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.
I was fortunate to speak on a panel recently at the prestigious Commit! Forum, an annual conference organized by Corporate Responsibility Magazine, for a session entitled "The Best Brand You Can't Buy--Establishing an Ethical Brand." Joined on the panel by Jennifer Prosek, the founder and CEO of communications firm Prosek Partners, we addressed how responsible organizations can establish an integrity brand that deters misconduct, creates a more energized and invested body of employees, and positively impacts the bottom line. I also outlined the positive impact the SEC Whistleblower Program has had in strengthening corporate compliance and integrity programs. The event is unique and uniquely special in that it calls on individuals and organizations to make commitments that will improve their organizations…and the world. It was a powerful event (as I noted here in an “exit interview”) attended by a veritable who’s who of the country’s powerbrokers. Indeed, the speaker roster included titans of virtually every industry, media moguls and thought leaders from prominent universities and think tanks. If you have an opportunity to attend a Commit! Forum in the future, it belongs on your bucket list. And, in the meantime, check out the commitments that major conglomerates have made here.
Thomson Reuters’ Legal Education Arm and Labaton Sucharow Join Forces: Six-Part Webinar Series Launched
Op-Ed in International Business Times: Political Response to Corruption May Lead to Watershed Moment in November
Is corporate corruption a top-of-mind issue for most Americans? It certainly is. Recent data from our 2nd Annual Ethics & Action Survey underscores that a majority of Americans not only see a causal connection between corporate misconduct and the economic crisis, but the political response to corporate corruption is likely to be a significant factor in voting decisions this November.
Building on these survey results, and fleshing out the implications even further, on September 25th, political scientist Jamie Chandler and I authored an Op-Ed in the International Business Times. We argue that an emerging anti-corruption majority can significantly influence elections at all levels of government. And, we point to historical successes of campaigns that put front and center a commitment to root out corporate misconduct. Please see the full column here.
Americans Plan to Act in November and Beyond: New Survey Reveals Growing Frustration With Corporate Misconduct, Government’s Response
This week, we announced the results of our 2nd Annual Ethics & Action Survey: Voices Carry, which polled more than 1,000 Americans on corporate ethics and wrongdoing, the impact of corporate misconduct on the economy, government's role in its repair and the impact on their voting decisions in November. Notably, 61 percent of respondents report that a candidate's commitment to rooting out corporate wrongdoing will be a significant factor in their voting decision in November. This action builds on a growing frustration with inaction. The survey revealed that 77 percent of Americans believe politicians generally favor corporate interests over their constituents' interests and 81 percent do not believe the government has done enough to stop corporate wrongdoing. The data also revealed 54 percent of Americans have personally observed or have first-hand knowledge of wrongdoing in the workplace and 64 percent believe that corporate misconduct was a significant factor in bringing about the current economic crisis.
The survey also pointed to a continued lack of faith in employers. Nearly one in five respondents felt that their employers' ethical values took a back seat to bottom line profits. With respect to acting on reports of misconduct, 24 percent of Americans would fear retaliation if they reported wrongdoing in the workplace and 20 percent believe that a report of wrongdoing would not be appropriately handled by their employer.
The data also revealed signs of hope. In addition to acting at the polls, 63 percent of Americans believe the government should allocate more dollars to financial regulators and law enforcement to combat corporate wrongdoing. Particularly encouraging, 84 percent of Americans have a positive perception of individuals who report illegal or unethical conduct and 83 percent would 'blow the whistle' on corporate wrongdoing given protections and incentives such as those offered by the SEC Whistleblower Program.
It is extremely encouraging to see Americans’ willingness to take a stand for integrity – at the polls and in their communities. This is exactly the kind of grassroots action that will create lasting reform and compel a stronger commitment to ethics by the government and American employers. To see the full results of our survey, please click here.
On the heels of the SEC’s announcement of its first whistleblower award, the IRS announced last week that it would pay one of its first awards—a startling $104 million—to a former UBS banker, Bradley Birkenfeld, who aided the government in connection with its investigation into the bank’s practice of helping wealthy U.S. taxpayers hide billions of dollars in secret accounts.
The IRS and SEC whistleblower programs are different—both in form and function. For one thing, individuals criminally convicted of related misconduct do not qualify for monetary awards under the SEC Whistleblower Program (though they may benefit from the program’s anonymity and employment protections). The programs also have different guidelines about protecting the identity of the whistleblower. (Under the SEC program, whistleblowers working with an attorney do not need to disclose their identity when submitting a claim.) In addition, while the SEC Whistleblower Program applies only if the monetary sanctions the agency collects exceed the minimum threshold of $1 million, the program can also extend to recoveries by other regulatory and law enforcement organizations that stem from the whistleblower’s information. This means that eligible SEC whistleblowers can also receive monetary awards for sanctions collected in related parallel proceedings by other agencies, such as the Department of Justice. To provide a sense of scope, in fiscal year 2011, the SEC recovered more than $2.8 billion in monetary sanctions alone and many of its more significant cases had successful related enforcement actions with large monetary sanctions collected by other agencies. (To better understand SEC Whistleblower Program eligibility, check out Labaton Sucharow's Eligibility Calculator.)
Despite these differences, the two federal whistleblower programs share a common goal – a call for the public to step forward and speak out against wrongdoing. And the buzz around the recent whistleblower awards suggests that the public is hearing to the call.
For further analysis on the recent IRS award and the differences between the SEC and IRS whistleblower programs, please see an instructive story from Reuters here.
The ABA Journal, a publication of the American Bar Association, has just announced its Legal Rebels for 2012. I was honored to be counted in the list of 11 Legal Rebels who come from a wide range of practices and firms across the nation. Now in its fourth year, this is the journal’s "annual nod to lawyers who are helping change the profession in ways both big and small. These are the innovators—the folks who’ve found a different path, some new way to blend the needs of their clients or their practice, or even their own needs of personal expression, into the way they practice the law." While a humbling personal moment, this accolade champions the important work Labaton Sucharow does to advocate for courageous whistleblowers and help responsible organizations establish stronger ethical cultures.
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Jordan A. Thomas
SEC Whistleblower Advocate
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