Employers May Come to Regret Seeking Narrow Definition of “Whistleblower”

Jordan Thomas - Wednesday, April 23, 2014
One of the most important unsettled legal questions for SEC whistleblowers and their counsel is whether the SEC Whistleblower Program’s anti-retaliation provisions apply to individuals who have reported misconduct internally, but have not yet blown the whistle to the SEC. We recently published an article in the National Law Journal on this issue, arguing that employers and their counsel may come to regret seeking a narrow interpretation of “whistleblower” that discourages internal reporting. This is a critical issue, which every potential whistleblower should understand before moving forward.  For the full article, please click here.

- By Jordan Thomas and Vanessa De Simone

New SEC Task Force Fights Financial Fraud And Encourages Collaboration with Whistleblowers

Jordan Thomas - Monday, April 21, 2014
Last month, I attended SEC Speaks, an annual conference in which the SEC’s leadership provides insight into the agency’s priorities, projects and plans for the future. One of the key initiatives highlighted this year was the SEC’s new Financial Reporting and Audit Task Force. Comprised of SEC lawyers and accountants from around the country, the task force seeks to combat accounting and auditing fraud, like the well-known frauds perpetrated by Enron, WorldCom and Adelphia. As the SEC’s Director of Enforcement Andrew Ceresney outlined in a speech last September, the task force will place renewed emphasis on generating cases related to a wide range of possible financial reporting violations, including reserve manipulation and improper revenue recognition practices, as well as independence violations by auditors (for more information on different types of financial fraud, please see our Securities Law Primer.)

While accounting cases have not been making as many headlines in recent days as they did in the Enron-era, accounting fraud is still pervasive – and incredibly harmful to investors and the integrity of the financial markets – making this task force an important and welcome development. What’s particularly exciting to me about the task force is the fact that it has identified encouraging and collaborating with whistleblowers as one of its principal goals. Moreover, as the task force’s website reflects, it also recognizes that these potential whistleblower partners can and should include not only corporate insiders, but also “gatekeepers” such as auditors and attorneys, who often have first-hand knowledge of securities violations. Likewise, the task force identifies the important role that academics and other experts can play in promoting market integrity issues and pioneering new methods of fraud detection (as explained more fully in our SEC Whistleblower Program Handbook, outsiders such as academics may also be eligible to act as whistleblowers under the SEC Whistleblower Program rules if they voluntarily provide original information, such as an original analysis of a company’s public filings that reveals fraud, that leads to a successful SEC enforcement action.) Accounting-related misconduct is unlikely to be eradicated anytime soon, but by marshaling the combined efforts of the SEC Staff, whistleblowers, responsible gatekeepers and the academic community, I believe the task force can and will make a significant difference in the fight against financial fraud.

Senator Grassley Announces the Creation of a Congressional Whistleblower Caucus

Jordan Thomas - Friday, April 18, 2014
Last week, we provided an update on Senator Chuck Grassley’s (R-IA) efforts to strengthen the IRS Whistleblower Program and expedite the processing of IRS Whistleblower claims. Now, Senator Grassley – a longtime advocate for whistleblower rights – has announced a new plan to create a “Senate Whistleblower Protection Caucus,” to “help bring attention to the need for ongoing whistleblower protections.” The Caucus, which Senator Grassley aims to launch in the next Congressional session, will focus on advocating for whistleblower rights and ensuring that existing legal protections for whistleblower are properly enforced.

Senator Grassley’s plan is crucial because, despite positive new initiatives like the SEC Whistleblower Program, whistleblowers remain an under-utilized law enforcement asset, which have huge potential to help numerous government agencies – from the SEC to the IRS to the FDA – uncover misconduct more quickly and efficiently. It may be a cliché but it’s true: knowledge is power. But, whistleblowing can only work as a law enforcement tool if individuals with information about wrongdoing are encouraged to come forward, and protected from retribution when they do blow the whistle. As Senator Grassley recognized, “the best protection for a whistleblower is a culture of understanding and respecting the right to blow the whistle.”

The SEC Whistleblower Program rules have already sought to develop this type of whistleblower-friendly culture by, among other things, allowing anonymous reporting and providing SEC whistleblowers with anti-retaliation employment protections. We hope that Senator Grassley’s new caucus will expand on these efforts and help other areas of the government leverage the power of whistleblowers to stop fraud, waste and other abuses.

