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Whistleblower Protection under the SEC Whistleblower Program

  
  
  
  

whistleblower protectionIn our web site, we established the types of anti-retaliatory protections offered employees under the SEC Whistleblower Program. A question constantly heard is how does an employee optimize or receive the full benefit of these protections?

Here are some of the specific rules proposed by the SEC on qualifying whistleblowers seeking protection and/or a reward.

Potential vs. Proven Securities Fraud

The SEC Whistleblower Program protects employees who report “potential” corporate misconduct. But it's imperative to understand that “potential” does not mean “proven," “actual,” “provable," or even “interesting–to-the-SEC”. Should an employee need to invoke the protections afforded to him or her, he or she will not need to prove that underlying misconduct occurred.  That person only needs to prove that she reported the misconduct using the appropriate forms to the SEC.   

Accrues to employee upon submission to SEC

The anti-retaliatory protections of the SEC Whistleblower Program accrue to an employee when that employee reports information to the SEC. It is not relevant where the SEC is in its investigation or whether the SEC intends to investigate the matter at all. Again, it is the proper reporting of potential corporate misconduct that triggers the whistleblower protections, not the investigation the report may or may not generate.

Qualifying for protection verses qualifying for a reward

Much of the statute creating the SEC Whistleblower Program and much of the energy the SEC is expending creating qualifications for the program deal with who can be entitled to receive a reward, not who is entitled to protection from retaliation. Certain types of compliance officers and senior executives may not qualify for a reward.  So too some attorneys and auditors may not. The information must be provided voluntarily to receive a reward. This type of analysis deals with who qualifies for a reward, not who qualifies for protection from retaliation.  

While the distinction is still unsettled at this time, it seems clear that a larger group of employees and individuals will qualify for whistleblower protection, even though some of those employees may not qualify for a reward.

Learn more about SEC Whistleblower Qualifications to better understand if you're eligible for whistleblower protection and/or a reward.

SEC Whistleblowers can Help Uncover "Soft Dollar" Practices

  
  
  
  

Hedge Fund WhistleblowerHedge fund operators (politely called “Investment Managers” on Wall Street) can make the plaintiffs’ bar look like expensively dressed social workers. The hedge fund industry is estimated to be a $2.5 trillion industry. Potential hedge fund whistleblowers should know that the SEC and the DOJ are taking real aim at certain practices of the hedge fund industry and Investment Managers including their use of so-called “soft dollars,” and that SEC whistleblower incentives are available should the whistleblower qualify.

What are Soft Dollars?

When hedge funds purchase a stock from a broker, studies indicate that it should cost those hedge funds between 1.25 to 1.65 cents-per-share. Hedge Funds can pay up to 5 cents per share though to the broker. The broker effectively sets aside the difference (sometimes referred to as the spread) between what the actual trade costs and the actual price paid for the benefit of the Investment Manager of the hedge fund.  The Investment Manager of the hedge fund can then direct the broker to use that money to pay third parties or pay other divisions of the broker (referred to as “Third Party”) for services that the Third Party provides to the Investment Manager of the hedge fund.  These monies are what Wall Street calls “Soft Dollars.” Industry watchers estimate that Wall Street generates over $12 billion a year in these Soft Dollars.

Two reasons why Soft Dollars are so valuable to Investment Managers of hedge funds.

  • Investment Managers can offload costs of managing a hedge fund - Hedge funds are traditionally set up as limited liability partnerships.  A hedge fund will contract with an Investment Manger to manage the investments of the hedge fund. Typically, an Investment Manager receives a management fee that is a percentage of fund assets (usually 2%). The Investment Manager also receives a performance fee that is typically a percentage of the profits made based upon hedge fund profits.  Soft Dollars effectively give the Investment Manager the ability to transfer costs from the management fee to the performance fee, which means greater profits to the Investment Manager.
  • Investment Managers can limit disclosure requirements - An Investment Manager to a hedge fund typically must report actual hard dollars spent as part of the Investment Manager’s report to investors.  No such requirement exists for Soft Dollars and under the current laws, Investment Managers of Hedge Funds do not need to disclose the use of Soft Dollars under Section 28 of The Securities Exchange Act of 1934 (as other Wall Street players must).

I have just described a real life scenario where Wall Street operators have near unfettered ability to charge investors billions of dollars and not report how those billions or dollars are in fact spent.  

Abuses?  Come on, man. 

Hedge Fund operations are all quite creative, which leads to many potential illegal uses of Soft Dollars.  

Five travel expense related FCPA violations

  
  
  
  

FCPA business travelHere’s a tip for potential Foreign Corrupt Practices Act whistleblowers: travel expenses clearly fall within FCPA guidelines.

