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

Yesterday's conviction of Ponzi schemer Allen Stanford generated much news.  Most of the coverage, however, is missing the role of whistleblower Leyla Wydler.  Two weeks ago on Honesty Without Fear, I interviewed Eyal Press about his new book, Beautiful Souls: Saying No, Breaking Ranks, and Heeding the Voice of Conscience in Dark Times. We discussed his chapter about Wydler's resistance to Stanford's pressure to get clients to invest in his scheme.  Eventually, Wydler concluded that it was a Ponzi scheme, and she refused to sell the scheme to her clients.  Stanford fired her. She reported the fraud to the authorities.  The Securities and Exchange Commission (SEC) ignored her warnings.  She could not sue Stanford in court because of a forced arbitration agreement.  The securities arbitrator not only rejected her whistleblower retaliation claim, but also ordered her to repay her $100,000 signing bonus. (Under the 2010 Dodd-Frank Act, whistleblowers like Wydler are no longer bound by forced arbitration agreements.)

Yesterday, Eyal Press posted an article on Counterpunch and Middle East Online about Wydler and Countrywide whistleblower Eileen Foster. It is called Chilling Dissent on Wall Street. He contrasts the way the federal government has become hot to prosecute national security whistleblowers, but the concerns of financial fraud whistleblowers can be ignored. In Stanford's case, the SEC failed to act on Wydler's reports for years as Stanford continued to rake in money from more now-victimized investors.

As if being ignored is not bad enough, Press also notes how some members of Congress want to make it harder for whistleblowers to win their claims under the Dodd-Frank Law.  The bill by Rep. Michael Grimm would require whistleblowers to raise their concerns with their employer before going to the SEC, and would require the SEC to disclose whistleblower claims to the company alleged to be violating the law.  Really.  How is tipping off the crook to the impending federal investigation a good law enforcement strategy? Follow this link to TAKE ACTION against the Grimm bill.

Bloomberg News reports on Wydler's role in reporting Stanford's scheme.  Insurance Journal is reporting that Stanford's conviction will be a boost to several civil lawsuits seeking to hold attorneys and others responsible for covering up the fraud. Hopefully, with the new whistleblower protections and rewards for whistleblowers in the Dodd-Frank Act, schemes like Stanford's will become less common, and will be stopped more quickly when whistleblowers file claims with the SEC and CFTC.

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Updated May 15, 2012, with an eighth way the Grimm Act would undermine the corporate whistleblower program.

Corporate criminals rejoice. The Grimm Act packs seven deadly punches for whistleblowers. This law would make it more difficult for employees to report Wall Street corruption, Ponzi schemes, and other fraud – not easier. What happened to Congress fighting fraud?

The leadership in the House of Representatives is positioning the Grimm Act (H.R. 2483) to move quickly through Congress. It’s a license to steal for Wall Street and big corporations. Here’s how:

1. Gag Orders Legalized

The Grimm Act permits companies to enforce, “any established employment agreements, workplace policies, or codes of conduct,” regardless of the impact on the right of an employee to report corporate crimes. This means that companies can force employees to sign agreements forfeiting their whistleblower rights.

2. Workplace Retaliation Legalized

“Any adverse action taken against a whistleblower for any violation of such agreements, policies, or codes shall not constitute retaliation.” It looks like retaliation, smells like retaliation, but it’s not retaliation. (Emphasis added to the bill text.)

3. Law Enforcement Crippled

The Grimm Act requires the SEC to, “promptly notify any entity that is to be subject to [an investigation]” before beginning an investigation. Tipping off companies suspected of violating the law allows the corporations to intimidate witnesses and tamper with evidence before the investigation begins.

4. Whistleblower Anonymity Destroyed

The Grimm Act allows, and in most cases requires, the SEC to, “disclose to the employer’s audit committee such information provided by the whistleblower.” This means that the SEC would not only be unable to guarantee confidentiality, but it would be required to turn whistleblowers over to the very corporations accused of wrongdoing.

5. Corporate Accountability Minimized

The Dodd-Frank Act provides incentives for companies to self-report violations, including reduced fines and penalties. The Grimm Act creates a gaping loophole, allowing companies to claim they self-reported even when a whistleblower makes a report to the SEC. This applies even if the company initially covered up problems and retaliated against the whistleblower.

6. Most Whistleblowers Disqualified

People found guilty of fraud are reasonably excluded from obtaining the benefits of the new SEC whistleblower program. However, the Grimm Act disqualifies employees who in any way “participated in” a violation. This subtle-but-deliberate disqualification in the Grimm Act would cut out the vast majority of whistleblowers from protection, as almost every whistleblower “participates” in the violations they uncover. Think of all the low- and mid-level employee¬s, such as secretaries who take phone calls and clerks who make photocopies. These people are “participating” in violations, and are therefore disqualified from the whistleblower program.