- By Jordan Thomas and Vanessa De Simone

OIG Report Praises SEC Whistleblower Program

Jordan Thomas - Wednesday, April 16, 2014

The internal watchdog for federal government agencies, including the SEC, is the Office of the Inspector General (“OIG”), which conducts audits and investigations of the SEC to “promote integrity, economy, efficiency, and effectiveness in the Commission's programs and operations.” In keeping with this mission, the OIG has issued its first audit report on the SEC Whistleblower Program. Fortunately, this report was overwhelmingly positive, confirming that the whistleblower program is off to a strong start. The OIG’s key findings included:

  • The SEC Whistleblower Program rules are clearly defined and user-friendly;
  • The SEC promptly reviews whistleblower submissions to determine whether further enforcement action is warranted;
  • The funding mechanism for the Investor Protection Fund – the fund from which whistleblower awards are paid –  is sufficient, and an appropriate balance of more than $450 million has been maintained in the fund; and
  • The Freedom of Information Act (“FOIA”) exemption that helps the SEC protect the anonymity of whistleblowers is a vital feature of the program and should remain in effect.

These findings are especially significant because an OIG report is far from a “rubber stamp” of approval when it comes to whistleblower programs – to the contrary, past OIG reports sharply critiqued the OSHA whistleblower program and the SEC insider trading “bounty” program in place before the inception of the current whistleblower program. The fact that the SEC Whistleblower Program was able to earn such a positive report on its first try is an indicator both of the SEC’s commitment to the program, and the program’s effective leadership. That’s good news – not just for potential SEC whistleblowers, but for all of the investors who benefit when whistleblowers come forward to exposure fraud and wrongdoing.

- By Jordan Thomas and Vanessa De Simone

SEC Orders Show Importance of Complying with Whistleblower Program Rules

Jordan Thomas - Monday, April 14, 2014
As reported in the Wall Street Journal, the SEC recently denied two individuals’ applications for whistleblower awards because they had not met the requirements of the SEC Whistleblower Program rules. In the first case, an anonymous woman claimed that she had provided information that helped the SEC build its sub-prime mortgage fraud case against several former executives at Countrywide Financial and New Century Financial Corp., including former Countrywide CEO Angelo Mozilo, who reached a $67.5 million settlement with the SEC in 2010. The woman claimed that she had provided tips about the fraud to the U.S. Department of Housing and Human Development (or HUD) between 2008 and 2011, and that HUD had shared this information with the SEC. The SEC determined that, to the extent the woman was seeking an award for information provided to HUD prior to the official launch of the SEC Whistleblower Program in July 21, 2010, that information could not be the basis for an award. Additionally, the SEC determined that even if HUD had provided information to the SEC based on the woman’s tips after July 21, 2010, that information would not have been provided to the SEC in writing by the Claimant, as the rules of the SEC Whistleblower Program require.

In the second case, an unnamed person sought an award in connection with the SEC’s case against several defendants who had perpetrated a fraudulent penny stock offering scheme involving the stock of Anscott Industries, Inc. That case led to more than $21 million in sanctions being imposed against the defendants. The SEC denied that claimant’s application for an award because it found that he or she had not made the award application within 90 days of the time that the SEC posted its “Notice of Covered Action” – the official notice that alerts whistleblowers and others that a case involving more than $1 million in sanctions has been resolved and that any potentially eligible whistleblowers may seek an award. The SEC also found that the tips at issue did not constitute “original information,” as the rules require, because they were not provided to the SEC for the first time after July 21, 2010.

These cases show that, while whistleblowers with actionable information about wrongdoing have the opportunity to reap significant monetary awards, they must remain mindful of the rules of the SEC Whistleblower Program, both when initially submitting information to the SEC and when seeking an award (for more information about these rules, please see our SEC Whistleblower Program Handbook). That’s even more true for attorneys, accountants and auditors who may be considering blowing the whistle, since, although they can participate in the SEC program, they are subject to special rules and eligibility criteria. The rules of the SEC Whistleblower Program are not overly burdensome, but they are extremely important, especially given the high personal and financial stakes at issue in whistleblower cases. The moral of this story is that the more a potential whistleblower learns about the program before stepping in, the better experience and outcome he or she is likely to have.

- By Jordan Thomas and Vanessa De Simone

Senator Grassley Urges IRS to Strengthen Whistleblower Program

Jordan Thomas - Friday, April 11, 2014
Both in our practice and on our blog, we typically focus on the SEC Whistleblower Program, which seeks actionable intelligence about possible violations of the federal securities laws. But, the SEC Whistleblower Program is only one of several federal programs that seek to leverage whistleblower information to detect and deter wrongdoing. One of the other prominent whistleblower programs is the IRS Whistleblower Program, which was revamped in 2006 to better incentivize individuals with information about possible tax evasion to report that misconduct. Under the program, whistleblowers may be eligible to collect a monetary award if they provide information that “substantially contributes” to the collection of taxes, penalties or other amounts in excess of $2 million.

