David Colapinto, Stephen Kohn, Sean McKessy and Michael Kohn.
Photo by Lindsey Williams.
Yesterday, the National Whistleblowers Center (NWC) road trip of seminars came to Washington, DC, to spread the word about new opportunities for whistleblowers under the Dodd-Frank Wall Street Reform and Consumer Protection Act. "This was the best continuing legal education I've had in 17 years," attorney Don McKenna told me. In fairness, this is in part because the law has never been so good for whistleblowers. "Dodd-Frank's employee protections are the Cadillac of whistleblower protections," NWC Executive Director Stephen M. Kohn said. However, it was also because of the star-studded faculty. The seminar marks the first appearance of Sean X. McKessy to a "whistleblower-friendly" crowd since he became Director of the Security and Exchange Commission (SEC) Office of the Whistleblower. There was more than one joke about McKessy's background working for corporations. Answering corporate concerns about whether the SEC's rules would undercut internal compliance programs, McKessy said, "I would know if something we [the SEC] do would destroy internal compliance as we know it." McKessy explained how he read through 305 pages of comments to the SEC whistleblower rules. He did so with an eye toward the 40% of frauds that go undetected. McKessy announced that on August 12, 2011 (the day the SEC whistleblower rules go into effect), his office will launch a new web page. The page will have a form for on-line whistleblower submissions. He said his office would be looking for submissions that are "specific, timely and credible." His main message, "We are open for business, and whistleblowers are welcome at the SEC."
Donna Boehme made a presentation on corporate compliance and interface with the new rules. Boehme (rhymes with "Rome") is an internationally recognized authority in the field of organizational compliance and ethics. She is currently a Principal of Compliance Strategists LLC. She serves on the boards of the RAND Center of Corporate Ethics and Governance, the Rutgers Center for Government Compliance & Ethics, the Society of Corporate Compliance & Ethics, and South Texas College of Law - Corporate Compliance Center, and is Program Director for the Conference Board Council on Corporate Compliance and Ethics. She previously served as Group Compliance and Ethics Officer for BP plc (London). Boehme said that she felt the SEC found a good balance between internal compliance and SEC enforcement action and is giving employees a choice of whether to report internally first depending on how they feel about the company's internal compliance program. "Employees really know if a company's compliance program is serious." One good clue: to whom does the chief compliance officer report? If the answer is the CEO, CFO, general counsel, or HR director, then the program does not have the independence required for the compliance mission. A company's senior people are the typical wrongdoers, she notes. The correct answer is the board. "Expectations for the board are changing, and real board training should be the next wave," she urges. "Not all internal compliance programs are equal," Boehme observed. The process of developing a program employees will trust "allows companies to do some soul searching." Boehme, and her colleague Michael Greenberg, wrote an op-ed for Bloomberg Government last month on the SEC whistleblower rules. "Compliance and internal audit people often get in trouble for doing their job too well," Boehme told us.
Dean Zerbe (pictured with David Colapinto) is special counsel to NWC, and a principal of The Alliant Group. He formerly worked for Sen. Charles Grassley as chief investigator, and as counsel to the Senate Finance Committee. In that capacity, he wrote the law creating the IRS whistleblower reward program. "The SEC rules came out a lot better because of the National Whistleblowers Center," Zerbe said, noting that the SEC cited NWC's comments over 40 times. "Thank them for the rule being much better." Zerbe's main point, however, was that, "the people whose hands are dirty are the ones who have the specific, timely and credible information." He explained that the phrase "substantially directed, planned, or initiated the violation" is a term of art that refers to the leader of the law-breaking group. Anyone who was following the leader should not suffer a reduction in any reward because they are precisely the group that whistleblower rewards were meant for. Moreover, since becoming a whistleblower can mean a person's career is over, rewards should not be reduced. "To catch a big fish, you need to put a lot of bait in the water."
The NWC seminar tour makes its next stop in New York City on July 25, 2011, at 1:00 p.m. Stephen Kohn will be speaking at the Mid-Manhattan Library in New York City at 6:30 pm (EDT) that evening on his new book, The Whistleblower’s Handbook: A Step-by-Step Guide to Doing What’s Right and Protecting Yourself.
Stephen Kohn offered additional tips for whistleblowers and their advocates.
