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.
Today, the SEC announced that two J.P. Morgan wealth management subsidiaries
agreed to pay $267 million to settle charges in an enforcement action initiated by information brought to the SEC by a Labaton Sucharow client, a J.P.
Morgan executive. The enforcement is one of the largest and highest profile actions initiated by an SEC whistleblower since the establishment of the
Just last month, the UK’s Financial Conduct Authority (FCA), together with the Bank of England’s Prudential Regulatory Authority, published strident new rules to encourage and support whistleblowers at financial institutions. By September 2016, banks and credit unions with more than £250 million in assets must standardize internal whistleblowing programs. They must also assign a senior manager to act as a whistleblower “champion.” Other requirements include an annual report on whistleblowing and notifying employees of whistleblowing services. Though currently applicable to UK institutions, these requirements could eventually apply to all regulated financial institutions in the country, including overseas banks with branches in the UK.
The SEC’s investigation uncovered that J.P. Morgan’s investment advisory business and its nationally chartered bank were steering clients to more expensive
in-house investments without proper disclosures of conflicts of interests. The troubling actions in this case occurred over several years, and deprived
JPMorgan's clients of necessary information to make informed investment decisions.
This case powerfully demonstrates the vast potential of the SEC Whistleblower Program to find and eradicate wrongdoing early and often. Because of
the unique protections and incentives of the program, our client chose to report the securities violations at J.P. Morgan to the SEC. In doing so,
the individual was able to protect J.P. Morgan clients and improve the sales culture of the organization, while avoiding retaliation and blacklisting.
And as awareness of the SEC Whistleblower Program grows, so does the likelihood that more individuals will step forward to reveal violations. The program’s
broad international reach and ability to report anonymously provide enormous opportunities to uncover misconduct wherever it occurs. In designing this
innovative program, the SEC understood that employees represent a critical first line of defense against wrongdoing. To learn more about the SEC Whistleblower
Program, please see here.
This landmark move addresses ongoing concerns about systemic ethical issues within the industry. Earlier this year, in an expansive survey we conducted together with the University of Notre Dame, The Street, The Bull and the Crisis, we uncovered some troubling findings on the topic of ethics in the US and UK financial services industry:
While there is clearly much work to be done on both Wall Street and Fleet Street, we are making real progress. Indeed, in 2012, I was privileged to give an address at the House of Commons about the ethical crisis that led to the development of the SEC Whistleblower Program and the program’s powerful and ground-breaking effect on law enforcement. I continue to have great faith in our combined abilities to bring forth and empower truthtellers wherever they reside. I note that in fiscal 2014, the SEC reported that it received 70 tips from whistleblowers in the UK—the highest number from any country outside of the US.
- When asked if they ever felt pressure at work to compromise ethical standards or violate the law—approximately 14% of the survey’s UK respondents admitted feeling such pressure. This was a full 6% higher than respondents in the US.
- 24% of UK respondents said it was likely that their employer would retaliate if they were to report wrongdoing in the workplace.
- And perhaps most troubling, more than 1 in 5 respondents said they believed their company’s confidentiality policies and procedures barred the reporting of potential illegal or unethical activities directly to law enforcement or regulatory authorities.
These latest rules promulgated by the FCA are a promising sign. Like the SEC’s Whistleblower Program, these rules recognize the crucial role of each individual employee in the fight against wrongdoing and offer the best hope for industry-wide reform.
Following criticism and public concern over the lack of prosecutions against individuals involved in the financial crisis, the Department of Justice recently released guidance that underscores a renewed effort to charge individuals in corporate wrongdoing. The memo, which sets forth best practices for federal prosecutors, makes clear that a company should be considered cooperative in an investigation only if it offers information about the individual employees involved in wrongdoing.
The policy memo arrives amidst recent public dispute among SEC directors regarding investigating and prosecuting individuals involved in financial fraud. Given the slew of multi—billion dollar settlements involving nearly all of Wall Street’s major firms in the last few years, concern has grown that financial penalties are viewed as a tax write-off, not a powerful deterrent to misconduct. As SEC Chairman White stated in a speech last year, “A company, after all, can only act through its employees and if an enforcement program is to have a strong deterrent effect, it is critical that responsible individuals be charged, as high up as the evidence takes us.”
