On March 15, Senate Banking Committee Chairman Christopher Dodd (D-CT) released his much-anticipated financial reform bill.[1] Part of Senator Dodd’s proposal – which went to the Senate floor March 22[2] – establishes a new program to reward whistleblowers who assist the SEC in an investigation of securities violations such as violations of the Foreign Corrupt Practices Act (FCPA).[3]
Whistleblowers providing “original information” leading to a successful enforcement action resulting in monetary sanctions exceeding $1,000,000 “shall” be paid between 10 and 30 percent of any money the government collects as a result of the provided information. Whistleblowers will also be paid if their information leads to successful “related actions,” i.e., administrative or judicial actions brought by other agencies, including the Department of Justice (DOJ), federal and state regulatory authorities, and foreign law enforcement agencies.
The amount of the award would be decided by the SEC after consideration of criteria such as the significance of the information to the success of the action and the degree of assistance provided by the whistleblower. Any determination made under the provision may be appealed to the appropriate U.S. Circuit Court within 30 days of the final decision. The financial reform legislation that passed the House of Representatives in December 2009 would create a similar program but the Senate version includes a mandatory reward of 10 percent and allows for judicial review.
Since 1998, the SEC has had a similar program in place to reward whistleblowers in insider trading cases. That program has paid only four rewards totaling $67,570.[4] However, the amount of money available in the proposed program would plainly be enough to encourage employees to contact and cooperate with the SEC. In fact, comparable amounts promised under a similar program with the IRS have seen a surge of claims and the rise of a cottage industry of whistleblower attorneys attempting to get a piece of the pie.[5] As discussed below, the potential monetary rewards could run into the hundreds of millions of dollars based on recent fines assessed in FCPA enforcement actions.
Similar to the proposed SEC whistleblower provision, the IRS program – contained in section 7623 of the Internal Revenue Code – provides whistleblowers a reward of up to 30 percent of any tax, interest, penalties or additional amounts collected based on provided information. Like the SEC proposals, as long as the whistleblower has not been convicted of a crime related to the information provided, the IRS may pay them a reward even if they were responsible for the activity leading to the tax liability.
Presumably, the SEC will have to adopt rules similar to those adopted by the IRS to implement its whistleblower program, including provisions such as the “one bite rule” prohibiting the IRS from deputizing a whistleblower to go “back in” to a company to root around for more information, and a “no bite” rule precluding the IRS from accepting information from a company’s representatives with fiduciary responsibilities.[6]
The tax whistleblower provisions have become extremely popular, largely because of the size of the tax recoveries at issue. Recoveries related to transfer pricing, foreign withholding, or corporate tax shelters for instance, often amount to hundreds of millions, even billions, of dollars. A 30 percent share of such a recovery is enticing to a potential whistleblower. As mentioned above, tax whistleblowing has become lucrative enough that law firms have jumped in to represent potential whistleblowers to guide them through the process of turning information over to the IRS. Some of these firms claim responsibility for double-digit billions in IRS claims.
By interacting with financially motivated legal counsel in this way, whistleblowers have become more sophisticated in their approaches. For example, the firms have instructed whistleblowers to combine tax related information with Sarbanes-Oxley whistleblower information to increase the chance that an enforcement action will take place and enhance protections against retaliation. The proposed Senate bill specifically allows whistleblowers to be represented by counsel. If the tax experience is any guide, such activities create obvious and hidden risks that companies will need to protect themselves from if the SEC provisions become law and are successful.
The most obvious risks from whistleblower activity are the costs incurred responding to investigations and the cost of any monetary (and spin-off DOJ) sanctions that may be imposed. Considering the dramatic increase in FCPA enforcement actions in recent years and the record-breaking fines imposed in those actions, becoming a whistleblower for the SEC would present an extremely lucrative incentive for employees.
For example, the combined monetary sanction assessed against Siemens in 2008 came to a grand total of $1.6 billion, including a fine of over $450 million by the DOJ, $350 million in disgorgement to the SEC, and $854 million in penalties assessed by the German government. Note that Dodd’s proposal includes disgorgement of ill-gotten gains by the SEC and fines assessed in related actions by the DOJ and foreign law enforcement agencies in its calculation of “monetary sanctions.”
If a Siemens whistleblower had been eligible for the 30% reward proposed in the current draft of the legislation, he or she could have received a windfall of $496 million. In the 2009 case against Kellogg Brown & Root (KBR) and former parent company Halliburton, the DOJ imposed a $402 million fine and the SEC assessed $177 million in disgorgement, for a total of $579 million in penalties. The windfall for a whistleblower in that case could have totaled $173 million.
The huge financial incentive for a whistleblower in FCPA cases changes the dynamics and timing of a company’s voluntary disclosure decision. It will become more difficult to justify a “wait and see” approach to disclosure if any one of a number of employees are well-placed to line their own pockets by beating the company to the punch. In this environment, companies may decide to make precautionary disclosures of unsubstantiated allegations in order to preserve a voluntary disclosure credit with the DOJ and SEC before verifying the facts in an internal investigation. At the very least, companies must quickly respond to, evaluate, and address any indications of violation of the securities laws or risk learning about the issue from the SEC.
