Achievements, Challenges and Change: A Look at the Past, Present and Future of the SEC Whistleblower Program

Jordan Thomas - Thursday, August 07, 2014
Four years ago, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most sweeping financial reform effort since the Great Depression. One of Dodd-Frank’s key charges was the creation of a whistleblower program that offered anonymous reporting, employment protections and significant monetary incentives to eligible SEC whistleblowers.

Is the program working? Are whistleblowers strengthening corporate compliance programs? Will the program be a game-changer in securities enforcement?  What makes corporate whistleblowers successful?

We invite you to read our Year in Review, a report that examines the major developments related to the SEC Whistleblower Program over the past 12 months and how these developments are likely to impact the future of corporate whistleblowing and how responsible organizations do business.

The Best Way to Honor Whistleblowers on National Whistleblower Appreciation Day? Do More to Protect Them

Jordan Thomas - Wednesday, July 23, 2014
In recognition of National Whistleblower Appreciation Day, coming up on July 30, we were asked to contribute a guest post on the Government Accountability Project’s website, which can be found here. GAP is the nation’s leading non-profit, non-partisan whistleblower protection and advocacy organization, which helps expose wrongdoing to the public and actively promotes government and corporate accountability. Since its founding in 1977, GAP has represented over 5,000 whistleblowers in the court of law and in the court of public opinion, including hundreds of whistleblowers who have reported financial misconduct.

Now, we are partnering with GAP and a growing coalition, representing more than 250 organizations and nearly two million citizens, to urge the SEC to take action to protect SEC whistleblowers from retaliation and other attempts by employers to restrict their employees’ rights to participate in the SEC Whistleblower Program. We believe that this important effort will help protect and strengthen the SEC Whistleblower Program. For more information or to get involved, please click here.

$8.9 Billion BNP Guilty Plea Shows Power of Whistleblowers

Jordan Thomas - Tuesday, July 01, 2014
The Department of Justice resolved another massive criminal investigation yesterday, as French banking giant BNP Paribas pled guilty to willfully evading U.S. embargoes on Iran, Sudan and Cuba. BNP agreed to pay an $8.9 billion fine, one of the largest in U.S. history, and admitted that it had taken steps to conceal the true nature of the banking transactions it executed in violation of the embargoes. 

The BNP settlement is notable not just for its huge size and the Department of Justice’s insistence that the bank admit guilt, but also because the investigation appears to have been substantially aided by whistleblowers. According to the New York Times, a whistleblower alerted authorities that BNP was violating U.S. embargoes in 2009. The investigation was also assisted by Stephen Flatlow, who uncovered the fact that a purported charity in New York was actually a front for the Iranian government while pursuing civil charges against Iran for the death of his daughter in a bus bombing. Likewise, the Statement of Facts filed by the Department of Justice suggests that an internal whistleblower (along with several compliance officials and some outside lawyers) expressed concern within BNP about its illegal conduct, but that these warnings were ignored.

While the BNP case is not an SEC action, this case underscores the extremely meaningful impact that just one whistleblower can make. It also shows that companies like BNP should give careful attention to internal whistleblowers, who often give companies a valuable opportunity to resolve problems before they reach disastrous proportions. 

SEC Settles $2.2 Million Enforcement Action Following Whistleblower Complaint by Labaton Sucharow Client

Jordan Thomas - Monday, June 16, 2014
Today, the SEC charged the Albany-based investment advisory firm Paradigm Capital and its owner,  Candace Weir, with violating the federal securities laws by engaging in prohibited and undisclosed principal transactions on at least 83 separate occasions, among other charges. Paradigm and Weir agreed to pay total sanctions of approximately $2.2 million to settle the charges. The SEC began investigating Paradigm after a Labaton Sucharow client – who has chosen to remain anonymous – reported possible misconduct at the firm to the SEC.

According to the SEC’s order, Paradigm, at the direction of Weir, engaged in a series of transactions with a broker-dealer called C.L. King when trading on behalf of a hedge fund client. C.L. King is also controlled and majority-owned by Weir, meaning that affiliated entities stood on both sides of these transactions. Under Section 206(3) of the Investment Advisers Act, an adviser like Paradigm must disclose such principal transactions to their client – here, the hedge fund – and obtain client consent before proceeding. Paradigm failed to satisfy these important disclosure and consent obligations, which are designed to ensure that clients are protected from self-dealing and possible conflicts of interest.

