer, or maybe resign, in the case we described above, rather than become a whistleblower. I suggest reading a May 13, 2010 article from a most unlikely source, the New England Journal of Medicine, for a fascinating article that tracked the experiences of individuals who had blown the whistle on health care frauds. Their stories reflect the reality of living as a whistleblower, and their tales are not at all reassuring. As noted, even though the new law provides much better protection from retaliation than under existing law, the path of the whistleblower must trod is still a lonely one. Doing it for the money alone is probably not enough to justify the risks. If however, one chooses to do the right thing, doing it in such a way as to mess up the chance for the money is unforgivable. Thus, if you are inclined to reach for that whistle, do it right, do it with honor, and do it so as to maximize your chances for a big payday, courtesy of the U.S. Government.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Daniel J. Hurson is former Assistant Chief Litigation Counsel at the SEC and a former federal prosecutor. He practices securities enforcement and white collar defense law in his own firm in Washington D.C. His email is firstname.lastname@example.org. His website is http://www.hursonlaw.com
- New SEC Whistleblower Rules Fall Short Harvard Law School Forum, December 12, 2010
- Labor & Employment Alert: New Whistleblower Incentives and Protections in the Dodd-Frank Act Jones, Day, August 20, 2010
GAO report on the DOL whistleblower protection program
- Source: Whistleblower Protection - Sustained Management Attention Needed to Address Long-standing Program Weaknesses, GAO, August, 2010
- Congressional Requesters
Workers who “blow the whistle” on prohibited or unlawful practices that they discover during their employment can play an important role in the enforcement of federal laws. However, these whistleblowers may also risk reprisals from their employers, sometimes being demoted, reassigned, or fired.
Federal laws establish whistleblower protection processes, whereby workers who believe that they have faced retaliation for blowing the whistle can report their allegations to the appropriate federal agency, which then determines the merit of their claims. The Whistleblower Protection Program at the Department of Labor’s (Labor) Occupational Safety and Health Administration (OSHA) is responsible for receiving and investigating most whistleblower complaints filed by nonfederal workers.
For over 20 years, we have reported that OSHA has focused too little attention on the whistleblower program.1 Most recently, in January 2009, we reported that OSHA has struggled to provide investigators with the skills and resources they need to do their jobs, and has not developed adequate internal controls to ensure that criteria and standards for investigating complaints are consistently followed across its regions.
At that time, we recommended that OSHA take several actions, including ensuring that investigators have necessary equipment and enhancing its audit program to provide for independence and accountability.
In this context, you asked us to update our review of the program and report on OSHA’s efforts to make improvements, including implementing our recommendations. We addressed the following research questions:
- What steps have been taken to ensure that whistleblower investigators have the necessary training and equipment to do their jobs?
- To what extent does the whistleblower program have adequate internal controls to ensure effective and efficient investigations?
On June 15, 2010, we briefed your staff on the results of our analysis. This report formally conveys the information provided during this briefing (see app. I for the briefing slides and attachments).
In summary, we found that OSHA has done little to ensure that investigators have the necessary training and equipment to do their jobs, and that it lacks sufficient internal controls to ensure that the whistleblower program operates as intended.
More specifically, we found the following:
- OSHA enhanced its whistleblower training, establishing two mandatory 2-week courses between 2007 and 2008, but has not ensured attendance or taken steps to ensure that investigators have necessary equipment to do their jobs. Nearly all investigators have been credited with taking the first mandatory course, but just over 60 percent has taken or registered for the second mandatory course.
Additional training on specific, complex statutes has not been developed because of resource constraints, according to OSHA officials. Our last review found that many investigators lacked basic equipment, such as portable printers, to do their jobs. OSHA officials have not implemented our prior recommendation to establish minimum equipment and software standards, citing resource constraints.
- OSHA lacks sufficient internal controls to ensure that the whistleblower program operates as intended due to several factors, including inconsistent program operations, inadequate tracking of program expenses, and insufficient performance monitoring. Program operations vary by region in significant ways, as exemplified by differing standards used to screen out complaints, and by some regions not having formally trained supervisors who approve investigation decisions.
The whistleblower program’s national office lacks mechanisms, such as access to accurate data and actual case files, to monitor compliance with policies and procedures. Although each region operates within a budget allocation for personnel slots (also known as full-time equivalents or FTEs) and other expenses, they have wide latitude in how they deploy resources across programs, in part because they do not report whistleblower expenses separately from other programs.
