Corporations and their defense lawyers have intensified their complaining about the whistleblower “bounty” provisions of the Dodd-Frank financial reform laws that provide financial incentives for employees to report securities fraud and other wrongdoing to regulators, citing increased costs and undermining of their “internal fraud-detection efforts” and self-reporting to the SEC, according to a Wall Street Journal article by Jean Eagleshaw entitled “”Firms Assail Whistleblower Plan by SEC.”
The letter, signed by 266 companies, was organized by the Association of Corporate Counsel, a group that represents in-house lawyers at companies around the world.
Susan Hackett, senior vice president of the Association of Corporate Counsel, said the whistleblower rules have excited a greater reaction than any other issue during her 22 years at the Washington group. Her comment is typical of the hysteria and hyperbole: “The proposals cut to the very core of what it is that every responsible U.S. company has been trying to do for the last couple of decades, which is to create effective, robust compliance reporting systems,” she reportedly said in an interview. “This just pulls the legs off the stool.”
But this supposedly “robust compliance reporting system” Ms. Hackett defends has been woefully ineffective ? let’s be honest, a joke – in the face of an epidemic of corruption and fraud on Wall Street, according to many observers both inside and outside of Wall Street. The fact that corporate fraud, particularly Wall Street fraud, has gotten out of hand, and the criticism that has produced, are the reasons why the SEC has revamped itself, intensified its efforts and come up with solutions ? like the whistleblower program ? that at least appear to have a chance to deter corporate fraud.
Anyone who reads the SEC’s proposed rule can see that the argument that the Whistleblower program encourages employees who spot fraud to immediately run to the government without giving an internal “robust compliance reporting system” a chance to work is simply untrue. The proposed rule states:
“Importantly, the proposed procedures will allow a potential whistleblower to provide information to legal or compliance personnel within his or her company, and wait for up to 90 days, without compromising his or her eligibility for an award under the Program. This would also allow a company a reasonable period of time to investigate and respond to potential securities laws violations (or at least begin an investigation) prior to reporting them to the Commission or an appropriate regulator. Therefore, this approach is consistent with the Commission’s efforts to encourage companies to create and implement strong corporate compliance programs.”
These new incentives are similar to existing whistleblower laws in the federal the False Claims Act, which helped the Department of Justice procure a $750 million settlement with GlaxoSmithKline recently. Cheryl Eckard, former Glaxo quality assurance manager who blew the whistle on her former employer, is due to receive $96 million, according to the article.
Corporate-governance experts say that financial incentives are necessary to draw out whistleblowers, especially since companies often retaliate against internal whistleblowers. Ms. Eckard, who blew the whistle on Glaxo, raised concerns internally before being fired.
Those with inside knowledge of wrongdoing who come forward and assist the Government stand to get between 10% and 30% of a recovery that is over $1 million.
“This overreaction to the reporting of corporate fraud to the appropriate authorities just confirms my belief that there is a lot of corporate fraud out there that needs to be rooted out,” said J. Boyd Page, a senior parent of Page Perry in Atlanta. “We hope the SEC will resist corporate pressure to help them keep a lid on wrongdoing.”
Page Perry is an Atlanta-based law firm with an active practice in representing individuals in whistleblower and employment disputes with firms in the financial services industry. The firm is currently involved in representing several employees in such disputes. Recently, the firm has won arbitration award for clients in employment disputes in the amounts of $1.7 and $3.9 million. For further information, please contact www.pageperry.com.