Whistleblower Protection Blog : Whistleblower Lawyer & Attorney : National Whistleblower Legal Defense and Education Fund : Whistleblower Protection, Fraud Claims : Washington DC

Notice No.	Action	Notice Date	Claim Due Date
2013-39	SEC v. A Chicago Convention Center, LLC, Anshoo R. Sethi, and Intercontinental Regional Center Trust of Chicago, LLC Case number: 13-cv-00982 (United States District Court for the Northern District of Illinois) Case filed: February 6, 2013 Qualifying Judgment/Order: April 19, 2013	4/23/2013	7/22/2013
2013-38	SEC v. Big Apple Consulting USA, Inc., MJMM Investments, LLC, Marc Jablon, Matthew Maguire, Mark C. Kaley, and Keith Jablon Case number: 09-cv-1963 (United States District Court for the Middle District of Florida) Case filed: November 18, 2009 Qualifying Judgment/Order: March 29, 2013	4/15/2013	7/15/2013
2013-37	SEC v. 3 Eagles Research & Development LLC, Harry Dean Proudfoot III, Matthew Dale Proudfoot, Laurie Anne Vrvilo and Dennis Ashley Bukantis Case number: 12-cv-01289 (United States District Court for the District of Oregon) Case filed: July 17, 2012 Qualifying Judgment/Order: March 19, 2013	4/15/2013	7/15/2013
2013-36	In the Matter of Banco Comercial Português, S.A. Administrative Proceeding File No.: 3-15248 Case filed: March 18, 2013 Qualifying Judgment/Order: March 18, 2013	4/15/2013	7/15/2013
2013-35	SEC v. Verde Retirement LLC, a California limited liability company, Verde FX Nevada, LLC, a California limited liability company, Covenant Capital Partners, a California corporation, and Steven L. Hamilton Case number: 12-cv-0445 (United States District Court for the Southern District of California) Case filed: February 21, 2012 Qualifying Judgment/Order: March 28, 2013	4/15/2013	7/15/2013
2013-34	SEC v. City Capital Corporation, Ephren W. Taylor, II, and Wendy Jean Connor Case number: 12-cv-1249 (United States District Court for the Northern District of Georgia) Case filed: April 12, 2012 Qualifying Judgment/Order: March 7, 2013	4/15/2013	7/15/2013
2013-33	SEC v. Derek A. Nelson, Capital Mountain Holding Corp., Systems XXI, Act I, LLC, and Systems XXI, Act II, LLC Case number: 09-cv-2222 (United States District Court of the Northern District of Texas) Case filed: November 20, 2009 Qualifying Judgment/Order: March 6, 2013	4/15/2013	7/15/2013
2013-32	SEC v. Bridge Premium Finance, LLC (f/k/a Berjac of Colorado, LLC), Michael J. Turnock, and William P. Sullivan, II Case number: 12-cv-2131 (United States District Court for the District of Colorado) Case filed: August 14, 2012 Qualifying Judgment/Order: March 11, 2013	4/15/2013	7/15/2013
2013-31	SEC v. K2 Unlimited, Inc., 211 Ventures, LLC, Diane Glatfelter, Robert C. Rice, and Robert S. Anderson Case number: 11-cv-11649 (United States District Court for the District of Massachusetts) Case filed: September 19, 2011 Qualifying Judgment/Order: March 13, 2013	4/15/2013	7/15/2013
2013-30	SEC v. M. Mark McAdams and R. Dane Freeman Case number: 10-cv-00701 (United States District Court for the District of South Carolina) Case filed: March 18, 2010 Qualifying Judgment/Order: March 1, 2013	4/15/2013	7/15/2013
2013-29	SEC v. Oversea Chinese Fund Limited Partnership, Weizhen Tang & Associates, Inc., Weizhen Tang Corp., Winwin Capital Management, LLC, Winwin Capital Limited Partnership, J.O.R. & Associates, LLC, and Weizhen Tang Case number: 09-cv-0614 (United States District Court for the Northern District of Texas) Case filed: April 3, 2009 Qualifying Judgment/Order: October 1, 2012	4/15/2013	7/15/2013
2013-28	SEC v. EFS, LLC, Freedom Fidelity, LLC, James N. Pratt, SP&V, LLC, and Timothy V. Coffin Case number: 06-cv-0793 (United States District Court for the Northern District of Texas) Case filed: May 3, 2006 Qualifying Judgment/Order: October 17, 2012	4/15/2013	7/15/2013
2013-27	SEC v. Merendon Mining (Nevada) Inc, Larry Lee Adair, Milowe Allen Brost a/k/a/ Milow Brost, M.B. Gonne or Phillip K. Collins, Ward K. Capstick, Bradley Dean Regier, Gary Allen Sorenson a/k/a Don Grey Fox, Martin M. Werner, Syndicated Gold Depository Inc, now known as Bahamas Resources Alliance Ltd., Merendon Mining Corp. Ltd., Institute For Financial Learning Group of Companies, Inc. Case number: 10-cv-00955 (United States District Court for the Western District of Washington) Case filed: June 10, 2010 Qualifying Judgment/Order: October 30, 2012	4/15/2013	7/15/2013
2013-26	SEC v. Chetan Kapur and Lilaboc, LLC, d/b/a ThinkStrategy Capital Management, LLC. Case number: 11-cv-8094 (United States District Court for the Southern District of New York) Case filed: November 10, 2011 Qualifying Judgment/Order: November 29, 2012	4/15/2013	7/15/2013

