Office of the Whistleblower Annual Report: Remarkable Success in Principles & Practices

Jordan Thomas -

The SEC’s Office of the Whistleblower delivered its annual report to Congress, detailing the historic success of the Whistleblower Program this fiscal year. Highlights of the program’s achievements include:

  • In fiscal 2016, the SEC issued awards totaling over $57 million, more than all other awards issued in the program’s previous years combined. Since the program came into effect in August 2011, it has awarded nearly $111 million to 34 eligible whistleblowers.
  • Underscoring the surging momentum of the program, six of the 10 highest whistleblower awards were granted in fiscal 2016. 
  • Fiscal 2016 saw an increase in complaints related to Corporate Disclosures and Financials from 17.5% of all complaints to 22%. Offering Fraud (15%) and Manipulation (11%) comprised the next two largest types of complaints. FCPA allegations experienced a significant increase from 186 to 238, a nearly 28% increase in that allegation type. 
  • While there is no requirement that an SEC Whistleblower be an employee to qualify for an award, to date almost 65% of award recipients were company insiders. This percentage has increased from approximately 50% as of last year. It is also important to note that of these award recipients who were insiders, approximately 80% raised concerns internally to supervisors or compliance personnel, or understood these personnel were aware of the violations, before bringing their concerns to the SEC. A significant concern expressed by corporations is that the SEC Whistleblower Program undermines internal reporting. This statistic indicates strongly that this concern is unfounded.
  • In fiscal 2016, almost 25% of award recipients reported their concerns anonymously, an unsurprising statistic given that anonymous reporting is the best protection against retaliation and potential blacklisting. In my experience as a long-time advocate for whistleblowers, the more senior the individual, the more likely they are to choose to report anonymously.
  • 40% of individuals received an award for reporting information that significantly contributed to an ongoing SEC investigation and approximately 35% of award recipients were outsiders to the company on which they reported. Prior to Dodd-Frank, these types of tips were exceedingly rare and they demonstrate the value and broad impact of the SEC program in deputizing the public to assist in enforcement efforts.

The success of the program and the SEC’s work to increase awareness has yielded powerful results both domestically and internationally:

  • In fiscal 2016, the SEC received over 4,200 tips, a 40% increase in the number of tips since 2012, the first full year for which data is available. This increase in tips leads us to question: Are violations on the rise or is increased awareness and a powerful partner in the SEC emboldening and empowering whistleblowers to come forward in greater numbers?
  • Individuals in California submitted the largest number of tips, 547, 84.8% more tips than those submitted by individuals in New York. 
  • Tips from Ohio are a curious outlier -- where the SEC saw a 370% increase, from 49 to 230, in the number of submissions.
  • Demonstrating the global reach of the program, approximately 24% of all whistleblower award recipients in fiscal 2016 were foreign nationals. 
  • During the year, the SEC received approximately 10% of its whistleblower tips from individuals in 67 countries outside the US. The number of international tips increased 10.2% and the number of countries from which tips were reported increased 9.8% in fiscal 2016. Outside of the US, the largest number of tips came from Canada, the UK and Australia, where I recently travelled to speak to members of the legal community and elected officials about the remarkable success of the SEC Whistleblower Program.

Fiscal 2016 also included ground-breaking activity by the SEC to protect and empower whistleblowers to the fullest extent of the law:

  • The agency brought a first-of-its-kind enforcement action in September 2016, when it commenced a stand-alone whistleblower retaliation case against a company for retaliating against an employee for reporting a possible securities law violation.
  • The SEC brought charges against multiple companies for the unlawful use of severance agreements and confidentiality agreements to impede employees from reporting to the SEC. 
  • In its report, the SEC also highlighted its landmark action, precipitated by whistleblowers represented by Labaton Sucharow, against Merrill Lynch, in which the company agreed to pay settlements totaling $415 million for its misuse of customer funds to generate profits. Merrill Lynch also settled charges for using language in severance agreements that prevented employees from providing information to the SEC.

This year’s report from the Office of the Whistleblower reveals the growing power and increasing magnitude of the program to fight corruption. The ability to report anonymously, the SEC’s determination to act against retaliatory employers, together with the numerous other protections and incentives of the program, continues to embolden more and more brave individuals to come forward. Corruption festers, destroying our workplaces and our markets in silence. The Whistleblower Program’s results and continued success demonstrate that empowering individuals to come forward and speak out against misconduct is the most effective solution.

Labaton Whistleblowers Assist SEC With Landmark Enforcement Actions; $415 Million In Settlements & Ongoing Initiatives to Protect Consumers

Jordan Thomas -

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.”

 

Inside Intelligence is Key: SEC Awards over $5 million to Whistleblower

Jordan Thomas -

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 from insiders.

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.


 

 

Confidentiality: The Key Factor in Empowering Whistleblowers

Jordan Thomas -

 

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.

 

No Slowdown in Sight: SEC Expects Steady Pace of Enforcement Actions

Jordan Thomas -

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.

SEC Awards $2 Million to Whistleblowers: Increased Tips Yield Results

Jordan Thomas -

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 efforts.

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.

A Victory Lap for the SEC

Jordan Thomas -

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 victory.

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.

​Newly Introduced WARN Act Offers Whistleblowers Critical Support

Jordan Thomas -

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 industry.

 

SEC Speaks 2016: Commission to Pursue Cases Involving Illegal Confidentiality Agreements

Jordan Thomas -

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.

 

Labaton Sucharow Whistleblower Tips SEC in Groundbreaking Enforcement Action

Jordan Thomas -

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 program.

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.