The reality is, finding and building cases against individuals is incredibly difficult. These cases are hampered by corporations utilizing massive financial resources to defend executives, the difficulties of gathering evidence from multiple, sometimes foreign, jurisdictions, and corporate structures themselves which are often designed to protect senior officials. Indeed, just last year, while French banking giant BNP Paribas was fined nearly $9 billion for processing financial transactions through countries subject to U.S. sanctions, the Justice Department maintained that the bank withheld records that might have implicated individual employees until after the deadline to file individual charges had passed. The odds are seemingly stacked in favor of corporations.
Whistleblowers fundamentally alter these odds.
As federal law enforcement renews its efforts to bring down the bad actors behind these devastating frauds, we must keep in mind that whistleblowers may be the sharpest tool in the enforcement arsenal. By exposing high-level insiders with detailed accounts of wrongdoing, whistleblowers can provide authorities with early and actionable intelligence. Dodd-Frank has deputized us all to act as the government’s eyes and ears. Empowered with an army of courageous witnesses, federal prosecutors and enforcement lawyers will build formidable cases that ferret out wrongdoing and promote a corporate marketplace where integrity is the price of admission.
In another significant victory for the SEC and for whistleblowers, the U.S. Court of Appeals for the Second Circuit reversed a lower court and ruled that whistleblowers who report potential wrongdoing to their company prior to reporting to the SEC are entitled to the robust employment protections established under Dodd-Frank. As we discussed in an earlier post, the SEC issued guidance in August to clarify that Dodd-Frank anti-retaliation provisions apply equally to those whistleblowers who report potential violations internally. Given that at least one other court has ruled in an opposing way, the issue might be on its way to the Supreme Court for review.
In the meantime, this more expansive view of whistleblower protections not only empowers corporate whistleblowers, it also serves as an important reminder that companies must develop and encourage internal policies and procedures for the reporting of misconduct. For several years, we have examined the growing ethical crisis in corporate America and the crucial role truthtellers must play if we wish to reverse the prevalence of win-at-any-cost corporate cultures. With enhanced protections for whistleblowers, companies must shift their focus from silencing and retaliating against whistleblowers to establishing compliance programs that more effectively detect, deter and mitigate wrongdoing.
Deciding when, if and how to blow the whistle is an extraordinarily complex decision. Please see this short video for some of the key issues to consider. And, for more information on the specific employment protections offered by the SEC Whistleblower Program, please see here.
In addition to the case we described in an earlier post, in which the Commission filed an amicus brief on behalf of an internal whistleblower, in a significant move to protect whistleblowers at large, this month the SEC issued interpretive guidance to clarify that Dodd-Frank anti-retaliation provisions apply equally to those whistleblowers who report potential violations internally.
The SEC’s expansive view on whistleblower protections essentially confirms that to qualify for Dodd-Frank anti-retaliation protections, a whistleblower may report potential violations to the SEC directly or internally through an employer’s compliance channels. According to the SEC, the clarification “avoids a two-tiered structure of employment retaliation protection that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the investor-protection and law-enforcement benefits that can result from internal reporting.”
While many organizations work hard to build credible ethical cultures, over the last few years, we have witnessed increasing efforts by some organizations to dismantle and deter the landmark reforms of Dodd-Frank. Indeed, through the use of secrecy agreements, legal bullying, and the creation of omerta cultures, some companies aggressively discourage whistleblowers from reporting misconduct.
This must stop.
Last year, we, along with the Government Accountability Project and 250 other organizations, submitted a petition urging the SEC to, among other things, engage in rule-making to clarify and strengthen whistleblower protections. By issuing this guidance on internal reporting, the SEC has sent a clear message that it will do just that. We applaud this action by the SEC and its clear aim to protect and encourage whistleblowers.