7. Awards Program Broken

The Grimm Act makes whistleblower awards discretionary, returning the SEC whistleblower program to its pre-Dodd Frank Act status. That version of the program was completely discredited by a 2010 report by the SEC Inspector General. The report showed that the SEC helped only five people and awarded only $159,537 during 20 years of operating a discretionary program. The report lamented that the discretionary program was, “not fundamentally well-designed to be successful,” and made recommendations that were implemented by the Dodd-Frank Act. The Grimm Act turns back the clock.

8. Justice Obstructed

The Grimm Act requires employees to make reports about their bosses to their bosses before going to law enforcement. As it turns out, this is the definition of obstruction of justice, a crime that packs a severe punishment. The federal obstruction of justice statute calls for prison sentences of up to 20 years for those who, bear with me now, "hinder, delay, or prevent the communication to a law enforcement officer or judge of the United States of information relating to the commission or possible commission of a Federal offense." Yes, laws are a bit wordy, but there's not much wiggle room here. The Grimm Act undermines the fundamental right for citizens to report wrongdoing to law enforcement. It's an obstruction of justice.

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If you want your Member of Congress to fight fraud and protect your investments, take action and ask them to oppose Wall Street’s license to steal. Share your thoughts about the Grimm Act in the comments.

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Originally Published by FCPA Compliance and Ethics Blog
Author: Thomas Fox

The holiday season is past and many of us have returned to work. However, if you are a Chief Compliance Officer (CCO) there is a gift that you may wish to give yourself, it is “The Whistleblower’s Handbook – A Step-by-Step Guide to Doing What’s Right and Protecting Yourself” authored by Stephen Martin Kohn, Executive Director of the National Whistleblowers Center. I do not suggest that CCO’s purchase this volume for their own protection, although the former Chief Executive Officer (CEO) of Olympus might have been able to use it before he was fired by the Olympus Board last October. No, I suggest that CCOs purchase this because many others in your company may well do so and it is the best single volume collection of all laws, rights and obligations related to whistle-blowing that I have come across.

I thought about Kohn’s book when I came across a couple of whistleblower related items last month. The first one was an article in the December 28, 2011 edition of the Wall Street Journal (WSJ), entitled “Internal BNY Mellon Documents Show Panic” by Jean Eaglesham and Michael Siconolfi. In the article they report on some of the emails and other documentary evidence that whistleblower Grant Wilson was able to obtain during the two year period that he was operating “as a government informant” while employed by Bank of New York Mellon (BNY). The WSJ obtained this evidence through an open-records request. Wilson was part of a group which brought a series of whistleblower lawsuits against BNY, which have led to several states, and the Manhattan US attorney, filing civil suits against BNY. Eaglesham and Siconolfi also reported that “the bank’s [BNY] foreign-exchange traders grew concerned about a leaker” and in an earlier WSJ article, entitled “Secret Informant Surfaces in BNY Currency Probe”, reporter Carrick Mollenkamp stated “BNY Mellon sought to discover the insider’s identity and to fight the lawsuits.”

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Just before last night's deadline, I submitted comments on modifications to the Department of Labor's regulations for corporate fraud whistleblowers. The Occupational Safety and Health Administration (OSHA) originally issued regulations at 29 CFR Part 1980 to govern its whistleblower program under the 2002 Sarbanes-Oxley Act (SOX). The modifications OSHA published on November 3, 2011, reflect changes made by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and also make some policy changes. I made my comments on behalf of the National Whistleblowers Center (NWC) with helpful input from NWC Executive Director Stephen M. Kohn (especially on the issues of extraterritoriality and confidentiality).  My colleague Erik Snyder helped me finish the comments in time for last night's deadline.

OSHA's modifications reflect the new expanded time limit for filing retaliation claims. Section 922(c) of Dodd-Frank extended the statutory filing period for SOX retaliation complaints from 90 to 180 days. 29 CFR § 1980.103(d) now requires claims to be filed within 180 days of the date on which the employee became aware of the violation. Section 922(c) also protects the whistleblower's right to a trial by jury in cases where the employee removes a case to U.S. district court. Section 922(c) invalidates pre-dispute arbitration agreements that would keep whistleblowers from using the Department of Labor process or the "kickout" provision for going to U.S. district court. Section 922(b) of Dodd-Frank expaned SOX's coverage to include employees of nationally recognized statistical rating organizations (as defined in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c). My colleague Lindsey Williams, Advocacy Director of NWC, reported on these changes when Dodd-Frank passed in 2010.