While the IRS Whistleblower Program has had some notable successes, taxpayer advocates – including, most significantly, Senator Chuck Grassley (R-IA) – are calling for the IRS to do even more to encourage whistleblowers to come forward and help stop tax fraud. Senator Grassley urged the IRS to move more quickly to investigate and resolve cases based on whistleblower tips, stating “The agency should do everything it can to make these cases a priority.” Senator Grassley’s remarks were echoed in an article by Forbes contributor Erika Kelton, who called for a shift in culture at the IRS.

These remarks come on the heels of the IRS’s latest report to Congress on the status of the whistleblower program, which revealed that the IRS did not make its first award under the updated 2006 program rules until 2011 – a five year gap. The SEC Whistleblower Program, by contrast, made its first award just a year after the rules of the program became final. Moreover, the IRS acknowledged that there are limitations to its current program, including the fact that IRS whistleblowers (unlike SEC whistleblowers) are not accorded specific protection from retaliation under the statute that amended the IRS Whistleblower Program rules.

We agree with Senator Grassley that “supporters of whistleblowers need to stand firm. We can’t let up.” Given the enormous potential of whistleblowers to assist the IRS (and other government agencies), we hope the IRS will heed Senator Grassley’s call and devote additional resources to ensuring that whistleblower complaints are handled quickly, effectively and successfully.

- By Jordan Thomas and Vanessa De Simone

SEC Announces Additional Payout to Whistleblower

Jordan Thomas - Thursday, April 10, 2014
The SEC announced on Friday that it made an additional payout of $150,000 to the recipient of the first monetary award under the SEC Whistleblower Program, after successfully collecting more sanctions from one of the defendants in the action. With that additional payout, the whistleblower – who is entitled to receive up to 30% of any sanctions collected by the SEC under the original award order – has received a total of nearly $200,000. The SEC is now continuing its efforts to collect additional funds from the defendants, meaning the final award to the whistleblower is likely to be even bigger. This whistleblower reported the “multi-million fraud” at issue anonymously, and has not been identified by the SEC. Indeed, as in other cases, the SEC has revealed almost no information about the underlying case, such as the name of the defendants, in an effort to protect the whistleblower’s confidentiality – an encouraging sign for other individuals considering coming forward on an anonymous basis.

While this new payout may not grab as many headlines as larger awards like the $14 million award paid in October, it’s a positive reminder that monetary awards available under the SEC Whistleblower Program have the potential to grow over time if the original information provided by the whistleblower leads to additional recoveries. (As explained in our SEC Whistleblower Program Handbook, the total sanctions ordered in enforcement actions resulting from the whistleblower’s tip must exceed $1 million for a whistleblower to be eligible for a monetary award). That potential can be especially significant in cases involving multiple defendants: for example, if an eligible whistleblower reported accounting fraud at his or her company, resulting in the SEC ordering aggregate sanctions of more than $1 million against both the company and its auditor, the whistleblower could receive 10-30% of the total sanctions collected from both defendants, even if the case against the auditor was resolved months or years after the case against the company (or vice versa).

Ultimately, the objective of the SEC Whistleblower Program is to detect and deter harm to investors by aligning the interests of whistleblowers, investors and the Commission – all of who win if the SEC is able to recover funds from those who violate the securities laws, especially since awards to whistleblowers do not come from, or reduce, funds used to pay back damaged investors. Payouts like this one bring the program one step closer to that goal.

- By Jordan Thomas and Vanessa De Simone

SEC Officials Provide Promising Reports on the SEC Whistleblower Program

Jordan Thomas - Tuesday, April 08, 2014
One of the questions I’m most frequently asked by clients, other lawyers and friends is “what’s happening inside the SEC with respect to the whistleblower program?” Recently, several top SEC officials have provided insight onto this question – and their comments indicate that the SEC continues to see the SEC Whistleblower Program as a powerful tool for combating securities fraud.

For example, at the recent “SEC Speaks” conference in Washington, D.C. the Chief of the SEC’s Foreign Corrupt Practices Act (“FCPA”) unit, Kara Brockmeyer, indicated that whistleblowing tips are now one of the leading ways in which the SEC learns of potential FCPA violations. Likewise, Jina Choi, the Regional Director of the SEC’s San Francisco office, described the SEC Whistleblower Program as “huge” and praised its contribution to the Commission’s ability to detect securities fraud. These remarks echo similar comments by other SEC leaders, including Stephen Cohen, the SEC’s Associate Director of the Division of Enforcement, with whom I spoke on a panel last June. Cohen reported that he is personally “participating in numerous cases where we are working very closely with whistleblowers” and that the whistleblower program has “clearly turbocharged” the Division’s enforcement efforts. Indeed, according to the SEC’s most recent annual report on the Whistleblower Program, the agency received more than 3,000 tips from around the world in 2013, which Cohen predicts will lead to “incredibly impactful cases.”