Additionally, Paradigm failed to disclose in its Form ADV that a “conflicts committee” – which it had ostensibly established for the purpose of mitigating possible conflicts like those posed by the principal transactions – was itself conflicted. According to Julie Riewe, the co-chief of the SEC Enforcement Division’s Asset Management Unit, “Paradigm’s use of a conflict committee denied its hedge fund client the effective disclosure and consent to which it was entitled. Advisors to pooled investment vehicles need to ensure that any mechanism developed to address conflicts in principal transactions actually mitigates those conflicts.”

We’re very pleased that this case resulted in a successful settlement for the SEC: it’s one of a growing number of signs that the SEC Whistleblower Program is effectively helping the SEC detect, investigate and prosecute securities violations that might otherwise have remained under the radar. The process of being an SEC whistleblower isn’t often easy, but, as this settlement shows, coming forward can make a difference both for the SEC and for investors.

By Jordan Thomas and Vanessa De Simone

SEC Announces New Whistleblower Award

Jordan Thomas - Wednesday, June 04, 2014
The SEC announced yesterday that it will pay two whistleblowers an award of $875,000 for their reporting of original information that led to a successful SEC enforcement action. The total award, which will be split equally between the two whistleblowers, represents 30% of the sanctions collected by the SEC in the case – the maximum percentage award allowed under the SEC Whistleblower Program. In keeping with the program’s emphasis on protecting the anonymity and confidentiality of whistleblowers, the SEC did not disclose the names of the whistleblowers or provide identifying information about the underlying enforcement action.

This latest award suggests the SEC is beginning to complete investigations sparked or aided by the first wave of whistleblower tips received after the implementation of the SEC Whistleblower Program rules in August 2011. Given that SEC investigations typically take two to four years to complete – with larger and more complex cases often falling on the far end of that range – we expect to see an increasing number of significant awards in the coming months, as more cases work their way through the investigative pipeline. We applaud the whistleblowers in this case for coming forward and making a difference, and look forward to hearing more positive news from the SEC.

By Jordan Thomas and Vanessa De Simone

Labaton Client Profiled in Financial Times

Jordan Thomas - Friday, May 30, 2014
One of the first pieces of advice we give to any prospective client is that while being a whistleblower can be rewarding in many ways, it’s not always easy or glamorous. To the contrary, being a whistleblower can present significant personal and professional challenges, as an article published in this week’s Financial Times Weekend Magazine highlights. The article profiles three Wall Street whistleblowers, including our client Dr. Eric Ben-Artzi, who came forward in 2011 to expose possible misconduct by Deutsche Bank (Dr. Ben Artzi’s whistleblower complaint against Deutsche Bank, which alleged that the bank had improperly overvalued its credit derivative portfolio by over ten billion dollars, was the subject of an earlier Financial Times article and, according to news reports, is under SEC investigation).

As this article reflects, whistleblowers can face a very real risk of retaliation in the workplace. The good news, though, is that the Dodd-Frank Wall Street Reform and Consumer Protection Act and related laws do offer robust and effective protections for individuals who report misconduct to the SEC. In our view, the most important of these is the ability to report anonymously – as we noted in the article, the best protection against retaliation is if the whistleblower’s company has no idea that he or she blew the whistle. Therefore, reporting anonymously, as the SEC Whistleblower Program allows people to do, if they are represented by an attorney, goes a long way in stopping retaliation before it can start. While we certainly respect the courageous decision of Dr. Ben-Artzi and the other whistleblowers profiled in the article to publicly identify themselves, many SEC whistleblowers find that they are better able to protect their careers by remaining anonymous.

Ultimately, this article shows that the choice to become a whistleblower (and whether or not to do so anonymously or openly) is a deeply personal one. We’re gratified that Dr. Ben-Artzi was quoted as saying that, although his path as a whistleblower has sometimes been difficult, he has no regrets and that “I don’t think I could have or should have done anything else.” Our hope is that all whistleblowers who come forward can do so without regrets – a goal that can only be achieved if whistleblowers enter the process with their eyes open, fully understanding the risks, rewards and options available to them.

