Last week, I was fortunate to travel to Australia to discuss corporate ethics and whistleblower issues with various economic, business, and political leaders.
I also had the outstanding opportunity to address business and law students on the crucial importance of utilizing ethical conduct as a guiding principal
for one’s career. As I have previously discussed,
I firmly believe that the absence of ethical cultures is at the heart of the vast majority of significant financial scandals, and it is encouraging
to see this topic is an important issue to so many Australian audiences.
It is a fascinating time to conduct these conversations with Australians, as the country is at a key juncture in the national discussion of how best to
find and prevent corporate fraud and corruption. Numerous government and corporate entities are currently investigating legal reform and policy initiatives
to better protect and encourage whistleblowers in the country's financial services industry. In late 2014, the Australian Securities and Investment
Commission (ASIC), Australia’s financial services regulator, established an Office of the Whistleblower. And just this month, the government announced increased funding and reforms to further empower ASIC to fight financial fraud.
However, as I noted in many of my discussions in Australia, we live in an increasingly global and interconnected financial market system. This fact is
profoundly evident in the worldwide success of the SEC Whistleblower Program. Since the program’s initiation, the SEC has received whistleblower tips
from individuals in 95 countries outside the United States. In fiscal year 2015, approximately 10 percent of all whistleblower tips came from overseas.
And these tips have led to significant enforcement actions. In fact, the largest award to date, which the SEC announced in 2014, was a $30 million bounty paid to a whistleblower living in a foreign country.
The international impact of the SEC Whistleblower Program is not the result of happenstance. The program was designed with an understanding that our global
economies can yield global securities fraud. Therefore, the SEC’s program extends to possible securities violations that occur anywhere in the world,
regardless of a whistleblower’s individual citizenship. While each case is different and jurisdictional issues can be complex, a whistleblower complaint
may be brought against an entity or individual if they have investors, investments, operations, employees, or clients in the U.S.
As I continue speaking with international audiences, I am heartened to see many individuals and organizations actively engaged in the discussion of how
to build and maintain ethical and transparent cultures. While each nation obviously faces its own needs and challenges in developing appropriate standards
and regulations, corporate wrongdoing is not a country-specific issue. It affects every single commercial marketplace, and we must continue these discussions,
and work together if we wish to create real and lasting integrity in our markets. If you are interested in learning more about the SEC Whistleblower
Program, or would like to discuss a specific issue or concern, please see here.
As we previously discussed,
the SEC reported a number of important achievements regarding its Whistleblower Program in fiscal 2015, including a record number of whistleblower
tips as more and more individuals come forward with information about potential misconduct. This is an encouraging development, but it also reminds
us of the importance of understanding the factors that motivate or prevent people from speaking up.
Witnesses to misconduct often remain silent. The Ethics and Compliance Initiative’s 2013 National Business Ethics Survey of the U.S. workforce revealed
that 45 percent of individuals surveyed did not report misconduct because they did not trust their report would remain confidential. As we have
previously noted, whistleblowers face real and significant personal and professional risks. In fact, the ECI survey also revealed that more than
one in five respondents who reported misconduct said they suffered from retribution as a result.
A recent experiment reported in the American Accounting Association's
journal Behavioral Research in Accounting, examined this fear of retaliation. The researchers posited that when companies enact policies that
describe “explicit whistleblower protections” from retaliation, whistleblowers are actually discouraged by the “salience of retaliatory threats.” In
other words, hearing detailed information about the various forms of retaliation from which they were protected, made individuals feel increasingly afraid of retribution and less likely to report misconduct.
The experiment reveals a central issue in our work to deter corporate wrongdoing: fear of retaliation is the greatest single impediment to the reporting
of misconduct. The authors of the experiment and report do not suggest that corporations omit statements regarding protections, but the results indicate
the importance of recognizing and assuaging the powerful fear of retaliation when designing any compliance or whistleblower program.
In crafting the SEC Whistleblower Program, the Commission placed profound emphasis on confidentiality, understanding the fundamental importance of protecting
whistleblowers from retaliatory consequences. In addition to protecting whistleblowers who come forward, maintaining confidentiality creates an atmosphere
that encourages safe reporting. In fact, the record number of tips the SEC received last year seems to indicate a growing confidence in the protections
and incentives offered by the Whistleblower Program. If we are to architect true change in the landscape of corporate ethics, we must begin by empowering
and protecting those who wish to speak up. To read more about considerations for potential SEC whistleblowers, see here.
After a record number of enforcement actions brought by the SEC in 2015, the Commission’s leadership recently indicated that the SEC does not expect to see a decrease in these actions in 2016. SEC enforcement director, Andrew Ceresney
recently remarked, “I don’t think it’s going to slow down. In fact, I look at this year’s pace and I think it’s equivalent or exceeds last year.”
