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.
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.
As federal agencies heighten regulatory scrutiny, and programs like the SEC Whistleblower Program invite everyday citizens to play a role in the enforcement process, it is critical to understand how the SEC and its enforcement process work. In An Insider Guide to the SEC Enforcement Process, the fourth in our six-part webinar series presented with Thomson Reuters, I call upon knowledge gained through my years as a senior attorney at the SEC to outline the Commission’s enforcement policies, procedures and practices. You can access this program and our entire digital library in our resource center.
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 positive side, 60% of Fortune 500 companies operated comprehensive ethics & compliance programs as compared to 41% at all US companies. But there appears to be a wide open space where bad things can happen. More than half of all respondents had observed misconduct in the previous 12 months and, hearteningly, nearly three-quarters reported what they witnessed. Employees reported feeling pressure and pressure erodes ethical values. Specifically, the ERC survey found that 16% of employees felt that others pressured them to compromise standards in their jobs and 27% of employees who watched the stock price throughout the day felt pressure to break the rules. Of those who felt pressured, a shocking 90% reported observing misconduct on the job.
The survey findings highlight the importance of good leadership. Where management commitment to ethics was weakest, misconduct soared to 89%. Consistent with other recent surveys, the survey found that employees show a strong desire to stay under the tent. Indeed, a mere 1% of those who reported misconduct made their first report to an external authority. This should give comfort to those in the corporate community that feared the SEC Whistleblower Program would cause employees to circumvent effective internal reporting systems and report misconduct directly to the SEC. However, the bad news is that 17% of these employees went outside the company with a secondary report – largely because they were disappointed with the organization’s response to the reported misconduct.
Now, more than ever, companies – particularly the strongest corporate entities in the world – need to build ethical cultures that engender confidence in employees, investors and the public at large. These findings suggest that the lion’s share of the Fortune 500 have strengthened their corporate integrity programs. But more work remains to be done. We encourage our readers to see the full survey here.
Four Years of Reform and Recovery, and Still…Labaton Sucharow Survey Reveals A Need for a Renewed Focus on Corporate Integrity in the Financial Services Industry
In June, we surveyed 500 financial services professionals across the US and UK to take the pulse of the industry on issues involving corporate ethics, the regulatory landscape and the willingness to blow the whistle on wrongdoing. The results were startling. Some 24% of respondents reported a belief that financial services professionals may need to engage in unethical or illegal conduct in order to be successful and 26% of respondents indicated that they had observed or had first-hand knowledge of wrongdoing in the workplace. Particularly troubling, 16% of respondents reported that they would commit a crime—insider trading—if they could get away with it. Our survey also found that 39% of industry professionals believed that their competitors are likely to have engaged in illegal or unethical activity in order to be successful and equally disheartening, 30% of financial services professionals reported that their compensation or bonus plan created pressure to compromise ethical standards or violate the law.
While our survey did have encouraging findings–94% of respondents would report wrongdoing given the protections and incentives such as those offered by the SEC Whistleblower Program—only 44% were aware of this important investor protection program. What’s more, skepticism and uncertainty about employers’ handling of claims of misconduct persist. One in five of the professionals surveyed weren’t sure of, or had serious doubts about, how their employers’ would handle a report of wrongdoing.
These findings confirm that we must do a better job of bridging the gap between the regulators and industry. Most importantly, within organizations, we must adjust our focus; instead of beginning with compliance, we must address the preemptory issue, which is establishing an ethical culture within commercial organizations. This means doing more than drafting codes of ethics and model rules of conduct. We must get serious about establishing and nurturing a culture of integrity, not merely ‘tone from the top’ messaging. For more information on specific ways organizations can build and maintain an ethical culture, please see an article that I authored for the New York Law Journal entitled “The Limitations of Corporate Compliance.”
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Jordan A. Thomas
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