A FCPA whistleblower is often an employee or insider who often times assumes incorrectly that a bribe only constitutes a violation of the FCPA if actual cash changes hands to an elected foreign official.   One common FCPA whistleblower misperception is that a company can always pay for the travel expenses of foreign officials. 

This is simply not true.

The FCPA prohibits the payment of “anything of value” but the statute itself does not define this term.  The DOJ, SEC and courts have given this language a broad definition to include the standard travel expenses associated with a business trip, including entertainment, meals, airfare, gifts, lodging and drinks.  Importantly, there is not a de minimis threshold. 

Here are five red flags for travel related FCPA whistleblower violations.

  • Who arranges for the travel of foreign officials?  Often times a company does not have a central travel department and leaves the travel arrangements to the foreign official himself, or to a third party travel agency.  Such a policy can lead to the company knowingly paying for non-business related travel either before or after the business portion of the trip.  This would potentially violate the FCPA.
  • What guidelines are articulated to employees?  Companies with strong FCPA internal guidelines and enforcement procedures clearly articulate to employees the rules of the road.  Does your company?
  • How are expense reports generated and reviewed?   Companies with strong FCPA internal guidelines may require a more detailed expense report when company personnel are entertaining foreign officials.  Does your company?
  • Does you company pay for family members and spouses of foreign officials?  Clearly doing so may violate the FCPA.  What is your company’s policy?
  • Does you company distinguish between travel to and from US verses among foreign countries?  FCPA violations can occur even if the travel is not to or from the United States.  Does you company handle the payment of travel expenses differently when the trip is between between two foreign countries? 

Understand that it is absolutely legitimate and certainly does not violate the FCPA for a U.S. company to pay for the travel expenses of foreign officials – in their capacity as a customer or potential customer - to travel to meet company personnel, inspect products or company facilities, or even to execute a contract.  But the payment does potentially become a FCPA violation, however, if it is to cover a non-business expense.

Recent SEC insider-trading investigation leads to seizures

  
  
  
  

Loch Capital ManagementLast week, federal officials executed search warrants and seized boxes of information from three well-known hedge funds, Diamondback Capital Management, Level Global Investors and Loch Capital.  Former employees of SAC Capital operate these three “smaller” hedge funds.  The very next day, federal officials subpoenaed two hedge fund titans SAC Capital and Citadel, seeking information about the two funds trading activities.  Federal officials arrested Don Chu as he was preparing to leave the country.  Mr. Chu is an executive with Primary Global Research, which provides deep level due diligence and expert opinion on publically traded companies. 

To cap off the week, federal authorities sent information requests (not subpoenas) to several large mutual funds, including Janus Capital Group Inc. and Wellington Management Co.  It is unclear whether this activity stemmed from a SEC Whistleblower, but certainly the new SEC Whistleblower Program can still play an important role in ferreting out illegal insider activity. 

Time will tell the true nature of the alleged insider trading scheme, if any, but this cascade of activity across the entire web of Wall Street –from large mutual funds to large hedge funds to smaller hedge funds to so-called due diligence firms -- certainly raises one real question:

When does aggressive or creative due diligence equal insider information?

Hedge fund whistleblowers and insiders rely on a lucrative cottage industry known on Wall Street as the “expert network." Hedge Funds, mutual funds and investment banks pay large sums of monies to private companies that purport to link investors with due diligence, unique research and experts in a range of sectors, countries and thousands of individual companies. The detailed information they provide on product development, sales numbers and internal company strategy can be important research for any investor.  The largest “expert” firms are Gerson Lehrman Group Inc. and Guidepoint Global LLC, neither of whom was named in this investigation.   

“Expert” companies can be quite proctorial.  As part of their research, expert companies contact customers, suppliers, former employees and at times even current employees of a public company under investigation.   “Expert” companies retain recently retired executives to opinion upon the industry and company that executive just left.  “Expert” companies are paid to be aggressive and to bring to their clients unique, tradable information.

So when then does this activity cross the line to become illegal insider information? 

The SEC certainly believes that Mr. Chu, working for the “expert firm” Primary Global Research, crossed the line.  The SEC alleges in the criminal complaint against Mr. Chu that his collection of “experts and consultants” were in fact employees of large publically traded companies and that his “experts and consultants” were in fact providing insider information about the companies at which each was employed.   

Time will tell if other “expert” firms have crossed the line as well. 

