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This Week on Honesty Without Fear

Posted on May 15, 2012 by Lindsey Williams

Tune in today at 1:00pm EDT to Honesty Without Fear on Progressive Radio Network.

We invited candidates from one of the most hotly-contested House races, incumbent Michael Grimm and Mark Murphy, to come on the show to discuss the Grimm Act (H.R. 2483) with host Steve Kohn. The Grimm Act would reverse the corporate whistleblower protections passed in the Dodd-Frank Wall Street Reform Act. Congressman Grimm did not respond to the interview request, but candidate Murphy discusses his position on the Grimm Act and whistleblower protections.

Additionally, whistleblower Eugene Ross and attorney Jordan Thomas will join Steve to weigh in on how the Grimm Act will impact corporate culture. Eugene Ross blew the whistle on corporate fraud at Bear Stearns, and Jordan Thomas is partner at Labaton Sucharow and former SEC official who worked on drafting the SEC rules for Dodd-Frank.

 
Submit Your Question to be asked on air during the show or call in to 1-888-874-4888.

 

Missed last week's episode?? You can listen to the podcast.

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Wal-Mart. Whistleblower. Whitewash. Talk Amongst Yourselves.

Posted on May 4, 2012 by Donna Boehme

By Guest Columnist: Donna Boehme
Principal at Compliance Strategists LLC and editor of the weekly CS Newsflash (and former chief compliance and ethics officer at two leading multinationals)

Holy Wal-Mart Whitewash, Batman!  Without a doubt, the unfolding Wal-Mart bribery scandal in Mexico (coming soon to a business school case study near you) is ripe for “lessons learned”  for governance experts everywhere.   But it is also illuminating to drill down a little further and examine the implications from a whistleblower point of view.   

It’s true that only some of the facts are known so far, revealed in an exhaustive New York Times 8,000+ word investigative report.  But those reported facts are not boding well for the giant retailer.  This we know:  1) in 2005, a whistleblower with intimate knowledge of a Mexican bribery scheme (to secure permits and rapidly expand the market share) sent an email raising the flag to the international general counsel 2) although that international GC strongly recommended an expanded independent investigation, she was overruled (and ultimately resigned) 3) the top GC, CEO and “a small group of executives”  decided to refer the investigation to the very Mexican GC who authorized the bribes in the first place, who then 5) promptly closed the matter with a finding of “nothing to see here”  6) Wal-Mart decided to “self-report” only after learning of the soon-to-be newspaper expose and 7)  none of the execs or legal counsel involved in the handling of the matter have been fired or disciplined,  and a few have even been promoted.   Whew!  

As this tale of corporate whistleblower woe publicly unfolds, what have we learned? Early observations from the whistleblower standpoint:

 

  • All internal reporting systems are not created equal.

Why would a widespread bribery scheme, reportedly well-known to Wal-Mart employees and managers in Mexico, fail to be detected and raised to the highest governing authority through existing reporting mechanisms?    We now know that the whistleblower first notified the legal department through email.  But what about all the other employees “in the know” in Mexico and elsewhere in Wal-Mart? Did none of them trust the internal mechanisms enough to raise the alarm? Or if they did, what happened?  And where was the chief compliance officer?  So far it is alleged that the 2005 complaint was “hushed up” by the General Counsel and senior execs, and never made it to the boardroom. That’s alarming indeed, but not surprising.

Creating and maintaining an internal reporting system requires a lot more than hiring a third party vendor, turning on the phone lines and hanging posters.  Yet I continue to be amazed by the number of Boards and senior management teams who live with a false sense of security simply because they have a hotline or other employee reporting mechanism in place.  (See my open letter to boards on this point.)  Beyond the initial set-up, companies that are serious about compliance establish and enforce strict protocols for managing internal reports from initial intake to final consequences, whether discipline or process improvement.  And this is where the rubber meets the road, as powerful company forces often resist the very processes required for an objective, independent investigation.  As I have written elsewhere, Wal-Mart is Exhibit A, B and C for an independent chief compliance officer (i.e. not beholden to the General Counsel or any other corporate officer) who can oversee, among other things, the integrity of the investigation and the overall internal reporting system.  See “The Real ‘Happy Marriage’ Between the GC and the Compliance Officer.”  An independent CCO with a seat at the table would have been a cautionary voice in the exec decision-making process, and would have had direct, unfiltered access to report the matter to the board. If I were asked to advise a friend or a family member on how to raise a concern, I would recommend that they look carefully at the independence and rigor of a compliance program and internal reporting mechanism before ever pulling the trigger internally.
 