By Jordan Thomas and Vanessa De Simone

Another Win For Whistleblowers: Court Allows Retaliation Claims Based on Internal Reporting

Jordan Thomas - Thursday, May 29, 2014
One of the most important outstanding questions for SEC whistleblowers and their counsel is whether a whistleblower must report possible securities violations to the SEC to trigger Dodd-Frank’s anti-retaliation provisions. Is it enough for a whistleblower to internally report concerns to his or her company, or does only external reporting to the Commission give rise to employment protections?

As we described in a National Law Journal article last month, the SEC has taken a strong stand that internal reporting is protected activity under Dodd-Frank, where that activity would also fall within the scope of the Sarbanes-Oxley Act. Now, another court in the Southern District of New York has sided with the SEC, refusing to dismiss a retaliation claim based on internal reporting. The case, Yang v. Navigators Group, Inc., was brought by the former Chief Risk Officer of an insurance company, who claimed that she was fired after repeatedly raising concerns to her supervisors and the company’s general counsel regarding deficiencies in the company’s risk management systems and related misrepresentations in the company’s SEC filings. The court found that, under the SEC Staff’s own interpretation of the rules of the SEC Whistleblower Program (specifically, Rule 21F-2), the plaintiff would be protected from retaliation, and that the SEC’s interpretation was entitled to significant weight.

Yang is a significant win for whistleblowers, particularly because it follows other favorable Southern District decisions on the same issue, including Egan v. TradingScreen, Inc. and Ahmad v. Morgan Stanley & Co. While the Court of Appeals (and perhaps ultimately the Supreme Court) will have the final say on whether internal reporting is protected under Dodd-Frank in the Second Circuit, Yang reflects growing momentum in favor of the SEC’s position. Yang may also prove important for future whistleblowers who work in risk, compliance, legal and audit functions, since the court flatly rejected the company’s  argument that the whistleblower was not covered by SOX or Dodd-Frank’s anti-retaliation provisions because risk-related reporting was part of her job description. Hopefully, Yang and cases like it will encourage companies to think more expansively about what constitutes potentially actionable retaliation, and take steps to ensure that internal and external whistleblowers are protected.

By Jordan Thomas and Vanessa De Simone

What’s the Harm of Corporate Scandals?

Jordan Thomas - Tuesday, May 27, 2014
In our experience, one of the primary reasons that whistleblowers come forward to report possible securities violations (and the reason that many attorneys like us chose to devote our professional lives to representing whistleblowers) is concern about the harm that financial misconduct causes. In some cases, this harm is easy to perceive and measure: shareholders may watch their hard-earned investments plunge in value, while innocent employees who played no role in the misconduct may find their livelihoods jeopardized.

Now, a recent study by two finance professors from the University of Minnesota and the Stockholm School of Economics provides empirical evidence that corporate scandals cause another type of harm, which is harder to quantify yet still deeply destructive: a loss of investor confidence in the stock market. The study, Corporate Scandals and Household Stock Market Participation, sought to determine how corporate scandals affect investor confidence by examining whether ordinary “household” investors changed their investment patterns following the revelation of corporate fraud in their home state (the theory being that investors would more likely become aware of a local scandal). The authors found “unambiguous evidence that household stock market participation decreases… following corporate scandals in the state where the household resides.” Moreover, they concluded that corporate scandals cause household investors to decrease their stock holdings not just in “fraudulent” companies – i.e. companies implicated in a corporate scandal – but also in “non-fraudulent” companies.

This study is enormously significant because it confirms what many of us working in the securities field have long believed based on logic and anecdotal evidence: that securities fraud hurts not only the directly-affected investors, but also the markets as a whole. This is a crucial message not just for investors and investor advocates, but also for public corporations, broker-dealers and investment managers, all of whom financially benefit from robust stock market participation. As this study underscores, stopping securities fraud and corporate scandals is not about impeding business: it’s about protecting investors and, in so doing, protecting the markets themselves.

By Jordan Thomas and Vanessa De Simone

CFTC Announces First Whistleblower Award

Jordan Thomas - Wednesday, May 21, 2014
The Commodities Futures Trading Commission (“CFTC”) announced on Tuesday the first award paid under the CFTC Whistleblower Program launched in 2010.  Like the SEC Whistleblower Program, the CFTC Whistleblower Program was created by the Dodd-Frank Act, and allows eligible individuals to receive a monetary award if they provide original information that leads to a successful CFTC enforcement action resulting in the recovery of more than $1 million in total sanctions.  As in the SEC Whistleblower Program, the potential monetary award ranges from 10-30% of the total sanctions recovered in the action and any related actions.

