Whistleblowers on Tour

Jordan Thomas - Friday, October 24, 2014
This week, I was honored to participate in the NYC stop of the Government Accountability Project’s Whistleblower Tour, which seeks to educate the public about the important role whistleblowers play in promoting government and corporate accountability. Speaking on a panel with Enron Whistleblower Sherron Watkins, Jon Oberg, Louis Clark and Jennifer Pacella was a phenomenal experience, which I’ll dive into in a forthcoming post. My thanks to GAP for organizing this important event and to Baruch College for hosting. For more information in the meantime, here’s an excellent article in Corporate Counsel.

Gearing Up for Annual Report, White Touts Whistleblower Program’s Success

Jordan Thomas - Tuesday, October 21, 2014
As we await the Annual Report of the SEC Office of the Whistleblower—expected in mid-November—Mary Jo White categorically praised the program, citing its 'enormous success’ in generating information about significant securities violations. (See the FY 2013 Annual Report here.) In her address last week to the Ontario Securities Commission, which is considering the implementation of an incentive-based whistleblower program, White remarked that there was “no question” the US agency had achieved more with the program than it could have without it.

In FY 2014, the SEC awarded some $35 million to 9 whistleblowers, including the largest award to date, more than $30 million paid to a whistleblower living in a foreign country. Notably, that award represented less than the 30% maximum allowed under the program—because the whistleblower delayed coming forward to the SEC.

So while we share the agency’s enthusiasm, and salute a record-setting year, we are mindful that our work to educate whistleblowers continues. For more information on who can be a whistleblower and why timing matters in reports to the SEC, please feel free to see this video or to reach out to us directly.

By Jordan A. Thomas and Jennifer D. Larson

2014 Enforcement Division Report

Jordan Thomas - Monday, October 20, 2014
Last week, the SEC released key data relating to Enforcement Division activity in FY 2014.  Among the highlights, we note a 10% increase in enforcement actions over the prior year. Most importantly, monetary sanctions are significantly larger; a 22% increase in penalties an disgorgement as compared to FY 2013.  Whistleblowers continue to play a crucial role in the enforcement paradigm — with 9 whistleblowers receiving total awards of approximately $35 million in FY 2014. Notably, using its new authority to bring anti-retaliation enforcement actions, the SEC charged hedge fund advisory firm Paradigm Capital Management with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the Commission, and charged the firm’s owner in connection with the principal transactions. This employee is a Labaton Sucharow client. For the complete results, see the SEC release.

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

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Website Editor &
SEC Whistleblower Advocate

Jordan A. Thomas jthomas@labaton.com


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