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
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.
Last week, the Financial Industry Regulatory Authority (FINRA) released its regulatory and examination priorities for 2016. FINRA’s letter highlights five areas for examination
at brokerage houses and financial advisory firms, including standards of ethical behavior, alignment of firm and customer interests, and the management
of conflicts of interest. FINRA’s chairman also stated intentions to specifically examine the conflicts of interest that can arise in the sale of proprietary
investment products to clients. These conflicts have garnered increased regulatory scrutiny, including in a recent landmark action where our whistleblower client tipped the SEC to inappropriate client "steering"
at JPMorgan. One of the largest actions against an investment adviser, the matter resulted in a $267 million settlement with the SEC and an additional
$40 million to the CFTC in a parallel proceeding.
FINRA’s concentration on ethical culture marks an important first step in identifying the nature of corruption within the industry at large. As our
recent survey of financial services professionals revealed, the industry has a disregard for ethics and a deep-rooted culture of secrecy. While
regulatory oversight has played and will continue to play a critical role in dismantling the status quo, true and sustainable change requires organizations
to prioritize and demand integrity—from within and top down.
In developing a new paradigm for corporate ethics, companies need to begin by understanding that traditional reporting methods alone do not work. In a
New York Law Journal article, we previously discussed how too many compliance programs are designed to respond to problems after they have surfaced, and focus on
the latest reporting trends, rather than proactive, consistent, organization-wide change that puts a premium on transparency and ethical agency.
To be sure, creating such a culture is a substantial undertaking. But in an era of whistleblowers and empowered law enforcement, no organization can bear
the cost of noncompliance. As we reported earlier, the Ethics and Compliance Initiative recently examined certain key characteristics that are common to high-quality
compliance and ethics programs. These characteristics must be the admission standard for all commercial entities, but particularly those in the financial
In order to truly eradicate corruption, firms must embrace and develop comprehensive and clear ethical visions. We applaud FINRA’s decision to examine
corporate culture, and believe it signals an important shift in the financial services industry in recognizing the critical role of ethics in deterring
wrongdoing, protecting investors, and building stronger companies.
In our ongoing work to protect individual whistleblowers and bring wrongdoing to light, we never lose sight of our fundamental goal: to help establish
a culture in which corporations no longer retaliate against those who raise concerns about misconduct.
I was reminded of the importance of communicating this goal while serving as a panelist at the Thomson Reuters 4th Annual Corporate Whistleblowing Forum
last Fall. In a recent article highlighting our session, the author noted that whistleblower lawsuits are bringing hard truths to light
about the weakness of existing compliance programs. As I noted on the panel, building a culture of strong ethics begins with establishing consistent
communication and support to employees who raise concerns. As we gain greater understanding of the challenges faced by whistleblowers, most of whom
report wrongdoing internally first, companies have a responsibility, as well as an opportunity, to create corporate cultures in which compliance
and ethics are integral to operations.
Protecting whistleblowers is not only about catching bad actors, but also about revolutionizing the way in which we view corporate ethics. As recent history
has taught us, corporate misconduct can do more than alter the basic bottom line—it can lead to devastating consequences for individuals, companies,
and society at large.
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
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.
Working at the forefront of whistleblower advocacy, we have previously discussed the numerous
ways companies hinder or actively retaliate against individuals who choose to bring corporate misconduct to light. In fact, according to the Ethics
and Compliance Initiative’s National Business Ethics Survey,
more than 1 in 5 respondents said they experienced retaliation after reporting internally. We also continue to witness companies developing new and sophisticated strategies to discourage employees from reporting possible violations.
To be sure, though, the majority of companies want to behave ethically, and are potentially stymied by antiquated internal policies or a lack of guidance
regarding appropriate and effective compliance measures.
As part of its continued dedication to improving the current state of corporate ethics, last week the ECI released a new report which examines key characteristics of high-quality compliance and ethics programs. According to the report, common practices of organizations with
strong ethics and compliance cultures include:
- Creating an environment in which employees are encouraged and able to speak up. Management in such organizations not only offers ample opportunity
for employees to voice concerns, but also takes retaliation seriously through actively engaged HR, legal and compliance departments.
- Acting quickly and maintaining accountability when misconduct occurs. These organizations develop a plan of action in which suspicions are
thoroughly investigated, and confirmed misconduct leads to consistent consequences, regardless of the employee’s position.
- Treating compliance programs as central to business strategy. Misconduct poses dire business risks. As a result, an organization that is serious
about ethics will ensure that the compliance department is not only responsible for meeting legal requirements, but also works to help management
understand and establish integrity to benefit the organization’s overall mission.
It is apparent that companies must demonstrate greater leadership in building ethical cultures, and we applaud the focus and continued work by the ECI
to help advance this goal. In our ongoing effort to root out misconduct in the workplace, the ECI’s report provides a solid foundation of principles
and practices on which we can continue to build.
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.
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.
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.
Together with the University of Notre Dame, today we released the findings of a collaborative and historic survey of financial services professionals across the U.S. and UK. The Street, The Bull and The Crisis is the most expansive analysis of its kind, probing the ethical views of a broad spectrum of the industry, from young professionals to senior executives, investment bankers, and investment managers, from San Francisco to Scotland.
Despite sweeping reform efforts and headline-making consequences of corporate misconduct, the findings make clear that attitudes toward corruption within the industry have not changed for the better. Indeed, nearly half those polled find it likely that their competitors have engaged in misconduct in order to gain an edge in the market. On an individual level, 32 percent of professionals with less than a decade in the business would engage in insider trading if they could get away with it. That’s twice the figure (14 percent) for employees with more than two decades in the industry. What does this mean for the future of the industry and how will it impact the fragile confidence of investors?
We are most concerned by findings relating to the widespread use of secrecy policies and agreements—a full 25 percent of individuals earning $500,000+ per annum have been asking to sign a confidentiality agreement that would prohibit reporting illegal or unethical activities to the authorities. As federal agencies and Congress has made clear, corporate entities cannot obstruct an individual’s fundamental right to freely engage with his or her government.
For more information on our findings, please see the full report here or see select highlights in this infographic.
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.
If you missed the NYC stop on the Government Accountability Project’s Whistleblower Tour last month, you’re in luck. Baruch has shared a fantastic recording of the panel on which I was honored to speak alongside Enron Whistleblower Sherron Watkins, Jon Oberg, Louis Clark and Jennifer Pacella.
American Whistleblowers Live at Baruch from kokobaz on Vimeo.