In an important case for whistleblower advocacy, last week, the SEC filed an amicus brief in California federal court contending that employees need not report misconduct directly to the government to qualify for whistleblower protection under Dodd-Frank. The underlying case involves a lawsuit filed by the former general counsel of Bio-Rad Technologies Inc. who claimed that he was terminated after voicing concerns about potential violations of the Foreign Corrupt Practices Act (FCPA). The company ultimately paid $55 million to settle the SEC’s charges.
While courts have generally sided with the SEC holding that a whistleblower need not report misconduct directly to a government agency to qualify for the anti-retaliation protections afforded by Dodd-Frank and Sarbanes-Oxley, in 2013, a federal appeals court ruled the other way. In all likelihood, the question of what triggers whistleblower protections will be an issue of ongoing debate in the courts that may go to the highest court in the land.
In many ways, this case and those like it are almost academic battles that will ultimately establish key legal precedent. So what’s a whistleblower to do? The key takeaway from the Bio-Rad matter is that individuals who wish to report misconduct would be wise to consider an early or simultaneous report to the SEC to assure eligibility for the protections guaranteed by statute to all whistleblowers. Even a cursory filing of original information may be sufficient. In the long run, corporate compliance programs are a critical first line of defense against corporate wrongdoing. But for those defenses to work, whistleblowers must be encouraged and protected when they use them.
Yesterday, the SEC announced a landmark enforcement action against engineering giant KBR for its use of confidentiality agreements that required individuals to obtain prior approval from the company’s legal department before discussing matters with outside parties…or face discipline and possible termination. This action sends a powerful message to companies that have sought to silence whistleblowers. Indeed, the proliferation of gag orders is a scourge on corporate culture, a threat to financial reform, if not democracy itself.
We have been at the forefront of advocacy efforts to protect truth tellers and, by extension, encourage open and transparent cultures at organizations across the United States and abroad. Last summer, I addressed the dangers of these gag orders in an article I drafted together with the Government Accountability project for the New York Times Dealbook. The op-ed followed on the heels of our work to assemble a coalition of organizations, which represented millions of citizens, petitioning the SEC to address the issue of silencing and retaliating against employees who speak out against wrongdoing.
In addition to these grassroots efforts, we have also addressed the more substantive issues at play in such employment agreements. In a recent article in the ABA Journal of Labor & Employment Law, the authoritative publication for workplace issues, together with Professor Richard Moberly and fellow attorney Jason Zuckerman, I examine the legality and enforceability of employment agreements that effectively undermine the crucial investor protection efforts established by the Dodd-Frank Act.
We remain steadfast in our belief that in this country, individuals have an unwaivable right to report wrongdoing to the government. And we will continue our work to protect this right and those courageous individuals who stand up to corruption.
In a landmark action that demonstrated the strength and reach of the SEC whistleblower program, the agency announced a sizable bounty to a former company officer, a Labaton Sucharow client, who provided law enforcement with key information about a securities fraud that resulted in a successful enforcement action. What makes this matter so unique is the fact that corporate officers are typically ineligible for awards. Typically. Among other exceptions, if a company had knowledge of a possible securities violation and compliance or other responsible parties failed to act within 120 days of learning of the misconduct, a company officer may come forward. This marks the first time the SEC issued an award in such a matter. Most importantly, this matter shows the remarkable power of the program to embolden high-level insiders to come forward and take a stand against corporate wrongdoing.
In the SEC’s report to Congress, just released today, the agency documented the tremendous success of its revolutionary investor protection initiative. As we peel back the layers of the report, we note some startling findings with respect to the origin of whistleblower submissions. First and foremost, the program’s international reach is inarguable. This year’s largest award — more than $30 million! — came from a foreign tipster. And, of all 14 awards issued by the SEC to date, four were awarded to whistleblowers outside the U.S. This year, the agency received tips from 60 different international jurisdictions, with the UK, India, Canada, China, and Australia chief among these. Within the U.S., submissions came from every state in the union. The busiest states for whistleblowers in FY2014? California, Florida, Texas, and New York. How this stacks up to 2013 submissions is particularly interesting: submissions from California jumped by 48%; Florida by 41%; Texas by 54%; and New York, which fell from 2nd to 4th place, actually recorded a 5% drop in submissions. To view the SEC report in its entirety, please see here.