Clarifying the Whistleblower Program's Anti-Retaliatory Provisions

  
  
  
  

sarbanes oxley3This fall, the SEC submitted for public comment its first draft of rules for the interpretation and enforcement of the whistleblower provisions of the Dodd-Frank Financial Reform Act.  The SEC took great pains to clarify the full scope of the protection now afforded employees when they report facts that may give rise to securities fraud or corporate bribery.

The primary statutory protections are anti-retaliatory provisions for employees who report to the SEC, and the specific creation of a private cause of action against the employer. The SEC whistleblower protection provision prohibits employers from discharging, demoting, suspending, threatening, harassing or otherwise discriminating against a whistleblower in the terms and conditions of employment. Any lawful act by the whistleblower either in reporting, or participating in the investigation or prosecution of violations of the securities laws, including disclosures that are protected under the Sarbanes-Oxley Act of 2002 (SOX). 

The relief specifically laid out in the statute includes reinstatement, double back pay with interest, compensation for litigation costs, expert witness fees and reasonable attorneys' fees.

SEC rules extend protection to “potential” violations of law.

A natural question for an employee after reading the above paragraph is, “am I still protected if I report to the SEC and the SEC decides not to proceed with an enforcement action based upon the information I submit?  The short answer is “yes." The SEC specifically addressed this issue and stated:

 “[use] of the term “potential violation” makes clear that the whistleblower anti-retaliation protections set forth in Section 21F(h)(1) of the Exchange Act do not depend on an ultimate adjudication, finding or conclusion that conduct identified by the whistleblower constituted a violation of the securities laws.  As noted in the Senate Report accompanying the legislation, “[t]he Whistleblower Program aims to motivate those with inside knowledge to come forward and assist the Government;”5 affording broad anti-retaliation protections to whistleblowers furthers this legislative purpose. “

Additionally, the SEC is developing a set of procedural requirements a whistleblower must go through to be deemed a “whistleblower” and then entitled to a whistleblower reward.

“We believe the statute extends the protections against employment retaliation in Section 21F(h)(1) to any individual who provides information to the Commission about potential violations of the securities laws regardless of whether the whistleblower fails to satisfy all of the requirements for award consideration set forth in the Commission’s rules.”

These rules apply only to the ability for a person to earn a cash reward but that a person is still entitled to the protections afforded them by the SEC Whistleblower Program regardless of whether the whistleblower followed the right procedures.

Department of Justice and Foreign Corrupt Practices Act Settlements

  
  
  
  

Department of Justice SettlementsFor years a battle cry for United States-based companies went something like this:  

Bribery is wrong. But if you enforce anti-bribery laws against U.S. companies then those companies simply cannot effectively compete with foreign companies, which are immune from prosecution under U.S. anti-bribery laws. 

While always a bit unsavory, it is now flat-out untrue.

Today, eight of the top 10 Foreign Corrupt Practices Act (FCPA) whistleblower settlements involve foreign companies. The Department of Justice (DOJ) has even-handedly applied the FCPA across all industries and participants.  Indeed, foreign companies now account for eight of the top ten FCPA enforcement settlements.  The below list comes from FCPABlog.com:

  1. Siemens (Germany): $800 million in 2008.
  2. KBR/Halliburton (USA): $579 million in 2009.
  3. BAE (UK): $400 million in 2010.
  4. Snamprogetti Netherlands B.V. ENI S.p.A (Holland/Italy): $365 million in 2010.
  5. Technip S.A. (France): $338 million in 2010.
  6. Daimler AG (Germany): $185 million in 2010.
  7. Panalpina (Switzerland): $81.8 million in 2010.
  8. ABB Ltd(Switzerland): $58.3 million in 2010.
  9. Pride (USA): $56.1 million in 2010.
  10. Shell (UK/Holland): $48.1 million in 2010.

Because FCPA whistleblower laws now apply to non-issuer foreign companies, it is wrong to assume that a foreign company can avoid liability under the FCPA because that foreign company does not issue securities that must be registered with the SEC. 

Panalpina World Transport Ltd. (PWT) is a Swiss shipping and freight logistics company.  It does not have to register its securities with the SEC.  It does have a wholly owned United States subsidiary called Panalpina Inc. (number seven on the above list), which is incorporated in New York and has a principle place of business in New Jersey.  According to the DOJ’s FCPA complant against Panalpina Inc, the company was a domestic concern and subject to FCPA

This DOJ enforcement action reiterates a basic premise behind the FCPA; namely that if a business has sufficient ties to the United States, that business is subject to the anti-bribery provisions of the FCPA.

Five tips for reporting fraud through internal corporate channels

  
  
  
  

whistleblower protection“Why didn’t you say something to HR or your boss?”  If you’re blowing the whistle on your company for fraud, expect to hear that question asked, including your whistleblower lawyer.

