In a positive light, the survey found that compliance programs are in place and seemingly effective in most of the companies surveyed. Particularly effective mitigation strategies include internal audits, employee training and oversight of books and records. Compliance is, of course, top-down and 73% of survey respondents noted that involvement by audit committees and boards reduces risk.
Perhaps most concerning was the “perception gap” among respondents. While US companies perceived greater risk in various markets and also greater success with aggressive compliance efforts, some jurisdictions – including those in emerging markets where we expect to see greater commercial activity in an increasingly global marketplace – downplayed the instance and severity of corruption risk.
The key takeaways are consistent with other surveys, our own Wall Street Survey among them: Misconduct continues to thrive and in an age of whistleblowers, strong compliance procedures and a commitment to ethical engagement are a company’s best insurance policy.
While the anti-retaliation provisions of SOX are separate from those provided under the SEC Whistleblower Program rules and the Dodd-Frank law – which include their own robust remedies for whistleblowers who face retaliation from their employers – the Lawson decision is significant for current and potential SEC whistleblowers in many ways.
First, it helps ensure that an SEC whistleblower who is an employee of a public company contractor will have a full arsenal of legal protection if he or she is retaliated against for reporting possible securities violations involving public companies. The protections available under SOX are particularly important if an SEC whistleblower is retaliated against after he or she internally reports possible misconduct, but before blowing the whistle to the SEC, because courts have reached conflicting conclusions about whether Dodd-Frank and the SEC rules cover retaliation for internal reporting. Whistleblowers covered by SOX, on the other hand, need not have reported externally to receive employment-related protections. For this and other reasons, many of our SEC whistleblower clients who pursue retaliation claims against their employers decide, in consultation with their employment counsel, to bring both SOX and Dodd-Frank retaliation claims, and Lawson gives more whistleblowers the opportunity to leverage this strategy.
Second, the decision is a strong acknowledgment by the Court of the importance of whistleblowers, and the fact that outside contractors, including accountants, auditors, consultants, lawyers, and investment advisers, are often in the best (and sometimes only) position to detect, report and stop corporate fraud. Rejecting efforts to narrow the definition of a “whistleblower,” the Court instead emphasized that the Congressional goal of “protecting investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws” cannot be effectively realized if “gatekeeper” whistleblowers like outside accountants and consultants are not protected. The Court’s common-sense approach, and recognition of the critical role of whistleblowers in securities enforcement, bodes well for future whistleblower cases that are likely to come before the Court in the years ahead.
Labaton Sucharow's U.S. Financial Services Industry survey results were released today. The survey confidentially polled financial professionals on corporate ethics, wrongdoing in the workplace and the role of financial regulators in policing the marketplace. The results suggest that the financial services industry faces a serious and growing ethical crisis.
New Survey Reveals Problems in the Hedge Fund Industry; Affirms Importance of the SEC Whistleblower Program
The results revealed a twofold problem in the hedge fund industry. First, the survey indicated both that misconduct remains commonplace and that professionals are under pressure to break the rules. In fact, 30% of respondents reported that they had personally observed or had firsthand knowledge of wrongdoing in the workplace. An alarming 35% of those surveyed reported feeling pressured by their compensation or bonus plans to violate the law or engage in unethical conduct. For some (13%), unethical or illegal activity was viewed as a prerequisite to success.
We were particularly concerned that hedge fund professionals lacked faith in the ability of both firm leadership and the government to effectively curtail and respond to wrongdoing in the workplace. Significantly, 28% of respondents felt that if leaders of their firm learned that a top performer had engaged in insider trading, they would be unlikely to report the misconduct to law enforcement or regulatory authorities. An even higher percentage of respondents (29%) would fear retaliation if they were to report wrongdoing. With regard to regulatory authorities, a majority (54%) of respondents felt that the SEC is ineffective in detecting, investigating, and prosecuting securities violations.
Still, the survey provided signs of hope. A significant majority, 87% of hedge fund professionals surveyed, indicated that they would report wrongdoing given the protections and incentives such as those offered by the SEC Whistleblower Program and 83% were aware of the program. This is significantly higher than the figures we found when surveying the US & UK financial services industry last summer. So while the lack of faith in government and fund leadership – in the face of tremendous pressure to break the rules – should sound the alarm, we take some comfort that hedge fund professionals are more willing to break their silence and report possible securities violations.
Mapping Misconduct: Looking Back, Looking Ahead - First-of-its-Kind Database Offers Insights into SEC Enforcement
Once we built the database, we wanted to better understand where securities violations have occurred, when and exactly how bad they have been. To that end, we have prepared this report, which summarizes some of our more interesting findings. For instance, did you know that of the six common securities violations we examined, the SEC successfully prosecuted 457 enforcement actions where the monetary sanctions exceeded $1 million? Or that enforcement activity has been on the rise, with approximately 57% of all enforcement actions announced within the last five years? And, if there is any doubt about the potential for whistleblowers to earn substantial monetary awards, we found that in the calendar years 2003-2011 the SEC brought 419 successful enforcement actions, with aggregate monetary relief for injured investors in excess of $65 billion. As a bonus feature, where actions involved a corporate defendant, we mapped the actions, analyzed the data by region and added to the analysis recent regional data on ethics.