- Finally, OSHA has not made assessing program performance a priority, as evidenced by the lack of program-specific goals or measures in key performance documents.
Investor Protection Act draft
- Source: Investor Protection Act draft House Financial Services Committee, October 1, 2009
Whistleblower Bounties. A whistleblower bounty program will create incentives to identify wrongdoing in our securities markets and reward individuals whose tips lead to successful enforcement actions. With a bounty program, we will effectively have more cops on the beat in our securities markets.
Davis Polk summary of the legislation
- Source: Investor Protection Act of 2009 Davis Polk Client Newsflash, July 13, 2009
The Act would allow the SEC, in any action in which it levies sanctions in excess of $1,000,000, to compensate whistleblowers with up to 30% of the amount of the sanctions. Within these parameters, the amounts paid to whistleblowers under the Act would be within the sole discretion of the SEC and not subject to judicial review. This would greatly expand the SEC’s current authority under the Exchange Act, which caps such compensation at 10% of collected penalties, and restricts it to the insider trading context. The Act would also establish an Investor Protection Fund, intended to grow to a maximum of $100,000,000 through revenues from certain sanctions, to pay awards to whistleblowers and to fund investor education initiatives.
Lehman's whistleblower's letter to management
- Source: The Lehman Whistleblower’s Letter Wall Street Journal, March 19, 2010
In May 2008, former Lehman Senior Vice President Matthew Lee wrote a letter to senior management warning that the New York securities firm may have been masking the true risks on its balance sheet. A month later, he had been ousted.
His warning was revealed for the first time in a report by a U.S. bankruptcy-court examiner and showed that Lehman’s auditors knew of potential accounting irregularities and allegedly failed to raise the issue with Lehman’s board. Here is the letter that placed the little-known Lehman executive at the center of allegations that Lehman manipulated its numbers and misled investors.
MATTHEW LEE. May 18, 2008, PERSONAL AND CONFIDENTIAL, BY HAND
- Mr. Martin Kelly, Controller
- Mr. Gerard Reilly, Head of Capital Markets Product Control
- Ms. Erin Callan, Chief Financial Officer
- Mr. Christopher O’Meara, Chief Risk Officer
- Lehman Brothers Holdings, Inc. and subsidiaries
- 745 7th Avenue
- New York, N.Y. 10019
Gentlemen and Madam:
I have been employed by Lehman Brothers Holdings, Inc. and subsidiaries (the “Firm”) since May 1994, currently in the position of Senior Vice President in charge of the Firm’s consolidated and unconsolidated balance sheets of over one thousand legal entities worldwide. During my tenure with the Firm I have been a loyal and dedicated employee and always have acted in the Firm’s best interests.
I have become aware of certain conduct and practices, however, that I feel compelled to bring to your attention, as required by the Firm’s Code of Ethics, as Amended February 17, 2004 (the “Code”) and which requires me, as a Firm employee, to bring to the attention of management conduct and actions on the part of the Firm that I consider to possibly constitute unethical or unlawful conduct. I therefore bring the following to your attention, as required by the Code, “to help maintain a culture of honesty and accountability”. (Code, first paragraph).
The second to last section of the Code is captioned “FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE DISCLOSURE”. That section provides, in relevant part, as follows:
“It is crucial that all books of account, financial statements and records of the Firm reflect the underlying transactions and any disposition of assets in a full, fair, accurate and timely manner. All employees…must endeavor to ensure that information in documents that Lehman Brothers files with or submits to the SEC, or otherwise disclosed to the public, is presented in a full, fair, accurate, timely and understandable manner. Additionally, each individual involved in the preparation of the Firm’s financial statements must prepare those statements in accordance with Generally Accepted Accounting Principles, consistently applied, and any other applicable accounting standards and rules so that the financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of the Firm.
Furthermore, it is critically important that financial statements and related disclosures be free of material errors. Employees and directors are prohibited from knowingly making or causing others to make a materially misleading, incomplete or false statement to an accountant or an attorney in connection with an audit or any filing with any governmental or regulatory entity. In that connection, no individual, or any person acting under his or her direction, shall directly or indirectly take any action to coerce, manipulate, mislead or fraudulently influence any of the Firm’s internal auditors or independent auditors if he or she knows (or should know) that his or her actions, if successful, could result in rendering the Firm’s financial statements materially misleading”
In the course of performing my duties for the Firm, I have reason to believe that certain conduct on the part of senior management of the Firm may be in violation of the Code. The following is a summary of the conduct I believe may violate the Code and which I feel compelled, by the terms of the Code, to bring to your attention.