If your employer has a meaningful corporate whistleblower policy that offers true protection to you, reporting what you know through this internal whistleblower protection channel may be your best option, but it’s important to know how credible the program is before running the risk of fracturing a relationship with your company. 

Here are five tips (neither conclusive nor exhaustive) to consider when reporting fraud through internal corporate channels:

  1. Are the internal corporate whistleblower protection policies formally memorialized in your employment manual and policies and does the corporation specifically state in writing that you cannot be harassed, demoted, mistreated or terminated if you report facts that may amount to corporate misconduct?  No wiggle words.  No legalizes.  
  2. Does the human resources department run the internal corporate whistleblower program?  If so, I would be concerned.  With apologizes to the many great HR executives out there, HR reports to management and that management may have a vested interest in the misconduct.  In a large corporation, the HR executive operating in a subsidiary or a remote location is often times hired by the manager running the subsidiary or off-site location.  That HR executive reports to that manager.  The solid corporate whistleblower programs that I have seen are independent of HR and report to either a specific executive tasked with investigating fraud or even a committee of the Board of Directors. 
  3. Are there examples of fellow employees successfully using the corporate whistleblower program?  If so then this may be a good indication of its value.
  4. How actively does the corporation promote its whistleblower policies to the employees?  Active, open communication of the program may be a strong sign of that program’s effectiveness.
  5. What assurances do your have that your name will remain anonymous?  Anonymity is the only way to practically avoid backdoor mistreatment.

In short, you need to consider how meaningful the corporate whistleblower protection policy is at your office. Is the program viable, or does it amount to a “suggestion box” located near the men’s room? 

SEC Whistleblower Program simplifies FCPA enforcement

  
  
  
  

sec whistleblower programThe Foreign Corrupt Practices Act prohibits making bribes to foreign government officials. Sounds straightforward, right?  Not so.

The FCPA has been around since 1977, and while the Department of Justice (DOJ) has had recent well-publicized enforcement actions under the FCRA, it is frankly a complicated and difficult matter to successfully tackle corporate bribery.   Witnesses are hard to find and often outside the subpoena power of the DOJ, and documents can be spread out in many foreign countries.  Corporations are great at covering their tracks, setting up subsidiaries, hiring foreign agents, using creative accounting techniques and otherwise disguising bribes.  Seasoned prosecutors have often said the key to successfully pursing a FCPA case is getting solid, insider information early in the prosecution.

The SEC Whistleblower Program:  Enter stage right.

The beauty of the whistleblower provisions of the Dodd-Frank Wall Street Reform Act is its simplicity. This type of beauty is rare in federal law. At its core, an employee can report corporate bribery to the SEC. Based upon this whistleblower report, the SEC can now issue a subpoena to the corporate entity asking for records to further prove or disprove the whistleblower claim. Of course, the employee is incentivized to provide detailed, important information as the quantity of the whistleblower reward depends on the quality of the information he provides to the SEC. 

In sum, it is the exact tool prosecutors have been asking for over the last 35 years.  Now, the SEC can cut right to the chase; it can subpoena relevant documents only and not subject itself to massive document reviews.  It can surgically depose company witnesses.  It can immediately focus on the critical accounting entries and practices of a company.   The SEC Whistleblower Program gives real bite to the FCPA. 

This simplicity troubles large corporations.

Corporate minions (lobbyists and large law firms) are now actively seeking to reinsert complexity and confusion back into anti-bribery cases.   

Here is a collection of recent arguments and proposals made by these groups, both in public position papers and directly to the SEC, many of which are advocated by the U.S. Chamber Institute for Legal Reform’s “Restoring Balance: Proposed Amendments to the Foreign Corrupt Practices Act”:

  • Most bribes occur outside the United States, so no big deal. 
  • Compliance with the FCPA makes US companies less competitive.
  • Whistleblowers should not be allowed to obtain follow up documents from a corporation once the original whistleblower submission is made. 
  • High level employees or employees with sensitive information should be excluded from reporting.
  • SEC should not rely on privileged or confidential documents.
  • Whistleblowers must first report bribery to corporation before reporting bribery to the SEC.

Let’s hope that the SEC, when developing rules and procedures to enforce the SEC Whistleblower Program does not dilute the simplicity and inherent power of the law.