Brockmeyer, Choi and Cohen’s remarks certainly ring true in light of my own experience representing SEC whistleblowers: not only is our firm seeing cases involving major frauds, but also cases involving senior-level employees with timely, original and actionable intelligence about possible violations. Given that enforcement officials at the SEC continue to enthusiastically welcome whistleblower tips – and that the SEC has already paid one extremely significant award of $14 million as well as several other smaller awards – I predict that more major awards will be coming in the months ahead, as the SEC begins to resolve open investigations driven by whistleblowing. These investigations may take time, but ultimately I believe that’s a good thing for both investors and whistleblowers, since it will allow the SEC to properly investigate every tip and build strong cases against those who violate the securities laws and threaten the integrity of our markets.

High-Frequency Trading: Further Thoughts on the “Flash Boys” Debate

Jordan Thomas - Friday, April 04, 2014
The firestorm sparked by Michael Lewis’ new book on high-frequency trading, Flash Boys, raged on this week, with both opponents and supporters of high-frequency trading entering the fray. In a heated debate on CNBC’s Power Lunch, Lewis and the founder of IEX – a new exchange designed to limit high-frequency trading – repeated the charge that the U.S. stock market is “rigged.” Defending ultra-fast traders and the stock exchanges on which they operate was William O’Brien, president of the BATS exchange, who accused IEX of distorting the facts to promote its own business model. Charles Schwab also weighed in, with a scathing statement that described high-frequency trading as “cancer” and “a technological arms race designed to pick the pockets of legitimate market participants.”

Whichever side is right, it’s clear that high-frequency traders have gone to huge lengths to gain mere milliseconds in trading time and other informational advantages. As reported by the Wall Street Journal, some high-frequency trading firms have spent hundreds of millions of dollars to lay specialized fiber optic cables between the New York and Chicago exchanges, while others have developed sophisticated lasers to beam information between exchanges.

What is also clear is that these high-frequency trading practices raise fundamental questions whether regulatory reforms can keep up with an ever-changing and hyper-competitive market. The SEC and other regulators must be nimble enough to recognize new trends in the market, and be able to articulate whether and when these practices cross the line. Since the SEC is up against the nearly unlimited capital and creativity of Wall Street, that also means that the SEC must be given adequate resources to do the job. If the high-frequency trading industry can invest billions to boost their trading speed by a few milliseconds,we should invest at least an equivalent amount to protect investors.

- By Jordan Thomas and Vanessa De Simone

High-Frequency Trading: Whistleblower Aids SEC and FBI Investigations

Jordan Thomas - Wednesday, April 02, 2014
The buzz on Wall Street this week has been all about high-frequency trading and Michael Lewis’ new book on the topic, Flash Boys. As Lewis explains, high-frequency trading typically works by exploiting a powerful combination of speed and information: high-frequency traders use sophisticated computer programs to see and analyze trade orders that are placed by other stock market participants, then quickly make their own trades based on that data before the original orders can be filled. Known as “front-running,” these advance trades often mean that traditional, slower traders – including some pension funds and other institutional investors – receive less favorable terms for their own stock sales and purchases. Such front-running can represent a securities violation in some, but not all, circumstances – for example, a violation would likely occur if a stock exchange gave high-frequency traders access to order information that it had promised to keep confidential. SEC rules also prohibit national exchanges from distributing market data in an “unreasonably discriminatory” manner, as reflected in a recent enforcement action against the exchange Euronext.

While Lewis’ book is likely to open many investors’ eyes to the realities of modern stock trading, he is not the first to identify the dangers (and potential illegality) of high-frequency trading. In fact, as reported in the Wall Street Journal, a Goldman Sachs trader-turned-whistleblower, Haim Bodek, disclosed many of these abusive practices to the SEC in 2012. Bodek apparently told the SEC that certain exchanges offered high-speed traders the right to “jump ahead” of other investors’ trades – for an extra fee. According to the Journal, both the SEC and the FBI are actively investigating such practices, likely based at least in part on Bodek’s whistleblowing. Bodek’s case is yet another example of the ways in which whistleblowers can help the SEC and other law enforcement agencies to understand and successfully police even the most complex and rapidly-changing corners of the financial markets.

- By Jordan Thomas and Vanessa De Simone

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Website Editor &
SEC Whistleblower Advocate

Jordan A. Thomas jthomas@labaton.com


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