Whistleblowing | Regulatory & Compliance
KEEPING FRAUD WITNESSES SAFE Everyone should be given protection to report corruption
approved as an amendment to SOX. Additionally, the then chair of the House Judiciary Committee, Rep. Jim Sensenbrenner (R-Wisconsin), successfully included another amendment to the law. It made economic, job-related retaliation against ‘any person’ who reported, in good faith, possible crimes to any federal law enforcement official, a felony, subjecting the retaliator to up to 10 years in prison. This also passed. Under SOX, employee whistleblowers were promised job protection. Their reports to internal compliance programmes were also fully protected. A strong message was sent, but corporate behaviour did not change. Companies were very effective in undermining these reforms. Instead of embracing the reforms mandated by Congress, in case after case corporations used every legal trick to defeat the whistleblowers. They tried to exempt subsidiaries or mutual fund companies from coverage, they successfully narrowed the scope of protected disclosures, they forced employees to arbitrate their cases in pro-employer forums and they were highly successful in defeating the vast majority of whistleblower claims. Thousands of employees who relied upon SOX lost their jobs. In regard to compliance programmes, companies also tried to work around the new procedures that protected internal whistleblowers. The most common tactic was to have compliance programmes report ultimately to the company’s General Counsel. Under Supreme Court precedent, corporations worked to ensure that whistleblower disclosures to attorneysupervised compliance programmes were covered under a corporate attorney-client privilege, giving the company an option to keep the whistleblower information secret and open confidential investigations on those who made the reports.4 All in all, the fi rst go-around with SOX was a failure. The overwhelming majority of employees who fi led claims lost. But, in hindsight, the failure of corporate executives to embrace and enhance the SOX reforms was a massive mistake.
Between 2002 to 2008, whatever trust may have been forged between corporate management and employee whistleblowers, as had been envisioned by Congress as part of the SOX reforms, was lost. The 2008 financial crisis laid bare these failures, both in terms of the protections afforded under law and the abysmal failure of Wall Street to change its anti-whistleblower culture. Thus, it is not surprising that when Congress again looked at Wall Street reforms in 2009 and
2010, the failure of the whistleblower programmes was one of the major topics revisited. As part of discussions leading to the Dodd-Frank Act reforms, this author discussed the whistleblower laws with representatives from the Senate Banking Committee.5 The views of these congressional staff members were clear – if an employee is ever known to be a whistleblower, their career on Wall Street is over. The committee staff, had clearly reviewed the history behind SOX and most likely interviewed numerous employees, were emphatic as to their opinion as to how whistleblowers were treated by corporate executives. The heart of the Dodd-Frank Act’s Wall Street reforms directly confronted the reality that employees who worked in financial services faced and the failures of SOX. The reforms were numerous: ■ SOX itself was reformed. Jury trials were guaranteed, mandatory arbitration was prohibited and subsidiaries were directly covered ■ Anonymous whistleblowing was permitted under the Securities and Commodity Exchange Acts ■ Qui tam rewards were made available to whistleblowers whose information resulted in an enforcement action in which the SEC or CFTC obtained sanctions of more than $1million ■ The definition of a whistleblower was changed from an ‘employee’ to ‘any individual with original information’ After Dodd-Frank was enacted, a rulemaking battle erupted within the SEC. Corporations wanted to limit the rights of their executives or compliance officials to blow the whistle. Rules were proposed that would have blocked the ability of directors, officers, trustees, partners, audit committee members or chief compliance officers to benefit from the new reforms. Instead of embracing change, or creating a culture that would encourage whistleblowing, every major corporation and trade association that weighed in on the new Dodd-Frank rulemaking proceedings wanted to limit the scope of the law and block all executives from qualifying as whistleblowers entitled to a reward. Not surprisingly, those efforts failed. The statutory definition of a whistleblower as meaning ‘any individual’ could not be squared with the efforts to strip entire classes of ‘individuals’ from coverage. At the end of the day, under intense pressure from Wall Street, the SEC reached a compromise on executive whistleblowing. Officers, partners and directors of corporations and other employees who had a fiduciary duty to prevent fraud were given a qualified right to blow the whistle to the government and obtain a monetary reward.6 Spring 2019 | Ethical Boardroom 123