- Noting that the SEC rule for anonymous whistleblowers requires that they be made through counsel, Kohn suggested that an attorney could review the documents available for submission and select those that well establish the whistleblower's claim while minimizing the risk of "fingerprinting." In "fingerprinting" a corrupt corporate manager would use the scope of a government investigation, and the documents relied upon, to narrow the group of suspected whistleblowers.
- The SEC Rule 21F-4(b)(4)(v) allows internal auditors to submit their own whistleblower reward claims in three circumstances:
(i) a report to the Commission is necessary to prevent substantial harm to the entity or investors;
(ii) the entity is engaging in conduct that will impede our investigation; or
(iii) 120 days have elapsed.
- The 120 day time limit will create a dilemma for corporate managers. If they fail to self-report a violation to the SEC within 120 days, their own internal compliance personnel can start filing their own whistleblower reward claims to the SEC.
- Since the SEC rules count reports to internal compliance programs in determining who was the first to file, whistleblowers should preserve evidence of their submissions to internal compliance.
Sean X. McKessy added these points:
- Each time the SEC completes an enforcement action for over $1 million, it must post a notice of the action on its web page. This posting starts a 90-day clock. During the 90-days, any whistleblower seeking a reward from this enforcement action must file a claim for it. His office will then review the claims and determine what rewards, if any, it can make from the enforcement penalty.
- The SEC Office of the Whistleblower plans to begin posting notices of eligible SEC enforcement actions on August 12, 2011.
- Those whistleblowers who submitted anonymous claims before August 12, 2011, must provide their lawyer with a signed TRC form [tips, complaints and reports] by October 11, 2011. Anonymous claimants filing on or after August 12, 2011, must provide their signed TRC from to their attorney before they file.
- Since the SEC gets over 30,000 tips a year, his office will be relying on the SEC Office of Market Intelligence to perform a triage function. Everyone at the SEC is looking for a good case, so it is in the interest of the whistleblower to make a good submission. Good submission have detailed information about dates, names, documents and witnesses. "Give us the iceberg," McKessy urges.
- Any written submission to the SEC on or before August 11, 2011, can qualify for a Dodd-Frank reward. However, whistleblowers must pay attention to the SEC notices of eligible enforcement claims and submit their claims for rewards before the 90 day time limit expires.
- If there are multiple claimants for the same reward, the reward goes to the whistleblower who was first to file, either with the SEC or with the company's internal compliance program. Don't sit around waiting for a fraud to grow. Be the first to file. The TCR portal is linked here. It will be updated on August 12, 2011.
- Rewards can be increased in size based on (1) the significance of the information provided, (2) the whistleblower's cooperation, (3) the extent of the SEC's "law interest" in the case, and (4) the whistleblower's cooperation with internal compliance.
- Rewards can be reduced based on (1) the whistleblower's culpability in the violation, (2) undue delay in reporting, and (3) interference with internal compliance efforts.
- When making a submission to the SEC, please disclose any other reports you have made. For example, if you disclose that you have also filed an IRS whistleblower report, or a report to the Department of Justice, then the SEC can share your information with those agencies and coordinate enforcement actions.
- If the SEC staff recommends an award of less than 30%, you have 30 days to request an opportunity to review the record and meet with the staff. Exercising both options is a good idea. The time to appeal to the Claims Review Board (CRB) is 60 days.
- Denials of rewards, and rewards of less than 10%, are reviewable in U.S. Circuit Courts of Appeals.
- Retaliation against a whistleblower is also a violation of the Securities Exchange Act. In addition to pursuing remedies from the Department of Labor, a whistleblower can ask the SEC to commence an enforcement action.
- Don't expect fast action on whistleblower claims. It will take time for the Office's staff of 7 to complete work on the rewards program.
- Help spread the word that the SEC Office of the Whistleblower is open now for business.
Dean Zerbe adds:
- When making a submission, ask when will be a suitable time to call back to discuss it again.
- Fraud violations are often also tax violations. If someone is accepting a bribe, what are the odds that they will be reporting it on their tax return? File a whistleblower report with the IRS too.
Supplemental statutory material for the seminar is available here.
Donna Boehme's Resource Guide on Empowered Chief Ethics and Compliance Officer (CECO) Role