In 2015, the Commission filed 807 enforcement actions and collected $4.19 billion in sanctions, surpassing 2014’s record 755 enforcement actions and
$4.16 billion in sanctions. The Commission’s efforts in 2015 also involved a broad range of securities violations and many first-of-their kind
actions. As we previously reported,
we are witnessing the powerful impact of the SEC and its determination to utilize all tools at its disposal in order to uncover and prevent corruption.
One of the sharpest tools in the enforcement arsenal is, of course, whistleblowers. The information provided by knowledgeable insiders enables law
enforcement authorities to more expeditiously pursue high-value cases. As the number of whistleblower submissions and awards increase, and as the
SEC maintains this aggressive pace of enforcement, we are making great strides in the effort to establish a more transparent and ethical marketplace.
Yesterday, the SEC awarded nearly $2 million to three whistleblowers. Approximately $1.8 million, the largest of the awards, was granted to a whistleblower who voluntarily provided
original information that allowed the SEC to open an investigation and continued to provide information during the investigation. Two other whistleblowers,
who provided information after the investigation started, each received awards of approximately $65,000.
The substantial discrepancy between the large and smaller awards makes clear the impact of early reporting. However, the smaller awards also illuminate
the value of reporting even at a later time as subsequent whistleblowers can provide actionable intelligence to support the agency’s investigative
Sean McKessy, Chief of the SEC’s Office of the Whistleblower, commented, “We’re seeing a significant uptick in whistleblower tips over prior years, and
we believe that’s attributable to increased public awareness of our program and the tens of millions of dollars we’ve paid to whistleblowers for information
that helped us bring successful enforcement actions.”
Given this increase in the number of tips, and given that the life of most investigations averages two to four years, it is not surprising that we are
witnessing a surge of whistleblower awards. As we reported yesterday, the SEC
is proving a formidable and expert foe against misconduct. As Chair White recently stated in a speech about the SEC
Whistleblower Program, “Gone are the days when corporate wrongdoing can be pushed into the dark corners of an organization. Fraudsters rarely act alone,
unobserved and, these days, the employee who sees or is asked to make the questionable accounting entry or to distribute the false offering materials
may refuse to do it or just decide that they are better off telling the SEC.”
As it continues to protect and empower whistleblowers, and reckons harshly with wrongdoers, the SEC is making enormous strides to eradicate the pervasive
fraud that has plagued the financial services industry for far too long.
Last month, a jury sided with the SEC in a closely watched case, finding two stockbrokers liable for insider trading in connection with a $1.2 billion
IBM acquisition. Though prosecutors had previously dropped the criminal case against the brokers, the SEC charged on, ending in an impressive court
The Commission is becoming expert at having—and winning—its day in court. This recent case follows a string of victories for the SEC's trial
unit. In 2015, the team took 27 cases to court and was undefeated in federal court, and had just two losses in administrative proceedings.
Shoring up the SEC's Trial Unit was a critical focus for Chair White, whose reputed toughness was questioned when she first took the helm of the SEC in
2013 and saw a series of losses. In 2014, she restructured the unit by teaming trial lawyers with investigative experts to create more full-bodied teams primed from the onset of complex cases. The Commission also directed
recruiting efforts to former federal prosecutors, who bring expert bench strength to the courtroom. The work began to pay off quickly.
Chair White has frequently spoken to the strengths of the SEC’s enforcement program, a system that looks to not only penalize wrongdoers, but also to prevent
future misconduct. “In order for our SEC enforcement program—or any enforcement program—to be effective, the punishment must not only fit
the crime, but the actions we bring must also send a strong message of deterrence to other would-be wrongdoers,” White said in a 2014 speech. “This is much easier said than done and very hard to measure,
but this much is certain—our sanctions must have teeth and we must send a strong public message about our cases. The more serious the misconduct,
the more aggressive we should be in seeking monetary penalties, industry bars, court injunctions and other remedies available to us.”
This most recent message should be heard loud and clear by those thinking twice before taking on the SEC, while it also reminds whistleblowers that as
they navigate the tricky terrain of reporting misconduct, they have a formidable ally in the United States government.
Last week, Rep. Elijah E. Cummings (D-MD) and Senator Tammy Baldwin (D-WI) introduced the Whistleblower Augmented Reward and Non-Retaliation Act of 2016
(WARN Act), a groundbreaking legislation that would encourage corporate whistleblowers, particularly those in the banking sector to come forward with
enhanced protections, providing a safe passage that the industry has never before seen. Banks are regulated by multiple regulatory agencies but currently
whistleblowers in those institutions have limited avenues to safely report wrongdoing. This legislation has the potential to change that forever.