More notices are listed in my previous post. 

3. PwC Survey Shows Increased CCO Independence

According to the 2012 PricewaterhouseCoopers State of Compliance study, the number of CCOs reporting to GCs fell by 6 percent—to 35 percent from 41 percent—in the prior year. CCOs reporting to CEOs held steady at 32 percent. This is momentum in the right direction and is consistent with the 2010 amendments to the Federal Sentencing Guidelines, which favor “direct reporting obligations” to the board or its independent committee. According to Keith Darcy, the ECOA’s executive director, “A clear, unfiltered CCO voice in the C-suite is key to a robust program. Without independence, a CCO is mere window-dressing and false security for the board."

4. Madoff’s Brother and CCO Pleads Guilty to Fraud, Gets 10-Year Sentence

Did you know that Ponzi scheme king Bernie Madoff’s brother Peter was also the firm’s chief compliance officer? Oh yeah, I’m not making that up. He’s in jail now, serving a 10-year sentence. Lack of independence is rarely this obvious, but it is incumbent on boards and management to recognize empowerment and independence issues in all their nuanced appearances. Note to the Securities and Exchange Commission: Please add “the CCO is the CEO’s brother” to your list of red flags. And add “independence” to the list of CCO requirements. Thank you.

5. Joint DOJ/SEC FCPA Resource Guide on Adequate Autonomy for CCO (and Incentives)

The widely anticipated Foreign Corrupt Practices Act Resource Guide, issued jointly by the DOJ and SEC, may not have broken new ground—but for CCOs it validated many best practices already in place in the field (ahem, use of incentives in programs- ahem) and also expressly tracked the language of the 2010 OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance, which noted that the CCO must have “adequate autonomy from management” in order to do the job. The Justice Department has been using this language in individual FCPA settlement agreements since 2010, going beyond the letter of the current Federal Sentencing Guidelines for Organizations.

6. Big Milestones for the C&E Profession

In 2012, the Ethics and Compliance Officer Association, the first industry association for C&E professionals, marked its 20th anniversary—a significant milestone for the profession. Also this year, the Society of Corporate Compliance and Ethics, an industry association that traces its founding to 2002, earned its 3,000th member, making it the largest cross-industry compliance and ethics organization, and its annual meeting attracted over 1,000 attendees for the first time. In addition, the SCCE’s sister organization, the Health Care Compliance Association, passed the 8,000-member mark. These important milestones signal the vitality, increased profile, and continued growth of the rapidly evolving profession.

7. HSBC Settlement Agreement Elevates and Empowers CCO

I would make the DOJ settlement agreement with HSBC (for widespread anti money-laundering violations and failure to maintain any semblance of a compliance program) required 2013 reading for boards, if I had that power. The case is notable for many reasons, but CCOs will recognize all manner of glaring missteps in how the firm positioned and structured its compliance function. HSBC has now “elevated” its CCO by separating compliance from the legal function, adding resources, fixing the line-of-sight, and creating levels of independence. And one more thing I’ve never seen before: the CCO was expressly raised to the level of the top 50 employees of the firm. Now that’s what I call a seat at the table. As SCCE CEO Roy Snell said “The real question is, will industry give independence to the compliance officer before the government mandates independence through regulatory action as they have with auditors.” Time will tell.

