Whistleblower information may be one of the SEC's "most
effective weapons in its new enforcement arsenal," but the agency's
whistleblower program "faces challenges on many fronts," according to an April
23, 2013 New York Times Dealbook article entitled "Hazy Future for
Thriving S.E.C. Whistle-Blower Effort" (here).
As evidence of the whistleblower program's promise that article cites several
"previously undisclosed" enforcement actions that whistleblower information
have triggered or aided. Yet due to several potential obstacles and
impediments, the future of the program may, according to one source cited in
the article "hang in the balance right now."
For its part, the agency says that it has "ramped up" its
staffing and the program has "gained momentum." As evidence of the value the
program has already delivered, the article cites the agency's investigation of
Knight Capital. The SEC was already investigating problems the trading company
was having following the company's bungled installation of new trading
software. The investigation had been narrow until a whistleblower came forward
and "the agency was able to shift gears and expand the investigation."
According to the article, with the help of a
whistleblower, the agency's investigation of the Oppenheimer's investment
firm's alleged overstatement of the performance of a private equity fund
resulted in a fine of nearly $3 million.
The article also details an enforcement action that
resulted in the first
whistleblower bounty payment under the Dodd Frank Act's whistleblower
provisions. According to the article, Dee Stone, an outside consultant to China
Voice Holding Corp, received a whistleblower bounty of $46,000 (so far) for
providing documents showing that the company was operating a Ponzi scheme.
(Refer here for more about this award, which was the first and is so
far the only award under the Dodd-Frank whistleblower bounty program). The
identity of the whistleblower and the subject of her whistleblower report had
not previously been disclosed.
But though the program has had its successes, the SEC has
also encountered obstacles from companies. Some companies have "drafted
policies compelling their staffs to report fraud internally," while other
companies require employees to "attest annually that they never witnessed any
fraud, a certification that could be used to discredit employees who later blew
The article also notes that companies have been accused
of retaliating against whistleblowers. The article cites the September 2012 complaint
that James Nordgaard filed in the Southern District of New York against his
employer, Paradigm Capital Management and related entities, as well as against
its founder and President, in which Nordgaard alleged that his employer
retaliated against him after he notified the employer that he had reported what
he believed to be illegal activities to the SEC.
In his complaint, a copy of which can be found here,
Nordgaard sought to recover damages for retaliation under the Dodd-Frank Act.
Nordgaard alleged that after he made his report, he was stripped of trading
duties and "constructively terminated." Initially, the company sought to
have the dispute submitted to arbitration. In December 2012, Nordgaard
voluntarily withdrew his complaint.
Even though the article highlights the successes that the
whistleblower program has already produced, the article nevertheless also
suggests that company efforts may undermine the program or limits its
usefulness. It may be true that some companies may succeed in diverting would
be whistleblowers to internal programs, but even that could still be useful as
long as the whistleblower's reports are not swept under the rug but are dealt
And while company retaliation could well deter
whistleblowing, the specific example of company retaliation that the article
notes suggests that retaliation could be as big of a problem for the
retaliating company than for the employee, given the retaliation protection
available to whistleblowers under the Dodd-Frank Act.
The fact is that during the first full fiscal year of the
whistleblower's operation, the SEC received 3,001 whistleblower reports (as
discussed in the agency's 2012 annual whistleblower report, a copy of which can
be found here).
And while that number may be, as an unnamed source in the article suggests,
"somewhat exaggerated," it is clear that the SEC is receiving a very
substantial number of whistleblower reports - and that is despite the deterrent
efforts of some companies noted in the article.
The agency has at this point made only a single
whistleblower bounty award. As the agency makes further awards and as those
awards attract publicity, would-be whistleblowers will likely be even further
motivated to come forward. As a plaintiffs' law firm noted in a press
release earlier this week, whistleblower awards provide "a reason for
taking a risk." (And it should not be overlooked that the plaintiffs' bar
clearly sees the development of a whistleblower practice as a growth
opportunity. The efforts of the plaintiffs' bar may not by itself be sufficient
to cancel out the efforts of companies to try to deter whistleblowers but it
does at a minimum represent a countervailing force.)
My take is that though companies may be taking steps to
avert whistleblower problems, the whistleblower program ultimately will prove,
as the article suggests, to be "one of the most effective weapons in the new
As I have said previously on this blog, if 2012 was the
year in which the Dodd-Frank whistleblower program finally got off the ground,
2013 will likely be the year when the program picks up serious momentum. It
seems likely that - notwithstanding the impediments noted in the Times
article -- we will not only see increased enforcement activity as a result of
whistleblowers' tips, but that we will see increased numbers of whistleblowers'
bounty awards, as well as the possibility of increased private civil litigation
following in the wake of the enforcement actions.
Read other items of interest from the world of
directors & officers liability, with occasional commentary, at the D&O Diary, a blog by
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