  • How a company reacts to internal whistleblowers is a good barometer of corporate culture.

That the Wal-Mart whistleblower tip may have been “whitewashed” in an allegedly sham investigation, underscores one of the prime reasons employees consistently give for not reporting perceived misconduct:  the belief that nothing will be done. 

Forget codes of conduct, training, CEO speeches and awards for “most ethical company in the universe.”  If you really want a good barometer of a company’s culture, and the priority it places on accountability, transparency and ethical leadership, look no further than how internal whistleblower reports are treated.  This is tough business for organizations because the natural human reaction to whistleblowers is usually “seek and destroy.”  As in:“I’m all for openness and transparency and for blowing the whistle on wrongdoing.  Except if the guy is on my team, and then he’s a no good traitor.”   The enormous challenge for companies is how to turn this human knee-jerk response into a safe, transparent environment where internal reporting is valued (and not merely tolerated) and tips are expeditiously, confidentially and professionally investigated.  Potential whistleblowers are nothing if not observant.  Just as they notice misconduct, they also see what happens to those around them who raise their hands.  According to the New York Times, after finding the company’s initial interest in his complaint fade away, the Wal-Mart whistleblower said “I thought nobody cares about this.  So I left it behind.”  How companies react when whistleblowers come forward drives the organizational culture in a direct and lasting way.
 

  • Wal-Mart, Dodd Frank aftermath and the Grimm Act:  Another bite at the apple?

How Wal-Mart botched the internal whistleblower’s claim is an ironic postscript to the 2011 Dodd Frank whistleblower debate.  

Not too long ago, a long list of veritable who’s who in Corporate America, led by the Chamber of Commerce (of which Wal-Mart is a prominent member), lobbied hard against the then-pending Dodd Frank whistleblower rules,  in particular against the provision that permitted employees to go directly to the SEC without reporting internally first.  The main objection was that the potentially enormous rewards (10-30% of penalties over $1M) would incentivize employees to bypass internal reporting systems,  undermine company compliance programs and otherwise cause the sky to fall.  See “The Sky Has Not Yet Fallen.”  In a smart balancing act,  the SEC rejected those objections, but created incentives to encourage internal reporting.  Now one year later,  that same corporate lobby is attempting another bite at the apple through Grimm Act (House Bill 2483), which would amend the Dodd-Frank whistleblower rules in a second attempt to require internal reporting as a condition to access to the law’s protections and financial rewards. 

The Wal-Mart headlines should give legislators considering the Grimm Act serious pause.  One of the disconnects in this debate has always been the divergent views on the effectiveness of internal reporting systems.  As noted in a 2011 RAND Symposium report on the topic, the corporate lobbyists based their arguments on the premise that these reporting mechanisms were working just fine, thank you very much,  and that Dodd-Frank was going to ruin years, even decades, of all that good work. In stark contrast, whistleblower advocates argued that many internal reporting programs might look good on paper, but in reality are so flawed that they fail in their mission.  Judging by reports so far, Wal-Mart could well be the poster child for the latter view. 

It will be worth revisiting this list of takeaways as more details reach the public domain.  At a minimum, the impact of the Wal-Mart spectacle on current efforts to curtail both the Dodd-Frank whistleblower rules and the Foreign Corrupt Practices Act will be interesting to follow. But for now,  it’s safe to say that companies may have a lot more work to do on their internal reporting systems,  and the controls surrounding investigations and reporting up the chain, before crying “the sky is falling”  about the Dodd Frank whistleblower program.  
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7 Ways the Grimm Act Will Help Wall Street Steal

Posted on January 24, 2012 by Owen Dunn

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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