8. Enforcers Tally a Record $9 Billion in Corporate Settlement Agreements, Warn Boards and Management

As Joe Warin of Gibson Dunn puts it, the “B word”—corporate settlements levied by federal enforcers with totals in the billions—are almost the “new norm.” The 2012 total of $9 billion dwarfs the previous 2006 high of $3 billion. With 35 NPAs and DPAs in 2012, across a broad spectrum of industries, CCOs have significant new input to add to the existing guidance for compliance programs, many of which include positioning, structure, and resources of the compliance function. As Gibson Dunn advised its clients: “Make no mistake: while not formally labeled as such, DOJ and other regulators appear to be promulgating compliance guidance for various industries through the remedial requirements included in the DPAs and NPAs used to resolve real-world cases.” In 2012, officials made a number of public statements and speeches urging boards and management to “elevate the role of compliance” by supporting their CCOs with “adequate resources, independence, standing, and authority” to be effective. Boards and management should take heed.

9. Greg Smith’s Very Public Goldman Sachs Resignation, General Services Adminstration, et al—It’s the Culture, Stupid

In 2012, organizational culture hit the headlines. Greg Smith wrote about it in his spectacular “take-this-job-and-shove-it” New York Times op-ed (key word: “muppets”). And social media was abuzz over photos of Jeff Neely, the former head of the General Services Administration, in a taxpayer-funded hot tub with two glasses of wine at the ready. And don’t get me started on those wild and crazy Secret Service parties in South America. The 2012 RAND Symposium report also zeroed in on this “missing link” in its examination of compliance programs at a crossroads. Of course this is all preaching to the CCO choir.

10. The Year of the Corporate Whistleblower

By the end of 2012, it was clearly the year of the corporate whistleblower on a number of fronts. False Claims Act recoveries totaled over $9 billion, more than double the previous year, including the largest health care fraud settlement in history—a $3 billion settlement paid by British drug maker GlaxoSmithKline. After a slow start to its 2007 whistleblower program, the Internal Revenue Service also paid out at least two eye-popping bounties, including $104 million to former UBS banker Bradley Birkenfeld. Companies continue to scramble to respond to the new Dodd-Frank whistleblower program, which provides a direct line to the SEC for allegations of fraud, and a potential bounty of 10 to 30 percent for penalties collected over $1 million. With 3,001 whistleblower tips in its first year and its first bounty paid in 2012 (and reportedly many more in the pipeline), the new Dodd-Frank whistleblower program is now officially alive and kicking. With so much at stake, companies that fail to empower their CCOs could pay a steep price.

And there you have it. After the chief compliance officer was named 2011 Person of the Year by former federal prosecutor Michael Volkov, who recognized the CCO as the “unsung hero” of the corporate workplace, CCOs made strides in 2012. And that’s a good thing, with 2013 promising to be no less fraught with peril for the overseer of the company compliance and ethics program. As Machiavelli wrote, “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things."

Donna Boehme is an internationally recognized authority and practitioner in the field of organizational compliance and ethics, designing and managing compliance and ethics solutions within the U.S. and worldwide. As principal of Compliance Strategists LLC, Boehme is the former group compliance and ethics officer for two leading multinationals and currently advises a wide spectrum of private, public, governmental, academic, and nonprofit entities through her NJ-based consulting firm.

UNDENIABLE TRUTH NO. 2

Whistleblower bounty programs help create a level playing field. Without these programs, the deck is always stacked against the mere mortal employee or regulator slaving away in the trenches trying to unravel the facts. The large, well-resourced financial institution holds all the cards (and the data). But the introduction of large financial rewards creates incentives for others, such as plaintiffs law firms (or in some cases, hedge funds investing in a whistleblower case for a percentage of the bounty), to support a whistleblower and thus even the score. Harry Markopolos is, no doubt, well versed in Undeniable Truth No. 2 [PDF].

