In a significant win for the good guys, today, the SEC announced settlements with Merrill Lynch totaling $415 million for its misuse of customer funds to generate profits for the financial services firm. Merrill
Lynch also failed to safeguard customer securities from the claims of its creditors. The action against Merrill Lynch was precipitated by whistleblowers
represented by Labaton Sucharow.
This announcement comes on the heels of record-setting whistleblower payouts, including the recent $17 million award—the second largest in the SEC program’s history—to another Labaton
Sucharow client. In an incredible show of the program’s strength—and the potency of its anonymity provision, financial incentives, and employment
protections—we see more and more often that behind major enforcement actions stand courageous whistleblowers.
Importantly, the value of whistleblower intelligence is not limited to a one-time slap on the wrist for a single bad actor, rather it arms regulators and
law enforcement to take on misconduct on a much bigger scale. In addition to the massive financial penalty levied against Merrill Lynch, in conjunction with this case, the Commission announced "a coordinated effort across divisions to find potential violations by other firms through a targeted sweep and by encouraging firms to self-report any potential violations of the Customer Protection Rule.”
The SEC announced today that it would
award between $5 million and $6 million to a whistleblower whose detailed information led the SEC to uncover securities violations which would have
been “nearly impossible to detect” without the company insider’s help. The award is the third highest ever granted under the SEC whistleblower program
since the program’s inception in 2011, and closely follows another whistleblower award of over $3.5 million granted last week.
Today’s award epitomizes the specific strengths of the SEC Whistleblower Program—strengths which are inherent in the program’s very design. Following
the financial crisis, I was fortunate to have a leadership role in the development of the SEC Whistleblower Program, and my colleagues and I understood
the necessity of empowering insiders who had first-hand, detailed, and actionable intelligence. As this case illustrates, given the vast scope and
complexity of our financial markets, products and transactions, corporate wrongdoing can be difficult to detect, investigate, and prosecute without assistance
As we wrote previously regarding last week’s award, the crucial value of insider intelligence is not to be underestimated. Neither
financial services professionals nor the industry are fundamentally unethical, but the culture within the financial services industry has led too many
otherwise ethical people to feel powerless against illegal or unethical behavior. Through the SEC whistleblower program, the government has effectively
deputized every insider, and empowered them to act. As we are witnessing, because of the program’s significant protections and incentives, truth-tellers
are coming forward in larger and larger numbers and fraudsters are finding it very difficult to hide. If you are interested in learning more about
the SEC whistleblower program, see here.
Last Friday, the SEC announced it had granted a $3.5 million whistleblower award to an individual who provided additional information that supported an ongoing SEC investigation.
The award, one of the largest granted to a single whistleblower in 2016, involves a unique set of circumstances and highlights the potential impact
of whistleblowers who come forward with information, even when an investigation is already underway.
According to a final order released on
Friday, the whistleblower’s award application was initially denied in January. The whistleblower had submitted a tip through counsel, but the application
was denied because the information did not lead to the initiation of an investigation or cause the SEC to inquire into new conduct. However, the whistleblower
appealed under a rule which states that whistleblowers may receive a reward if the information “significantly contributes” to the success of an investigation.
Upon reconsideration, the SEC determined that the whistleblower did meet this criteria.
In fact, according to Andrew Ceresney, Director of the SEC’s Enforcement Division, “Whistleblowers can receive an award not only when their tip initiates
an investigation, but also when they provide new information or documentation that advances an existing inquiry. This particular whistleblower’s tip
substantially strengthened our ongoing case and increased our leverage during settlement negotiations with the company.” The SEC also stated that it
considered “certain unique hardships experienced” by the whistleblower, such as being “unable to find employment since reporting the misconduct.” The
final order was redacted to protect the whistleblower’s identity.
This award highlights a number of important issues for whistleblowers. First, it demonstrates the challenge and complexity of filing a successful whistleblower
claim. In addition to complicated legal and procedural issues, individuals must manage numerous personal and professional risks. By filing with counsel,
this whistleblower was able to maintain anonymity and ultimately articulate a successful argument for an award through the appeals process. This award
also demonstrates that the SEC takes retaliation seriously. In considering the whistleblower’s difficulties in finding new employment, the SEC not
only weighed the retaliation the whistleblower faced from his/her company, but also blacklisting from the greater financial services industry.
And while the whistleblower process is complex, this case also illustrates a simple, but critical point: never underestimate the value of actionable intelligence, especially from insiders. During my long tenure at the SEC, I witnessed first-hand the powerful impact that seemingly simple intelligence from insiders could have on a case.
In issuing this award for providing supporting information, the SEC has empowered individuals to come forward – even in ongoing investigations – and
has demonstrated the huge financial benefits of doing so.
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