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The newly created federal Consumer Financial Protection Bureau (CFPB) has issued a call to whistleblowers. The CFPB is seeking "knowledgeable sources with information about potential violations of Federal consumer financial laws." They can submit their information by email to whistleblower@cfpb.gov, or they can call toll-free at (855) 695-7974.

The CFPB announcement recognizes that Section 1057 of the Dodd-Frank Act creates a new whistleblower protection for employees. Employees are protected when they (1) raise concerns about compliance with the federal consumer protection laws enforced by the Bureau, (2) testify in enforcement proceedings, (3) initiate proceedings, or (4) refuse to take action they believe would violate the laws enforced by the Bureau.

I would add a couple of suggestions.  Anyone considering a formal disclosure about illegality or fraud at work could benefit from a consultation with a whistleblower attorney before they make their disclosure.  An experienced attorney can help write an effective disclosure that will make it easier for a judge to say, "that is protected activity." An attorney can provide an objective assessment about the risk of being discovered, and how to protect against retaliation. Whistleblowers should also know that the time limit to file a written complaint with OSHA about any retaliation against a consumer finance whistleblower is 180 days from the employee's first notice of the employer's retaliatory action. Whistleblowers are welcome to seek a referral to a attorney through the Attorney Referral Service of the National Whistleblower Legal Defense and Education Fund.

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Last week, a House Subcommittee "marked-up" a bill that would seriously undercut the strength of the whistleblower protections in the Dodd-Frank Act.  This Subcommittee is the Capital Markets and Government Sponsored Enterprises Subcommittee of the House Financial Services Committee. Their mark-up of H.R. 2483 sends it to the full Committee for consideration.

Take action to stop the bill.

H.R. 2483 would add a requirement for Dodd-Frank awards that the whistleblower first make disclosures to company management before disclosing them to the Securities and Exchange Committee (SEC). Regular readers here will remember the intense campaign last year and earlier this year over whether the SEC would impose such a requirement in its Dodd-Frank regulations. Stephen Kohn, Executive Director of the National Whistleblowers Center (NWC), met with each SEC Commissioner to explain why a requirement for internal disclosures would subject some whistleblowers to retaliation and deter them from reporting violations. We submitted a 16-page letter with 36 pages of attachments about the importance of encouraging whistleblowers to make reports through whatever channels they believe will be best in their circumstances. The NWC released a report showing that the qui tam provisions of the False Claims Act have not diminished internal reports of fraud. Corporations led their own campaign to set up hurdles and loopholes to trip up whistleblowers with a requirement to tell company management first. They sought exclusions to disqualify some whistleblowers altogether. NWC opposed the corporate campaign.

In the end, the SEC issued final regulations that largely sided in favor of whistleblowers.  Internal reporting was encouraged, but not required. Whistleblowers could judge for themselves whether internal channels would be effective.  If they reported internally, that report could still protect their status as the first to disclose the violation. The SEC cited NWC's comments 44 times in explaining its final decisions on the regulations.

The corporate lobby was not happy. They have now turned to Rep. Michael Grimm (R-NY) to push through the bill to mandate that whistleblowers make their reports internally. This freshman, elected with Tea Party support, has introduced H.R. 2483. He cynically calls this bill the "Whistleblower Improvement Act of 2011."  To be clear, this bill will not improve the rights of whistleblowers.  It will improve the ways in which company managers can discover who is blowing the whistle, and it can block Dodd-Frank awards to whistleblowers who fail to expose themselves to their managers.  Rep. Carolyn Maloney (D-NY) calls the bill the “Throw the Whistleblowers to the Wolves Act.”

Would company managers really use the internal reports to discover who is blowing the whistle and then retaliate against them? Rep. Grimm introduced an amendment last week that will specifically remind managers that they are not allowed to retaliate. Apparently, the 2002 Sarbanes-Oxley Act (SOX) was not quite enough to stop retaliation.  Corporate managers needed not just a law, but the law and a reminder to follow the law.  Will whistleblowers now feel safe that they can report their boss' violations without fear of retaliation? I don't think so.

Is there really any problem with the SEC whistleblower program that has to be fixed? Not according to SEC Chairman Mary Schapiro. The Wall Street Journal's Market Watch reports that Schapiro has sent a letter to Rep. Barney Frank (D-MA) saying that the SEC's whistleblower program is  already providing "significant benefits." She asked that the whistleblower program be allowed to work to show its effectiveness, and that attempts to change it are premature. She notices the obvious in saying that requiring internal reports would have a "chilling effect." Our friends at the Project on Government Oversight (POGO) agree. POGO's Michael Smallberg says H.R. 2483 would, "chill the flow of high-quality insider tips, imperil the safety and livelihood of whistleblowers, and give law-breaking companies an accountability escape hatch." Market Watch says that while Rep. Grimm's bill may advance in the House, it has "zero chance" in the Senate.  There, Senators on both sides of the aisle have recognized the value whistleblowers provide to law enforcement, investors, taxpayers and the public interest.

