Earlier this month, we announced the results of a survey that we conducted in partnership with HedgeWorld and the Hedge Fund Association. The survey polled U.S. hedge fund professionals on the prevalence of misconduct in the workplace and the effectiveness of firm leadership and the government in curtailing and responding to securities violations.
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.
As an SEC Whistleblower Advocate, I have discovered that even the most sophisticated individuals often have questions regarding what constitutes a securities violation and how similar violations have been handled by the SEC in the past. To help our clients to make informed reporting decisions, we have conducted a detailed analysis of SEC enforcement actions involving six of the most common violations – Offering Fraud, Trading & Pricing, Foreign Corrupt Practices Act (FCPA), Municipal Securities, Financial Fraud and Market Manipulation – and built a first-of-its-kind SEC Sanctions Database. Our data comprises actions announced since the enactment of the Sarbanes-Oxley Act in 2002 through September 30, 2012, where monetary sanctions exceeded $1 million--the minimum eligibility threshold for the SEC Whistleblower Program. Our goal was to collect this important information and allow it to be searched by the public (whistleblowers, educators, job seekers, etc.).
Once we built the database, we wanted to better understand where securities violations have occurred, when and exactly how bad they have been. To that end, we have prepared this report, which summarizes some of our more interesting findings. For instance, did you know that of the six common securities violations we examined, the SEC successfully prosecuted 457 enforcement actions where the monetary sanctions exceeded $1 million? Or that enforcement activity has been on the rise, with approximately 57% of all enforcement actions announced within the last five years? And, if there is any doubt about the potential for whistleblowers to earn substantial monetary awards, we found that in the calendar years 2003-2011 the SEC brought 419 successful enforcement actions, with aggregate monetary relief for injured investors in excess of $65 billion. As a bonus feature, where actions involved a corporate defendant, we mapped the actions, analyzed the data by region and added to the analysis recent regional data on ethics.
If you would like to learn more, check out this easy-to-use database. There, you can search actions, without filters, or with them – such as regions, sanction amount or type of violation. All queries appear with a Google mapping feature so you can actually see where actions are concentrated…and where they’re not.
I am proud to report that I was recently named a “Rising Star” in the esteemed ranking, 2012 Attorneys Who Matter, by the Ethisphere Institute, a leading international think tank focused on business ethics, corporate social responsibility, anti-corruption and sustainability. In its ranking, Ethisphere recognizes leading practitioners in a wide range of legal disciplines within government, private law practice and corporate law departments. It is a great honor to be included in the 2012 class alongside so many tremendous leaders in public service, private practice and within major corporations. I feel particularly fortunate to be at a firm that has consistently championed corporate integrity for almost 50 years and encouraged me to find new ways to make a difference. For more information about the Ethisphere Institute, please click here.
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.
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.
I was fortunate to speak on a panel recently at the prestigious Commit! Forum, an annual conference organized by Corporate Responsibility Magazine, for a session entitled "The Best Brand You Can't Buy--Establishing an Ethical Brand." Joined on the panel by Jennifer Prosek, the founder and CEO of communications firm Prosek Partners, we addressed how responsible organizations can establish an integrity brand that deters misconduct, creates a more energized and invested body of employees, and positively impacts the bottom line. I also outlined the positive impact the SEC Whistleblower Program has had in strengthening corporate compliance and integrity programs. The event is unique and uniquely special in that it calls on individuals and organizations to make commitments that will improve their organizations…and the world. It was a powerful event (as I noted here in an “exit interview”) attended by a veritable who’s who of the country’s powerbrokers. Indeed, the speaker roster included titans of virtually every industry, media moguls and thought leaders from prominent universities and think tanks. If you have an opportunity to attend a Commit! Forum in the future, it belongs on your bucket list. And, in the meantime, check out the commitments that major conglomerates have made here.
Corporate Ethics isn’t just something I blog about, it’s something I believe in, something that Labaton Sucharow has been committed to strengthening for 50 years. With that in mind, I am pleased to announce a program I am chairing, the 2012 Corporate Whistleblowing Forum, which will take place in New York City later this Fall. Putting together this program and its fantastic stable of speakers was no small feat and months in the making! With tremendous support from Thomson Reuters’, I am hosting this definitive conference on corporate whistleblowing--bringing together key regulators, industry giants, thought leaders in the ethics & compliance arena, and one of the most famous and senior whistleblowers of all time, Michael Woodford, the former CEO of Olympus and author of the soon to be released "Exposure." With lively debate and instructive presentations by other thought leaders, such as Professor Ann Tenbrunsel the co-author of "Blind Spots: Why We Fail To Do What's Right and What To Do About It," this conference is not-to-be-missed so register today! Note: CLE credit is available and discounted registration is available through November 30th with promotional code: 15WHISTLE.
I am pleased to share an animated video created by my former colleague at the SEC, David Smyth. Through his short film, Whistleblower!, Smyth, who now works in the private sector at the law firm of Brooks, Pierce, McLendon, Humphrey & Leonard LLP, outlines some of the key provisions of the SEC Whistleblower Program. The film depicts a funny exchange between cartoon in-house counsel robots after learning that there’s a whistleblower in their ranks. Awareness of the SEC program is critical to its efficacy, so it is encouraging to see such a creative approach to educating the public about this important investor protection initiative.