1. Senior Firm management manages its balance sheet assets on a daily basis. On the last day of each month, the books and records of the Firm contain approximately five (5) billion dollars of net assets in excess of what is managed on the last day of the month. I believe this pattern indicates that the Firm’s senior management is not in sufficient control of its assets to be able to establish that its financial statements are presented to the public and governmental agencies in a “full, fair accurate and timely manner”. In my opinion, respectfully submitted, I believe the result is that at the end of each month, there could be approximately five (5) billion dollars of assets subject to a potential write-off. I believe it will take a significant investment of personnel and better control systems to adequately identify and quantify these discrepancies but, at the minimum, I believe the manner in which the Firm is reporting these assets is potentially misleading to the public and various governmental agencies. If so, I believe the Firm may be in violation of the Code.
2. The Firm has an established practice of substantiating each balance sheet account for each of its worldwide legal entities on a quarterly basis. While substantiation is somewhat subjective, it appears to me that the Code as well as Generally Accepted Accounting Principles require the Firm to support the net dollar amount in an account balance in a meaningful way supporting the Firm’s stated policy of “full, fair, accurate and timely manner” valuation. The Firm has tens of billions of dollars of unsubstantiated balances, which may or may not be “bad” or non-performing assets or real liabilities. In any event, the Firm’s senior management may not be in a position to know whether all of these accounts are, in fact, described in a “full, fair, accurate and timely” manner, as required by the Code. I believe the Firm needs to make an additional investment in personnel and systems to adequately address this fundamental flaw.
3. The Firm has tens of billions of dollar of inventory that it probably cannot buy or sell in any recognized market, at the currently recorded current market values, particularly when dealing in assets of this nature in the volume and size as the positions the Firm holds. I do not believe the manner in which the Firm values that inventory is fully realistic or reasonable, and ignores the concentration in these assets and their volume size given the current state of the market’s overall liquidity.
4. I do not believe the Firm has invested sufficiently in the required and reasonably necessary financial systems and personnel to cope with this increased balance sheet, specifically in light of the increased number of accounts, dollar equivalent balances and global entities, which have been created by or absorbed within the Firm as a result of the Firm’s rapid growth since the Firm became a publicly traded company in 1994.
5. Based upon my experience and the years I have worked for the Firm, I do not believe there is sufficient knowledgeable management in place in the Mumbai, India Finance functions and department. There is a very real possibility of a potential misstatement of material facts being efficiently distributed by that office.
6. Finally, based upon my personal observations over the past years, certain senior level internal audit personnel do not have the professional expertise to properly exercise the audit functions they are entrusted to manage, all of which have become increasingly complex as the Firm has undergone rapid growth in the international marketplace.
I provide these observations to you with the knowledge that all of us at the Firm are entrusted to observe and respect the Code. I would be happy to discuss any details regarding the foregoing with senior management but I felt compelled, both morally and legally, to bring these issues to your attention. These are, indeed, turbulent times in the economic world and demand, more than ever, our adherence and respect of the Code so that the Firm may continue to enjoy the investing public’s trust and confidence in us.
Very truly yours, MATTHEW LEE, cc: Erwin J. Shustak, Esq
Ernst & Young defends Lehman whistle-blower treatment
- Source: An Ernst & Young Response: Dear Audit Committee Member re: The Auditors, March 21, 2010
Handling of the Whistleblower’s Issues
The media has inaccurately reported that EY concealed a May 2008 whistleblower letter from Lehman’s Audit Committee. The whistleblower letter, which raised various significant potential concerns about Lehman’s financial controls and reporting /but did not mention Repo 105/, was directed to Lehman’s management. When we learned of the letter, our lead partner promptly called the Audit Committee Chair; we also insisted that Lehman’s management inform the Securities and Exchange Commission and the Federal Reserve Bank of the letter. EY’s lead partner discussed the whistleblower letter with the Lehman Audit Committee on at least three occasions during June and July 2008.
In the investigations that ensued, the writer of the letter did briefly reference Repo 105 transactions in an interview with EY partners. He also confirmed to EY that he was unaware of any material financial reporting errors. Lehman’s senior executives did not advise us of any reservations they had about the company’s Repo 105 transactions.