The WARN Act would enforce upstanding citizenship in the financial sector in two major ways:
Enhanced Employment Protections for Whistleblowers and Regulators
The bill would prohibit employers from demanding that employees waive their rights or disclose their communications with the government. By making
it illegal for institutions to contractually ban potential whistleblowers from disclosure, the WARN Act comprehensively addresses the proliferation
of gag orders. This is critical, particularly in light of findings from The Street, The Bull, and The Crisis: A Survey of the U.S. & UK Financial Services Industry,
which found that 28 percent of financial services professionals earning $500,000 or more per year say that their company’s confidentiality policies
and procedures bar the reporting of potential illegal or unethical activities directly to law enforcement of regulatory authorities. WARN would also
safeguard whistleblowers from retaliation if they refuse to engage in actions that they suspect are unlawful. In addition regulators disclosing sensitive
information pertaining to a bank’s “safety and soundness” would be offered the same level of protection as whistleblowers. This is a crucial detail
as it highlights the fact that regulators, like whistleblowers, can be bullied into submission and secrecy.
Legal Protections and Monetary Incentives
The WARN Act would allow whistleblowers to show, through legal procedures including evidentiary standards and burden of proof, that their honest, protected
actions as whistleblowers contributed to unfavorable personnel actions. It’s not uncommon for a whistleblowing employee to be harrassed or demoted
because of her or his ethical pursuit. WARN would ensure that the whistleblower has backing from the court against such retaliatory conduct.
Whistleblowers would also be eligible to receive between 10 and 30 percent of monetary sanctions recovered for their willingness to stand up and report
wrongdoing—which award guidelines are already present in the SEC Whistleblower Program established by the Dodd-Frank Act in 2010. Moreover, whistleblowers
won’t have to worry about out-of-pocket legal expenses or lost pay. WARN would reinstate them up to twice the amount of back pay, with interest, in
addition to civil remedies, punitive damages, and compensation for any other related fees.
We applaud Senator Baldwin and Representative Cummings for introducing such a necessary piece of legislation. On the front lines of whistleblower advocacy,
we regularly field inquiries from individuals in the banking industry who are interested in reporting significant banking violations but have been
reluctant to follow through given the wholesale absence of meaningful employment protections and monetary incentives. Potentially, the WARN Act is
the answer, and based on the success of the SEC Whistleblower Program, it may be a crucial first step to rebuild ethical cultures in the U.S. banking
Earlier this month, at the SEC’s annual SEC Speaks conference, leaders of the Commission gathered to address a wide range of topics, including various plans to carry out the rulemaking agenda established
under Dodd-Frank and the SEC’s efforts to uncover harmful practices in an increasingly complex market.
Sharon Binger, Director of the SEC’s Philadelphia regional office, addressed the latest developments in the Commission’s Whistleblower and Cooperation
Programs. In particular, she cited In the Matter of KBR, Inc
in which case the SEC charged a company for using overly restrictive language in confidentiality agreements to hinder whistleblowers. The agreements,
which the company required witnesses in internal investigations to sign, threatened disciplinary action or termination if the employees discussed the
matters with outside parties without first gaining approval from KBR’s legal department. In her speech, Ms. Binger stated that she expected the Commission
to pursue more of these types of cases, as the SEC continues to support and protect the Whistleblower Program.
The use of these illegal confidentiality agreements are a clear indication that some employers will take extreme measures to prevent employees from speaking
out against misconduct. In a survey
of U.S. and UK financial services professionals we conducted last year together with the University of Notre
Dame, we were dismayed to find that one in every five respondents believed their company’s confidentiality policies and procedures barred the reporting
of potential illegal or unethical activities directly to law enforcement or regulatory authorities. Perhaps even more alarming was that among those
earning more than $500,000 a year, approximately one in four respondents said they had signed or had been asked to sign a confidentiality agreement
that would prohibit reporting illegal or unethical activities to the authorities.
However, as Ms. Binger made clear, corporations cannot prevent an individual from engaging with his or her government and the whistleblower program has
proven a powerful weapon against corruption. In fiscal 2015 the number of whistleblower tips increased by 30% compared to fiscal 2014 and the whistleblower
program continues to act as a robust source for SEC investigations. Through their first-hand knowledge, whistleblowers provide early and actionable
intelligence of potential wrongdoing to the SEC and help minimize damage to investors and the markets. By empowering, protecting, and incentivizing
whistleblowers, the program is a critical tool to ensure fairness and transparency in our financial system. To learn more about the SEC Whistleblower
Program, see here
Last week, Cornerstone Research released a new report, SEC Enforcement Activity Against Public Company Defendants, examining SEC actions initiated between fiscal years 2010 and 2015.
Utilizing data from the SEC Enforcement Empirical Database,
the report offers some detailed insights into SEC enforcement actions in recent years, such as:
- The number of enforcement actions continues to increase. In fiscal year 2015, the SEC initiated a record 807 actions, which represented a
7% increase over fiscal 2014, and a 10% increase over the median number of actions for fiscal years 2010 through 2015.