If you would like to learn more, check out this easy-to-use database. There, you can search actions, without filters, or with them – such as regions, sanction amount or type of violation. All queries appear with a Google mapping feature so you can actually see where actions are concentrated…and where they’re not.
Despite increasing efforts to establish ethical practices in the workplace, too often misconduct goes undetected and unreported to business leaders or law enforcement. Corporate leaders are on notice; as risk rises to the top, so too does responsibility. This webinar, the final presentation in our six-part series presented with Thomson Reuters, examines the rights and responsibilities of corporate insiders in light of the SEC Whistleblower Program established under Dodd-Frank. My co-presenter for the program, Lawrence Hamermesh, is the Ruby R. Vale Professor of Corporate and Business Law at Widener's Delaware campus and Director of the Widener Institute of Delaware Corporate and Business Law. Together, we examine the fiduciary duties of officers and directors and whether whistleblowing is consistent with fulfilling these duties. For additional information on the whistleblower program or ways to establish stronger ethical cultures, please see our corporate ethics clearinghouse here.
As we addressed in a post here in June, at one time, attorneys’ duty to maintain clients’ confidences, even in the face of anticipated or ongoing corporate wrongdoing, was thought to be virtually absolute. That is no longer so. In the wake of Dodd-Frank, attorneys may not only have the right, but a responsibility, to report a client’s misconduct. In this webinar, the fifth in our six-part series presented with Thomson Reuters, Boston University School of Law Professor Nancy Moore and I explore the SEC Whistleblower Program’s significant implications for lawyers and outline some key considerations for prospective attorney whistleblowers. Particularly important, we examine specific considerations for in-house counsel, duties of confidentiality and federal preemption as it relates to Dodd-Frank vis-à-vis state rules governing attorney conduct. In addition to this informative webinar, please see a recent Corporate Counsel Magazine article article I co-authored with national recognized ethics expert, Professor Bruce Green or feel free to check out our entire digital library in our resource center.
SEC Releases Annual Report on the SEC Whistleblower Program: First Full-Year Analysis Reveals Positive Growth
Yesterday, the SEC released its annual report to Congress on the SEC Whistleblower Program, the first full-year analysis of the program since its enactment by the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to the report, the SEC received 3001 tips, complaints and referrals from whistleblowers in all 50 states, the District of Columbia, and the U.S. territory of Puerto Rico as well as 49 foreign countries. The most common complaints were related to corporate disclosures and financials (18.2%), offering fraud (15.5%), and market manipulation (15.2%). Of the 735 enforcement brought by the SEC during the fiscal year, 143 (19.5%) involved monetary sanctions that exceeded the program's statutory minimum threshold of $1 million. As of September 30, 2012, the balance of the replenishing Investor Protection Fund, from which SEC whistleblower awards will be paid, was over $453 million.
The report is full of interesting information, including:
- The SEC continues to tout the high-quality of the whistleblower tips that it has received. "In just its first year, the whistleblower program already has proven to be a valuable tool in helping us ferret out financial fraud," said SEC Chairman Mary L. Schapiro.
- The SEC received 17% more whistleblower submissions than it did last fiscal year. For more information on last year's SEC Whistleblower Program report, please click here.
- The top five states in which whistleblower submissions were received were: 1) California; 2) New York; 3) Florida; 4) Texas; and 5) New Jersey and Washington. Surprisingly, California represented 14.5% of all whistleblower submissions worldwide and made 43% more than the financial capital of the world, New York state.
- 10.8% of whistleblower submissions were received from whistleblower living abroad. The top five countries in which whistleblower submissions were received were: 1) United Kingdom; 2) Canada; 3) India; 4) China; and 5) Australia. Interestingly, whistleblowers in the United Kingdom filed 22.8% of all whistleblower submissions and made 62% more than the next highest country.
- The report provides more information about the valuable contributions made by the anonymous whistleblower that received the program's first monetary award. For more information on the first monetary award made by the SEC Whistleblower Program, please click here.
Having played a leadership role at the SEC in its development, I am pleased with the continued strong growth of the SEC Whistleblower Program and its potential to protect investors. In the coming years, based upon my experience with whistleblowers at the SEC and in private practice, I believe that many of the SEC's most significant cases will be the result of courageous whistleblowers. Stay tuned.
For more information about the prior SEC enforcement actions, please visit our searchable SEC Sanctions Database here.
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Website Editor &
Jordan A. Thomas
SEC Whistleblower Advocate
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