Lehman’s September 2008 bankruptcy prevented EY from completing its assessment of the whistleblower’s allegations. The allegations would have been the subject of significant attention had EY completed its third quarter review and 2008 year-end audit.
Should any of the potential claims be pursued, we are confident we will prevail.
Feds dismal record of action on whistleblower allegations
- Source: Feds dismiss post-Enron tips of fraud By Michael Hudson, Center for Public Integrity, 07/22/10
Whistleblower protections passed after the Enron accounting scandal have been largely gutted by the federal bureaucracy responsible for protecting employees who try to expose corporate fraud, according to worker advocates and a senior lawmaker who helped write the provisions.
Since Congress passed the landmark Sarbanes-Oxley corporate reform law in 2002, the U.S. Department of Labor has upheld 25 whistleblower claims under the law — and tossed out 1,066 claims, according to figures available through June 30. That translates into a winning percentage of a little more than 2 percent for workers seeking whistleblower status.
Corporate defense attorneys argue that employees rarely win so-called “Sarbox” claims inside the Labor Department because their complaints are weak or involve “garden-variety” workplace disagreements. But Assistant Secretary of Labor David Michaels told the Center for Public Integrity that he has ordered a “top-to-bottom” review of the Labor Department’s handling of Sarbox cases, as well as least 15 other whistleblower statutes that the department oversees.
“I’m concerned with the statistics that I’ve seen,” Michaels said. “The question is: Are we doing all that we should be doing for whistleblowers? I don’t think we are.”
Michaels noted that few employees on Wall Street or in the mortgage industry came forward to report the questionable conduct that helped fuel the 2007-2008 financial meltdown. If workers felt comfortable identifying problems to employers and authorities, he said, “we might have avoided some of the very significant crises that this country has experienced.”
The sweeping financial reform law signed by President Obama on Wednesday includes substantial cash rewards for whistleblowers who expose securities violations and expands the number of employees covered by Sarbox protections.
Some labor attorneys say there are already signs that Obama administration appointees will be more aggressive in protecting whistleblowers than were their Bush-era counterparts. But they worry that the Labor Department lacks sufficient staff and resources to investigate whistleblower cases.
In the nine months ending June 30, the Labor Department upheld four Sarbox whistleblower claims and rejected 87. That’s a better winning percentage than in previous years — the agency upheld zero claims in fiscal 2006, 2007 and 2008 — but it still represents a lopsided margin for employers.
When the Sarbanes-Oxley Act was enacted, it raised hopes that whistleblowers would more freely come forward with information that would help head off future corporate scandals. The law decrees that publicly traded companies can’t discharge, demote or harass employees who report violations of securities rules or fraud against shareholders. It gives the Labor Department the power to order employers to swiftly reinstate whistleblowers with back pay.
Now Democratic Sen. Patrick Leahy of Vermont, co-author of the Sarbox whistleblower provisions, says he is concerned that the law has “resulted in very little actual protection for the men and women who risk their careers to step forward.” In a written statement to the Center, Leahy said, “When just over 2 percent of the cases brought to the Department of Labor are found in favor of the whistleblower, something is not working in the system.”
Sen. Chuck Grassley (R-Iowa), a longtime advocate for whistleblower protections, is also disappointed.
“The whistleblower provisions in the Sarbanes-Oxley law were intended as a safety valve to protect the public, shareholders and Americans’ confidence in the marketplace,” he said in a statement. “The Department of Labor’s dismal record for the whistleblowers who have come forward is of obvious concern and appears to fly in the face of the purpose of the protections in the law. I will continue to work with Senator Leahy to ensure that the Labor Department’s interpretation of the law matches our intent.”
OSHA Responsible for Sarbox Claims
Investigations of Sarbanes-Oxley whistleblower claims are handled by the Labor Department’s Occupational Safety and Health Administration, an agency whose primary responsibility is policing worker safety.
In addition to the 1,066 Sarbox claims that OSHA has dismissed and the 25 cases in which it found merit in workers’ claims, OSHA has overseen 230 Sarbox settlements between employees and employers.
Daniel Westman, a corporate attorney and lead author of the book Whistleblowing: The Law of Retaliatory Discharge, said many Sarbox claims have reflected “a misunderstanding of the statute or attempts to stretch it in ways that were not intended.” In one early example cited by defense attorneys, an employee filed a Sarbox claim alleging that she had been fired for complaining about a ventilation hazard in her workplace. A Department of Labor administrative law judge dismissed her claim because it “had nothing to do with fraud or the protection of investors.”