- Actions against public company defendants resulted in large penalties and disgorgements. Although actions against public company defendants
represented an average of 4% of actions from fiscal 2010 through fiscal 2015, these actions accounted for 18% of all SEC monetary penalties and
disgorgements during the period.
- The SEC has increasingly utilized administrative proceedings. In fiscal 2015, 76% of the SEC’s actions against public company defendants were
brought as administrative proceedings. The use of administrative proceedings by the SEC to seek penalties, which was enabled by the passage of
Dodd-Frank in 2010, has resulted in more streamlined and more prompt decisions according to the SEC. It is worth noting that the use of administrative
proceedings is under attack, with many critics questioning the constitutionality of the proceedings. The resolution of these challenges may negatively
impact the number and type of cases that are brought administratively by the SEC.
This report provides evidence of the powerful impact of law enforcement following the passage of Dodd-Frank, highlighting the SEC’s determination to
utilize all tools at its disposal in order to prevent corruption and to seek out wrongdoing wherever it occurs.
Last week, the Financial Industry Regulatory Authority (FINRA) released its regulatory and examination priorities for 2016. FINRA’s letter highlights five areas for examination
at brokerage houses and financial advisory firms, including standards of ethical behavior, alignment of firm and customer interests, and the management
of conflicts of interest. FINRA’s chairman also stated intentions to specifically examine the conflicts of interest that can arise in the sale of proprietary
investment products to clients. These conflicts have garnered increased regulatory scrutiny, including in a recent landmark action where our whistleblower client tipped the SEC to inappropriate client "steering"
at JPMorgan. One of the largest actions against an investment adviser, the matter resulted in a $267 million settlement with the SEC and an additional
$40 million to the CFTC in a parallel proceeding.
FINRA’s concentration on ethical culture marks an important first step in identifying the nature of corruption within the industry at large. As our
recent survey of financial services professionals revealed, the industry has a disregard for ethics and a deep-rooted culture of secrecy. While
regulatory oversight has played and will continue to play a critical role in dismantling the status quo, true and sustainable change requires organizations
to prioritize and demand integrity—from within and top down.
In developing a new paradigm for corporate ethics, companies need to begin by understanding that traditional reporting methods alone do not work. In a
New York Law Journal article, we previously discussed how too many compliance programs are designed to respond to problems after they have surfaced, and focus on
the latest reporting trends, rather than proactive, consistent, organization-wide change that puts a premium on transparency and ethical agency.
To be sure, creating such a culture is a substantial undertaking. But in an era of whistleblowers and empowered law enforcement, no organization can bear
the cost of noncompliance. As we reported earlier, the Ethics and Compliance Initiative recently examined certain key characteristics that are common to high-quality
compliance and ethics programs. These characteristics must be the admission standard for all commercial entities, but particularly those in the financial
In order to truly eradicate corruption, firms must embrace and develop comprehensive and clear ethical visions. We applaud FINRA’s decision to examine
corporate culture, and believe it signals an important shift in the financial services industry in recognizing the critical role of ethics in deterring
wrongdoing, protecting investors, and building stronger companies.
Earlier this week, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2016 examination priorities. The results of OCIE’s examinations of regulated entities are used
by the SEC to support rule-making, find and monitor risks, encourage compliance, and prevent and pursue misconduct. Since OCIE also regularly refers
matters to the SEC’s Enforcement Division, its priorities are an important and early indicator of the type of cases the Enforcement Division will bring
in future years.
This year’s priorities, like those announced in 2015, are organized around three thematic areas:
- Protecting retail investors, including those saving for retirement
- Assessing issues related to marketwide risks
- Utilizing data analytics to identify and examine potential illegal activity
While the general themes of the examinations are carried over from 2015, OCIE’s 2016 priorities include several new areas of focus, including:
- Liquidity controls: In assessing marketwide risk, the SEC will examine exposure to potentially illiquid securities as well as examine liquidity providers
in the market.
- Public pension advisers: In 2014, the SEC brought its first case under pay-to-play rules for investment advisers, and the current examination priorities call for a focus on pay-to-play
and other risk areas related to public pension advisers.
- Promotion of products: Given the increase of new, complex and high-risk products available in the market, the SEC plans to focus on the promotion of
and sales practices related to these products to identify potential suitability and fiduciary obligation issues.
- Exchange Traded Funds and Variable Annuities: The SEC will examine sales strategies, trading practices, disclosure, and other issues related to these
These new areas of focus encompass some of the most common and critical issues currently facing investors, demonstrating the SEC’s continued commitment
to protecting and promoting the healthy and fair operation of our financial markets. To read the complete examination priorities from OCIE, please