The CFTC’s announcement is notable not only because the award is the program’s very first, but also because it underscores the CFTC’s commitment to protecting the anonymity of whistleblowers.  Like the SEC Whistleblower Program, the CFTC program allows whistleblowers to report possible misconduct anonymously if they are represented by an attorney – an innovative feature that provides the best possible protection against blacklisting and other forms of retaliation.  The CFTC release provided no identifying details about the whistleblower or the underlying enforcement action, except the amount of the award, helping ensure that the whistleblower’s name is not inadvertently uncovered.

The CFTC announcement also emphasizes the important contributions that whistleblowers are already making to its enforcement program.  According to Acting Director of Enforcement Gretchen Lowe, “The CFTC’s Whistleblower Program is attracting high-quality tips and cooperation we might not otherwise receive and is already having an impact on the Commission’s enforcement mission.”  As the types of financial activities and products regulated by the CFTC – including certain swaps, retail foreign exchange trading, energy contracts, and commodity pools – continue to become more complex, CFTC whistleblowers are likely to play an even more significant role in uncovering violations and protecting investors in the months and years ahead.

By Jordan Thomas and Vanessa De Simone

What Happens to an SEC Whistleblower Tip?

Jordan Thomas - Tuesday, May 20, 2014

One of the questions we’re frequently asked by clients and prospective clients is “what happens to a whistleblower tip once it’s submitted to the SEC, and how does the SEC determine which tips to actively investigate?” These are crucial questions for any potential whistleblower, especially given that the SEC receives approximately 30,000 tips, complaints and referral each year – 3,200 of which were whistleblower tips in 2013 – but can only conduct about 700 active enforcement investigations each year.  

The SEC’s process for vetting and investigating tips starts when a whistleblower submits to the SEC a Form TCR – short for “Tips, Complaints and Referrals” – describing the securities violation(s) that he or she believes has occurred. (As we’ve noted in previous posts, it’s crucial for any SEC whistleblower to submit his or her information using the Form TCR in order to remain eligible for a potential monetary award). Once the TCR is received by the SEC’s Office of the Whistleblower or “OWB,” the OWB will assign the submission a unique TCR number and send that number back to the whistleblower or the whistleblower’s attorney for record-keeping and tracking purposes. 

At that point, the TCR is forwarded to the SEC’s Office of Market Intelligence or “OMI,” which has been described as a “point guard” for the entire agency. Comprised of more than 40 attorneys, former traders, accountants and other experts, the OMI is responsible for gathering and analyzing all tips and complaints received by the SEC. The OMI conducts an initial evaluation of each tip to determine, among other things, whether it relates to an existing investigation, whether similar information has already been submitted to the agency, and whether it relates to possible misconduct that occurred within the SEC’s five-year statute of limitations for enforcement actions. Most importantly, the OMI determines whether the tip is sufficiently specific, significant and credible to referred to the Division of Enforcement – the division responsible for conducting comprehensive investigations of possible securities violations and bringing claims against defendants where warranted.  

If a tip is referred to the Division of Enforcement, it’s then up to enforcement attorneys to determine whether, and how best, to further investigate the tip. In some instances, the enforcement attorneys may determine that the tip should not be pursued, either because it appears unlikely that an actionable securities violation occurred or for some other reason. In some cases, the Division may determine that the tip should be referred to a different government agency, such as the CFTC, IRS or Department of the Treasury. In many cases, though, the tip will be used as a valuable new lead in an existing SEC investigation or as the starting point for an entirely new SEC investigation. 

As the pathway traveled by a tip reflects, the SEC cannot launch a full-blown investigation into every new allegation, and instead must make difficult but necessary decisions about how best to allocate its resources. For that reason, it’s vital that any SEC whistleblower (whether using counsel or not) provide information to the SEC in clear, compelling, detailed and organized way, explaining exactly why he or she believes a securities violation has occurred and providing any supporting evidence. This type of tip is much more likely to catch the SEC’s interest than a vague or conclusory tip, giving both the SEC and the whistleblower a better chance at achieving a successful outcome. 



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Website Editor &
SEC Whistleblower Advocate

Jordan A. Thomas jthomas@labaton.com

212-907-0836

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