UNDENIABLE TRUTH NO. 3

Sometimes it takes a thief to catch a thief. Who better to unravel the mysteries of complex business misconduct than a whistleblower steeped in the nuances, tricks, and practices of the fraudulent scheme? Wal-Mart’s alleged massive Mexican bribery scheme, which was splashed across the headlines earlier this year, wasn’t uncovered by a regulator or a compliance officer, but by the ex-Wal-Mart executive who for years was allegedly at the center of the bribery-palooza. See Undeniable Truth No. 1.

Ultimately, all whistleblower bounty cases, whether under the False Claims Act, Dodd-Frank, or IRS programs, are a form of “whistleblower arbitrage.” If companies do not seriously root out misconduct through their internal compliance programs, then someone else probably will. However unpalatable the whistleblower, and however ridiculously large and undeserved the bounty may appear, misconduct left on the table will likely be disclosed for profit. Sometimes a very, very big profit. Time will tell whether that becomes Undeniable Truth No. 4.

Reprinted with permission from the September 20, 2012 edition of Corporate Counsel© 2012 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 or reprints@alm.com or visit www.almreprints.com .

For context, the NWC had submitted the qui tam study to the SEC in December 2010 during the heated debate about the proposed whistleblower rules (which did not require reporters to raise their concerns internally first). At the time, the Chamber of Commerce and a list of big name companies, GE included, had vigorously argued that allowing whistleblowers to go directly to the SEC was a very bad, no good, terrible idea, because of the undermining impact it would have on internal compliance programs.

The alarmists feared that the rules would create an army of mercenary employees, lured by the promise of big bounties, to bypass internal reporting systems. A few commentators (myself included) wrote back then that the “the sky is falling” approach was probably hyperbolic. The SEC did the wise thing and declared that whistleblowers would be protected and potentially rewarded for raising their concerns through any channels – internal or external. And so far, it seems the flood of internal bounty hunters hasn’t exactly materialized. Based upon Mr. McKessy’s comment, it appears that Dodd-Frank whistleblowers actually do try to report internally first. Where it gets interesting is what often happens to them when they do that. 

Enter the case of GE’s former Iraq country head, Khaled Asadi, who in the summer of 2010 reported to his supervisor that GE officials had hired an Iraqi official’s relative (“to curry favor” during an electrical bid process), as a potential FCPA violation. In fact, Mr. Asadi did what the entire Chamber of Commerce posse (and presumably the GE Code of Conduct) wanted him to do - he reported internally. So it’s all good, right? Well, not exactly. Mr. Asadi has filed a retaliation suit against GE, seeking Dodd Frank whistleblower protections, because evidently, GE did not care much for the internal report, thank you very much. Mr. Asadi says that after filing his complaint with the GE ombudsperson, he was “pressured to step down” from a role he held since 2006, given an "extremely negative and troubling performance review," and then fired - all before he even thought to proceed with the next step of reporting to the SEC. 

So what’s the message here? The story is still unfolding but this much I know: it is a cold, cruel, perilous world out there for internal whistleblowers. And my hypocrisy radar is starting to beep. Because after all those loud complaints about Dodd Frank’s direct line to the SEC causing compliance programs across the land to blow up, GE now says Mr. Asadi should not get whistleblower protections because – wait for it – he didn’t file with the SEC. Oh, okay. Looks like that internal reporting thing didn’t turn out so well for Mr. Asadi. 

Here are my takeaways so far, after 7 months of the controversial Dodd Frank whistleblower rules. First, as the NWC contends, most employees still report perceived misconduct internally, driven more by a sense of “outrage” than mercenary dreams of a bounty*. Second, some companies have taken the wrong message from Dodd-Frank. Instead of stepping up their programs to bolster management culture and encourage employees to speak up, they’ve gone the opposite way. They are setting up a siege mentality and waging war on whistleblowers. They have let the litigation defense interests of the General Counsel trump the value to the company (and the corporate culture) of the free flow of information. This course is not only ill-advised and illegal – it’s appallingly bad self-governance. But I’m ever the optimist. As the SEC unveils some of its more high-profile Section 922 cases, I’m hoping more companies will decide to travel the right road. It is time for them to finally fix what’s broken in their culture and encourage, rather than punish, participation in their internal reporting systems.

*But see my column on the BNY Mellon/State Street cases organized by Harry Markopolos here.