One of the hidden risks in dealing with whistleblowers is that the company runs afoul of federal laws that protect them. For example, 18 U.S.C. § 1514A provides employees with a right of civil action for actions taken by publically traded employers against people who provide information regarding “any provision of Federal law relating to fraud against shareholders.” Also, 18 U.S.C. § 1513(e) criminalizes “any action harmful to any person, including interference with . . . lawful employment” for the provision of “truthful” information regarding “the commission or possible commission of any Federal offense.” Punishment for violating this statute is a fine and up to 10 years of imprisonment. Its provisions are not limited to public companies.
The protections in these statutes are in addition to the SEC whistleblower protections included in the proposed legislation in Section 21F(h). Consequently, it is important for companies to have procedures in place to insure that actual or perceived whistleblowers are not mistreated. If companies take negative employment actions against employees, they must be properly documented. This is particularly important in the current economic environment so that disgruntled employees cannot cause mischief with claims they were terminated because of whistleblower activity.
Another hidden risk is the risk that the SEC will review and evaluate corporate statements based on potentially incomplete information provided by a self-styled “informant.” Although this risk may be limited by the implementation of some sort of “one bite” rule such as the IRS rule, knowing that an employee who is involved in internal deliberations could eventually disclose those deliberations or other relevant information directly to the government raises concerns about company officials being charged with making false statements in violation of 18 U.S.C. § 1001 and similar statutes. Even if false statements charges do not issue, the presence of a whistleblower may undermine the company’s reputation with the SEC if the Commission is receiving skewed information from an inside source, and the presence of an informant may undermine internal morale if an employee brings a whistleblower claim.
The aforementioned risks cannot be eliminated, but they can be reduced. It is important to make sure that employees are aware of company hotlines employees can use to report concerns and that the company quickly follow up on credible allegations so employees feel their concerns are being addressed. Companies should also make sure they implement best practices regarding privileged and proprietary information. It is also advisable to look for signs of whistleblower activity, including getting oddly similar requests for information from different sources, receipt of unusually focused or specific questions from the government, and/or repeated requests for the same or substantially similar information.
Finally, given the “related action” element of the whistleblower provisions, companies must ensure that they have robust compliance programs for financial issues related to areas monitored by the SEC like the FCPA. Lastly, if there is evidence of whistleblower activity and a violation is discovered, early voluntary disclosure can undermine the effectiveness of the employee-cum-whistleblower and mitigate potential damage from the underlying violation.
About the Authors
This article was written by James Tillen, George Clarke, and Kevin Mosley from Miller & Chevalier. James Tillen is Coordinator of the FCPA and Anti-Corruption Practice Group of Miller & Chevalier Chartered; George Clarke is a member in the Tax and White Collar Practices of Miller & Chevalier Chartered; and Kevin Mosley is counsel in the White Collar Practice Group of Miller & Chevalier Chartered
Works cited:
- [1] See Staff of S. Comm. on Banking, Housing, & Urban Affairs, 111th Cong., Restoring American Financial Stability Act of 2010 795 (Comm. Print 2010), available at http://banking.senate.gov/public/_files/Sectionbysection03_16_10FinancialReformLegislationRevised2.pdf.
- [2] The bill cleared the Senate Banking Committee by a party-line vote of 13-10 on March 22. The committee passed a manager’s amendment introduced by Senator Dodd prior to the final vote. The manager’s amendment adds a clause to the whistleblower provision stating that no reward shall be paid “to any whistleblower who gains the information through the performance of an audit of financial statements required under the securities laws and for whom such submission would be contrary to the requirements of section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j–1).” The financial reform bill passed by the House of Representatives in December, H.R. 4173, included similar language.
- [3] The SEC holds civil enforcement authority over issuers violating the FCPA, which prohibits the bribery of foreign officials and requires issuers to maintain accurate books and records and implement effective internal controls. See 15 U.S.C. §§ 78m, 78dd-1(a), 78dd-2(a), 78dd-3(a).
- [4] See Bruce Carton, Dissecting the Investor Protection Act, Securities Docket (Jan. 13, 2010) available at http://www.securitiesdocket.com/2010/01/13/dissecting-the-investor-protection-act/.
- [5] It appears that the proposed SEC program was based on the program at the IRS. See Letter of July 1, 2009 from SEC Inspector General to Rep. Paul Kanjorski, available at http://www.securitiesdocket.com/2009/07/01/sec-ig-kotz-responds-to-rep-kanjorski-with-legislative-suggestions-to-improve-sec/.
- [6] See Chief Counsel Notice CC-2010-004 (February 17, 2010) (which loosens up the “one-bite” restrictions and allows follow-up contacts under certain circumstances).
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