Take action to stop the bill.

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The New York City law firm of Labaton Sucharow released a survey yesterday that finds that 78% of Americans would report wrongdoing in the workplace if it could be done anonymously, without retaliation and result in a monetary award.  These are precisely the conditions established by the new Dodd-Frank Act whistleblower protections. However, the survey also finds that 68% of Americans are unaware of the new SEC Whistleblower Program created by the Dodd-Frank Act. The logical conclusion is that if we educate people about the anonymous reward program, and the protections against retaliation, then most of them will report misconduct when they see it. Under these conditions, it will be much harder for corporate fraudsters to intimidate employees into remaining silent.  It will only take one educated employee to submit a whistleblower report to internal auditors or the SEC to initiate an investigation.

In an article released today, Reuters Canada explains that those who provide original information about securities law violations can earn up to 30 percent of the SEC's penalty. The Dodd-Frank Act also allows whistleblowers to remain anonymous and includes protections against employer retaliation. The time limit to file a complaint of retaliation with OSHA is now 180 days.

Decades of whistleblower legislation have finally arrived at the formula that will actually encourage employees to speak up about misconduct. In the corporate fraud arena, we just need to get the word out about the rewards and protections currently in the law.  In other arenas, we need to spur Congressional action to use the same formula to encourage whistleblowers to come forward.

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The NWC is gearing up for our special seminar tomorrow in Washington, D.C. at the Willard Intercontinental Hotel, entitled “The NEW Corporate Whistleblower Protections and Rewards Provisions.” The entire NWC staff and I are looking forward to attending this open discussion on the newest whistleblower protection laws, which is also available via conference call.

We’re excited to offer you the chance to hear from a host of experts on the field. It is a rare opportunity to meet the Chief of the SEC Whistleblower Office, Sean McKessy, who will be conducting an hour-long session on how the new office will be upholding SEC’s recently adopted whistleblower rules. I am personally looking forward to hearing from Sean McKessy because the NWC’s legal staff and I were extensively involved in the Dodd-Frank rulemaking process. In addition, NWC Executive Director Stephen M. Kohn will present a session on important whistleblower laws. Other honored speakers include Donna Boehme (Principal of Compliance Strategies LLC) and Dean Zerbe (former Tax Counsel on the Senate Finance Committee and current Managing Director of Alliant Group).

It will be exciting for all to see how these new rules can provide greater employee protection and larger financial rewards. We will bring attendees up to speed on the latest whistleblower provisions and equip them with the legislative tools needed to effectively represent their clients. There is still time to register online by clicking here.

The NWC staff and I hope to see you tomorrow from 1:00 to 4:00 pm EST!

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Tomorrow, June 28th, NWC Executive Director Stephen M. Kohn will present his Corporate Whistleblower CLE seminar in Downtown Los Angeles at Carlsmith Ball LLP. Space is still available for this special seminar. The event will run from 10:00 am to 1:00 pm (PDT), and will focus on the new Dodd-Frank corporate whistleblower provisions adopted by the SEC and will also cover the Sarbanes-Oxley Act and other relevant whistleblower statutes. In addition, participants in this Los Angeles seminar will be offered the unique opportunity to teleconference in free of charge to the NWC’s Washington, DC seminar featuring SEC Whistleblower Chief Sean McKessy on July 20th. Those who wish to sign up should visit our website or call (202) 342-1903 for more information on the seminar.

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In a few weeks, the National Whistleblowers Center will be hosting a seminar in three locations in the western United States. The seminar is entitled The NEW Corporate Whistleblower Protections and Reward Provisions. On June 23rd, NWC Executive Director Stephen Kohn will host his seminar in Denver. Mr. Kohn will then travel to San Francisco for a seminar on June 27th. Stephen Kohn’s final stop on the west coast will be in Los Angeles for a June 28th seminar.

The event in Denver will be held at the Browne Palace Hotel and Spa from 2:00 p.m. to 5:00 p.m. (MST). The San Francisco seminar will be hosted by TURN—The Utility Reform Network at their facility from 1:00 p.m. to 4:00 p.m. (PST). In Los Angeles, Mr. Kohn will present at Carlsmith Ball LLP from 10:00 a.m. to 1:00 p.m. (PST).

Discounts are available for those who REGISTER early by June 17th. Call (202) 342-1903 or e-mail ek@whistleblowers.org for discount codes. The regular price for the seminar is $295 with early bird discounts and reduced fees for ARS members and whistleblowers. For early bird discounts and more information, including agenda and faculty click here.

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