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.
In a newly released video, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, provided useful ‘tips on tips’ to help prospective whistleblowers understand the basics of a whistleblower submission to the SEC. Three important takeaways from the video are: (1) Whistleblower submissions should be as specific as possible. The more detailed information the Commission has to go on, the better it can evaluate and, if appropriate, act on the information; (2) If, after submitting a tip to the SEC, a whistleblower discovers or otherwise possesses additional information, always update the SEC. Information that may seem insignificant at first glance, may be credible and actionable intelligence for law enforcement; and (3) Understand the award process. Whistleblowers should be familiar with the factors that both increase and decrease an award following a successful enforcement action that meets the program criteria.
Another important and related consideration that I would like to highlight for prospective whistleblowers is that patience is key. SEC investigations take time – often from two to four years. In fact, according to the SEC’s Annual Report for FY 2011, only 61% of SEC enforcement actions were filed within two years of opening an MUI, or matter under inquiry. Insofar as many cases built on whistleblower tips are more significant and complex than traditional cases, their investigations can be particularly time intensive. For more information on the nuts and bolts of the Whistleblower Program, we encourage you to see our SEC Whistleblower Program Handbook. We also provide a wealth of information on the operations and activities of the SEC Enforcement Division in our SEC Insider’s Guide.
But do people know about the program? The answer is not enough.
In December 2011, as part of our Ethics & Action survey, we found that only 32% of Americans were aware of the SEC Whistleblower Program. In our recent survey of the financial services industry, Wall Street, Fleet Street and Main Street: Corporate Integrity at a Crossroads, only 44% of respondents were aware of this critical investor protection initiative.
To increase public awareness of the SEC Whistleblower Program, we have launched an SEC Whistleblower Eligibility Calculator. This first-of-its-kind web-based tool helps potential whistleblowers understand the in’s and out’s of the program. The easy-to-use calculator presents users with various questions, which then lead to a customized and detailed eligibility report. The assessment also provides numerous links to the rules, regulations and other helpful resources.
Electing to blow the whistle is an incredibly difficult personal and professional decision. By providing a confidential mechanism for prospective SEC whistleblowers to learn more about the program on their own time and in their own space, we hope to empower individuals to make informed decisions.
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.”
Under Dodd-Frank, the SEC is required to pay monetary awards, between 10 and 30 percent of the total monetary sanctions collected by the SEC and in other related enforcement actions, to individuals who voluntarily provide the SEC with original information leading to an enforcement action in which the agency obtains at least $1 million in sanctions. The statute also provides robust employment protections that prohibit retaliation against an employee who provides information about possible securities violations to the SEC in accordance with the program’s implementing rules. In the event retaliatory action is taken, it establishes significant remedies including reinstatement with equivalent seniority, two-times back pay with interest, attorney fees, and other related expenses. Significantly, whistleblowers may report possible violations anonymously if represented by counsel. Attorneys are eligible to participate in this important investor protection program.
In a recent Corporate Counsel Magazine article, Professor Bruce Green, a nationally recognized ethics professor and the Director of the Louis Stein Center for Law and Ethics at Fordham Law School, and I explore the interplay between the SEC Whistleblower Program and attorney conduct rules, both state and federal.
David Callahan, the co-founder and Senior Fellow of the public policy group Demos, penned an informative blog post on the SEC’s latest arsenal in combating securities violations, the new Whistleblower provisions. The posts include two surveys whose findings demonstrate the huge potential of the new laws. There has been a positive and proactive response to the Whistleblower program, such as companies building internal mechanisms to protect and encourage whistleblowers. Also, Labaton Sucharow’s Whistleblower Representation Practice, which I proudly chair, is specially mentioned as one of the firms bringing the talents of private practitioners to represent corporate whistleblowers.
But more is still to be done. Educating the American public about the protection mechanisms built into the SEC Whistleblower program is still necessary and is one of the main reasons for the creation of the SEC Whistleblower Advocate online resource. It remains a tricky and complex terrain, but we are clearing the path, one step at a time.
Survey Suggests SEC Whistleblower Program Has Not Significantly Affected Internal Reporting, Still Companies Should Do More
In August and September 2011, TheCorporateCounsel.net surveyed the impact of the SEC Whistleblower Program and how companies are responding to the whistleblower provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Contrary to the significant concerns expressed by the corporate community during the legislative and regulatory process, more than a year after the enactment of Dodd-Frank, only 6% of respondents believed that fewer whistleblowers claims were reported internally as a result of the new program and 3% believed that more whistleblower claims were reported internally because of the program.
According to the survey results, almost 40% of respondents indicated that, in response to the SEC Whistleblower Program, their company had or was planning to change existing policies to address the new rules. This is a positive sign. Responsible organizations should regularly evaluate existing compliance policies and must take every step to ensure that internal reporting of misconduct is encouraged at every level. Nevertheless, a surprising 87% of respondents indicated that their organization hadn’t yet, were not sure that it would, or had decided not to create a system to alert employees of the benefits of reporting internally. For these organizations, the lack of such a system represents a fundamental compliance weakness and is likely to lead to a higher number of securities violations and increased external reporting.
To learn more about how to establish a culture of integrity and the price of failing to do so, see this New York Law Journal article.
An October 2011survey by law firm Littler Mendelson indicated that 96% of executives surveyed are at least moderately concerned about potential whistleblower claims against their companies in light of the Securities and Exchange Commission’s (SEC) new whistleblower program. The firm’s survey of senior legal, compliance and human resources executives at publicly traded or highly-regulated companies also found that 45% of respondents’ companies had already experienced a whistleblower claim in the last 12 to 24 months. In addition, 67% anticipated whistleblower claims to increase within the next year or two.