Workers’ attorneys contend, though, that many legitimate Sarbox claims have been dismissed by the agency.
In one example, OSHA ruled that North Carolina-based BB&T Corp. had not taken retaliatory action when it fired Amy Stroupe, a fraud investigator who uncovered a massive real estate Ponzi scheme created with the help of $20 million in loans from the bank. Stroupe claimed she was fired because she pushed too hard on the investigation, raising fears among BB&T executives that the bank would be liable not only for the money it had put into the venture but also for more than $100 million in loans made on the project by other banks. In one instance, Stroupe alleged, a bank attorney told her he didn’t want her in a meeting about the case with the FBI agents because “if they ask you a question, you’ll answer it.”
Stroupe appealed OSHA’s judgment, and an administrative law judge ruled that the bank had indeed retaliated against her. The judge wrote that he found it “virtually unfathomable that BB&T would fire an employee as highly regarded as Stroupe, and who had just recently provided invaluable service to BB&T, over one or two essentially minor issues.”
After the judge’s ruling, Stroupe and the bank settled the matter on undisclosed terms. BB&T denied any wrongdoing.
Tom Devine, legal director for the Government Accountability Project, an independent advocacy group, said Sarbox claims did not get the in-depth investigations they deserved from OSHA during the Bush administration. Some Labor Department officials were motivated by an “unabashed hostility to employee rights,” Devine said.
Devine and other worker advocates said that during the Bush years, the agency’s Administrative Review Board, which hears appeals of whistleblower claims and establishes precedents, consistently made rulings that created roadblocks for employees seeking whistleblower protections. OSHA also made things difficult for employees by withholding information about the company’s response or witness interviews, Devine said. “It’s like boxing with a ghost,” he said.
OSHA maintains that those settlements should be counted as findings of merit in favor of whistleblowers. However, attorneys who handle these cases say this isn’t necessarily so; rather than reinstating a fired employee, a settlement might simply involve an agreement to provide the worker with a letter of recommendation, or be a modest “nuisance settlement” paid to avoid the cost of more litigation.
Many corporate attorneys aren’t convinced that an overhaul of the whistleblower program is needed. They say OSHA has done a good job of vetting whistleblower claims by dismissing clearly frivolous complaints, as well as claims over issues that don’t have a real effect on shareholders. For a company that makes hundreds of millions or billions of dollars in revenues, they say, a problem involving a few thousand dollars isn’t likely to have an effect on shareholders. “There are many hurdles to overcome” for employees to win a claim, said Renee Phillips, a New York attorney who defends employers. “But rightly so,” she added, because accusing a company of covering up fraud is a serious charge and should not be dealt with lightly.
Edwin Foulke, who served as assistant Labor secretary from 2006 to 2008, said he disagrees “100 percent” with the notion that the agency didn’t do much to protect workers during the Bush years. “When I was there, I know we were pushing enforcement and making sure that laws were enforced,” Foulke said.
As for the agency’s handling of whistleblower cases, Foulke noted that when workers’ claims are dismissed, they have the right to appeals in front an administrative law judge and the Administrative Review Board. “The system is set up to give whistleblowers an opportunity to have their claims fully reviewed,” he said.
Reform Bill Expands Whistleblower Protection
Workers’ attorneys contend, though, that many legitimate Sarbox claims have been dismissed by the agency.
Michaels, the assistant Labor secretary, told the Center for Public Integrity that the department had recently decided that it will soon begin providing workers with copies of their employers’ responses in all whistleblower cases. He added that OSHA is also in the process of hiring 25 more investigators, bringing to 93 the number dedicated exclusively to handling whistleblower claims.
One area of controversy may be cleared up by the financial reform legislation just signed into law by President Obama.
The bill would make it clear that employees of privately held subsidiaries of publicly traded companies are covered by Sarbox whistleblower provisions. Rulings by the Department of Labor and administrative law judges had made it difficult for employees of privately owned subsidiaries of public companies to seek protection.
Richard Moberly, an associate professor of law at the University of Nebraska who has studied Sarbanes-Oxley’s whistleblower provisions, notes that since the 2008 elections Congress has focused attention on defending employees who try to report fraud, writing whistleblower safeguards into the banking bailout and other legislation. But Moberly noted that “how those legal protections get applied is where the rubber hits the road.”
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