Practical Whistleblower Protection Tips for Current Employees

  
  
  
  

Whistleblower Protection TipsSometimes it is too easy for lawyers and commentators to opine about the law and avoid the real life implications of those laws as applied to individuals.  This is especially true for whistleblower protection laws when the potential whistleblower is a current employee of a corporation committing fraud.  Lets say for example, you work for a corporation and become aware of facts that may amount to securities fraud or corporate misconduct.  While a whistleblower lawyer may say, “wow this is a great case,” you are probably asking more real life questions such as “will I get fired?” Or, “will my kids lose their health insurance?”  Put simply, these questions can be summarized into one overarching question, “what protections do I and my family have if I do the right thing?”

This blog article cannot completely answer that question. In fact no web article can.  The answer depends on many variables, including, the laws of the state in which you reside, the nature of the misconduct, your employers internal reaction when you come forward and how fast you react when you learn of the facts underlying this misconduct.

Here are three practical tips to consider if you find yourself in this situation:

Assemble documents in real time

Unless you are a direct descendant of Mark Twain, the simple fact is that documents tell a better story than you.  Documents can add the right context to your words and facilitate believability and keep you out of the ”he said/she said” morass.  Print out and keep e-mail chains. Retain draft documents, memos and notes from meetings.  Consider keeping a contemporaneous work journal.  

You should also consider keeping these documents in a place so that if you are ever terminated and escorted from your office (this does happen), you still have possession of these documents. Just be sure that you do not violate corporate confidentiality provisions.

Use care when reporting fraud through internal corporate channels

“Why didn’t you say something to HR or your boss?”  Expect that question to come up from some of your peers.  Quite frankly it is a fair question to ask.  If your employer has a meaningful corporate whistleblower policy that offers true protection to you, reporting what you know through this internal whistleblower channel may be your best option.

Is the corporate whistleblower program disclosed in an employee manual? Does your company aggressively communicate details of the program to all employees? Can you point to past examples of the program working successfully?  Those are just a few of the things to take heed of when considering reporting fraud internally.  

If you shoot, shoot to kill

This statement is true in whistleblower law, employment law and deer hunting. Do not be a water cooler complainer.  Do not use any information you have in an attempt to leverage something from your direct boss.  If you have facts of corporate misconduct, and you decide to report your facts and concerns, do so objectively and completely. 

Do not try to hide the involvement of someone you like.  Do not try to lay the blame on someone you dislike.  Report the facts.

SEC Whistleblower Program and Mortgage Industry Foreclosure Fraud

  
  
  
  


Ohio’s Attorney General has sued GMAC Mortgage and its parent Ally Financial Inc. alleging that GMAC, acting as a mortgage servicer, filed fraudulent documents during court proceedings in which GMAC was foreclosing on homes in Ohio.  Apparently a GMAC employee testified that he signed thousands of affidavits in foreclosure cases without verifying the content of the affidavit.  The Ohio AG is asking the court to grant an injunction preventing GMAC from proceeding to foreclosure in any pending Ohio case.

So what? 
On the chalkboard, a foreclosure is a straightforward legal proceeding and forging or committing some type of fraud is sort of like looking at the test of a buddy sitting next to you in school during an open book quiz.  Generally, an employee of a mortgage servicer prints out a fill-in-the-blank form affidavit.  The employee checks his computer system to determine the unpaid amount owed by the borrower.   The affidavit has boilerplate language in which the employee avers that the mortgage servicer has reviewed a true and correct copy of the mortgage and note.  Often times then the employee of the mortgage servicer attaches these three documents as exhibits to the foreclosure affidavit.   (I know this is an oversimplification.)

What if the mortgage servicer does not have the file?
Now it starts to get interesting.  Proving nonpayment is simply reviewing a computer screen from the mortgage servicer’s internal computer system.  Two minutes and done.    What about the mortgage?  Worst-case scenario is that the employee can get that from the appropriate real estate records office, which today is often a computer click away.  Done.  Now the fun part – the note itself.  The mortgage servicer may not have it!     

Where is the note?
I have no idea.  Apparently, GMAC may not either.  Keep in mind that the note may have past hands four to six times already or should I say the economic interest in the note has changed hands.  The originator of the loan may be defunct.  (Think Option One and New Century.)   The current owner may be one of those fancy Wall Street Asset backed trusts, which certainly does not have an office or warehouse.  Apparently it is easier to diagram the flow of the economic interest of the note holder (and when necessary park those economic interests off-balance sheet) than it is to keep tract of the physical note itself.   

Earning a SEC Whistleblower Reward.
If it is true then that mortgage companies and mortgage servicers are foreclosing on a large scale on homes without the proper paperwork but averring to the court that they do have the right paperwork, potentially these actions can amount to securities fraud.   Employees of these mortgage companies can report this misconduct to the SEC and/or a whistleblower lawyer, and potentially receive a cash reward under the new SEC Whistleblower Program.

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