There were some positive signs in the Littler Mendelson survey. While only 65% of respondents characterized their companies as being “moderately prepared” to handle whistleblower claims, 84% have taken steps to protect against unlawful retaliation claims and another 86% have either scheduled or are considering scheduling whistleblower and/or retaliation-related training in the next 12 months. These are good first steps. Establishing a strong ethical culture is mission critical for every commercial entity. As I emphasized in my recent article in the New York Law Journal, to remain successful and scandal-free in this era of increased regulation and law enforcement scrutiny, organizations must be more forward-looking and establish a culture of integrity that deters wrongdoing and promotes early, internal reporting of wrongdoing when it occurs.
The tide is changing. Crucial reforms are now in place to protect and encourage whistleblowers to come forward and early signs from the SEC indicate that whistleblowers are breaking their silence and taking a stand against misconduct. Given the results of the Littler Mendelson survey, it is crucial that organizations wholly commit to fostering a workplace characterized by integrity and transparency. The stakes are too high for anything less.
The Securities and Exchange Commission (SEC), having faced significant criticism in recent years, was dealt another PR blow in a recent Wall Street Journal article reporting the agency’s “inadvertent” outing of an SEC whistleblower. According to the article, the disclosure occurred during an investigation of Pipeline Trading Systems LLC, when an SEC lawyer shared the whistleblower’s notebook with an executive who was being questioned. The executive recognized the whistleblower’s handwriting. The article, and the widespread follow-on reporting, raises legitimate questions about protecting whistleblowers’ identities and what assurances of confidentiality a whistleblower can reasonably expect.
As a former Assistant Director and Assistant Chief Litigation Counsel in the Enforcement Division of the SEC, I can assure whistleblowers that all SEC staffers are extensively trained to conduct investigations in a confidential and non-public manner. After the enactment of Dodd-Frank, which expressly required the SEC and other law enforcement organizations to attempt to protect the identities of whistleblowers, the staff received additional training from the SEC Whistleblower Office on the proper handling of whistleblower information. Practically, during an investigation, as a matter of practice, the SEC will neither admit nor deny whether a whistleblower reported possible securities violations. Among other techniques, SEC staffers attempt to request and use materials in their investigations in a manner that protects the identity of whistleblowers. Additionally, in their initial submission to the SEC, whistleblowers and their counsel are asked if any of the materials provided to the Commission are likely to reveal the whistleblower’s identity so that the staff can handle those documents with particular care. These important policies and procedures and practices are deeply ingrained into the SEC’s practice and culture. As a result, the risk of accidental disclosure of whistleblower information by the agency’s staff is remote.
Nevertheless, despite the agency’s best efforts, there is always some risk that the individuals or entities involved in the possible securities violations will learn the whistleblower’s identity. With respect to the Pipeline matter, the Director of the New York Regional Office, George Canellos, wrote a letter to the editor of the Wall Street Journal, which set forth the SEC staff’s efforts to protect the identity of the whistleblower in the Pipeline investigation. While it is unfortunate that the whistleblower’s identity was discovered, all publicly available information suggests that the SEC did nothing inappropriate and its conduct was consistent with agency best practices.
An important takeaway is that the risk that a whistleblower’s identity will be discovered is substantially reduced if he or she works with counsel to file a submission anonymously pursuant to the program rules. Working through counsel, even the SEC is unaware of the whistleblower’s identity (until the individual elected to accept a monetary award); and sophisticated counsel would never share with the agency any documents that might compromise a whistleblower’s anonymity.
In the end, potential whistleblowers should not be discouraged from reporting possible securities violations because of this apparently unwarranted criticism but should carefully consider their options in reporting potential violations to the SEC.
For one thing, payback. We like to believe that what comes around goes around. Whether or not we fully understand the nuances of collateralized debt obligations or the connection between the tanking of the housing market and mortgage-backed securities, many Americans believe that big banks have done some bad things without too much of a hit to the executive bonus pool. Greg Smith, pedigree and position notwithstanding, is a little guy. And he’s a little guy who spanked Goliath. If there was any doubt about the power of Smith’s message, consider Goldman’s $2.15 billion stock dive following his very public message about the bank’s loss of “moral fiber.”
Perhaps more important, change is in the air. While important regulatory developments like Dodd-Frank and similar government initiatives launched overseas foretell a new kind of commercial engagement, The Goldman Resignation made it personal. People, everyday people, are speaking out against greed and standing up for corporate integrity. This matters. While Smith clearly stated that he had no knowledge of illegal conduct at Goldman, it is precisely the profits-over-people environment that allows misconduct to take root and thrive. When client interests are “sidelined,” when clients are transformed from humans to "muppets," it’s a slippery slope – and only a matter of time – before big, unethical or illegal conduct rears its ugly head.
In a 2007 survey, the Compliance and Ethics Leadership Council determined that, of 45 variables tested, the fear of speaking up is the strongest indicator of misconduct. The study found that “companies in which employees are uncomfortable speaking up or fear retaliation have significantly elevated levels of misconduct.” Hopefully, Greg Smith’s resignation can embolden more employees to take a stand. And, in those instances where an employee has knowledge of actual violations of the law, initiatives like the new SEC Whistleblower Program provide individuals with real protections from retaliation and significant financial incentives to tell the truth.
Let’s hope Greg Smith is a harbinger for a new era on Wall Street, an environment characterized by transparency and decency, where doing the right thing is the only thing. Good things happen when individuals commit to integrity. Clients prosper. Shareholders prosper. The public thrives.
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Jordan A. Thomas
SEC Whistleblower Advocate
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