United States: So You Want To Be A Whistleblower---Navigating The New SEC Whistleblower Law

Unable to land many of those big international contracts, your company has just been acquired by a more successful multi-national competitor. Luckily, you are considered a rising star and have been named assistant manager in a major foreign branch. During your first week at the new firm you notice substantial "consulting fees" being paid to a mysterious middleman who seems to know every government official in the capital city where the big contract decisions are made. You make inquiries, are introduced to the guy (who never really explains what he does for those hundreds of thousands in fees) and start asking around within the company. Soon, you are called into the division manager's office and told to stop asking questions. Then, an acquaintance in the accounting department tells you "in confidence" that this relationship has been going on for years, is done in other branches around the world as well, and that the consultant is little more than a cash conduit and most of the money ends up with local government officials influential in the award of contracts to the company. You review his invoices and see they have elaborate, but apparently false, explanations of the consulting services. You are not a lawyer, but you have reviewed company ethics bulletins and are convinced these payments are probably violations of the Foreign Corrupt Practices Act (FCPA).

Your dilemma is clear. You can ignore it and do your job (which fortunately does not involve making or accounting for the payments yourself). You can go above the local manager to the compliance office back in the U.S. with the real risk of losing your job if the information turns out to be false (or, you fear, even if it's true). You can call the anonymous tip line but fear you may be identified as the tipster. Being a genuinely honest person, you are alternately disgusted and terrified. Should you become a whistleblower? You have read about the usual fate of whistleblowers, loss of job, reputation and career. But can you live with yourself if you stay silent?

AN ALTERNATIVE—THE NEW SEC WHISTLEBLOWER LAW

Buried within the thousands of pages of the new Dodd-Frank financial regulatory reform act is a marvelous little section 922, "Whistleblower Protection." But it is more than just protection, which is clearly needed, but in fact an opportunity to profit handsomely from being honest (and how often does that happen in real life). Whistleblowers who provide "original information" leading to successful SEC enforcement actions can be awarded from 10 to 30 per cent of the "monetary sanctions exceeding $1,000,000."

What this means, as a practical matter, is that a whistleblower who threads his way through the law's technical hurdles can be on track to become wealthy, without many of the obstacles facing whistleblowers in current law and with far stronger protections against retaliation. It almost makes it worth it to be honest and do the right thing. I say "almost" because historically whistleblowing has never been an easy path to riches and unless one follows the law very carefully the old adage that "no good deed goes unpunished" may still hold true for most of the new class of wannabe whistleblowers.

ASSESSING YOUR CHANCES OF SUCCESS UNDER THE NEW LAW

Some would say that deciding to blow the whistle should not be about money or fame, but about basic honesty and doing the right thing. Many former whistleblowers end up saying they were mainly motivated by that admirable goal. In reality, however, one is making a cold career choice in deciding to break ranks and expose fellow employees, including superiors, and the organization itself, to potential criminal prosecution. This is serious business, and no one should assume others will be similarly motivated to do the "right thing." What is far more likely is that you will be met by resistance at every level. Regardless of what they may say for the record, you will be viewed by many as a weasel who is looking for little more that to profit for yourself. The new law creates significant redress for proven retaliation, but you still have to go to court to prove it, and you will still suffer the inevitable stigma that forever follows a whistleblower in many quarters. So, as they say, if you set out to bring down the king you have to kill him.

DO YOU HAVE A SOLID CASE THAT CAN BRING IN A LARGE PENALTY?

Whistleblowers are often motivated by some personal grievance that probably does not have much to do with fraud or the securities laws. Maybe the boss has told you to cover up a safety issue, or changed a report you wrote, or accepted free lunches from vendors, or some such clearly improper behavior. Maybe you have complained to others and have been demoted or otherwise suffered retaliation. These are often legitimate issues, but are not the grist for the kind of high stakes whistleblowing the SEC law is designed to reward. To meet the $1 million threshold you have to be on to what will amount to a significant case. To be sure, those cases are out there. Recent SEC cases under the FCPA, for example, have brought in enormous sanctions. The recent Bonny Island Nigerian cases, involving a joint venture of international companies to bribe officials through agents to get contracts to build natural gas facilities in that county, have resulted in almost $1.3 billion in penalties so far. Cases netting over $1 million are becoming routine, but not all enforcement actions bring that much, especially if they target only individuals, not the company. A gripe against your boss for covering up some minor infraction will not qualify. Check out the press releases on the SEC's website to get a feel for the kinds of cases the agency brings and the amount of recoveries involved. In more than a few instances, 10 to 30 percent of the cut is serious money. But for that money, you have to pick the right horse.

TO WHOM SHOULD YOU FIRST BLOW THE WHISTLE?

Under the new law, the most crucial decision you may make will come at the beginning: who do you talk to. Contrary to what you may have been instructed by the compliance department, or the method set forth in your corporate Code of Ethics, you should not call the hotline or the compliance or legal department. On its face, the law appears to provide rewards only to those whistleblowers "who voluntarily provided original information to the [SEC]." Even if your information causes the company to make some disclosure to the SEC, you may not get the credit, even if you are clearly identified as the source (which of course carries its own set of risks). Nor should you discuss the matter with your best friend in the next office, or post something on line. The best way to assess the "value" of the case is to go to someone outside the company who is legally obligated to keep the information confidential, and who is qualified to evaluate your evidence and assess the potential monetary sanctions that might be imposed. In my view, self-serving as it may be, the best guarantee of keeping it confidential is to consult a lawyer knowledgeable in the securities laws and enforcement actions who will keep your information confidential. She can evaluate with dispassion whether you are sitting on a case that may generate large penalties. In general, any case involving FCPA violations, accounting fraud, or material misrepresentations in SEC filings, particularly in a large public company, is a potential winner.

Another substantial benefit of getting a lawyer involved early is the fact that the new law explicitly protects the identity of whistleblowers who come to the SEC through counsel. Whistleblowers who act through counsel are entitled under the law to submit information anonymously. In effect, the lawyer becomes the liaison between his unnamed client and the government, and can advocate for his client and take actions designed to enhance the chances of a reward without exposing the client's identity. Having counsel also sends a message to the company that any acts of retaliation may be met with legal action.

CAN YOU PROVE YOU ARE THE ORIGINAL SOURCE OF THE INFORMATION?

The new law requires you to provide "original information" to the SEC to get an award. This means you have to be able to prove you were the first in the door with the information that led to the case. If the SEC already knows about it from any other source, you probably lose. My prediction is the SEC will resist making awards in any case in which the agency was already investigating your company for the activity, even if they had not yet found the information you bring them. The key issue in close cases will become whether your specific information "led to the successful enforcement...action." You also must be able to prove the information "is derived from [your] independent knowledge or analysis." Water cooler hearsay will not get you the prize. Nor, in my opinion, will information that consists solely of what someone else told you, even if it is true, be deemed "original information." With potentially millions on the line in a big case, the SEC may well look for any loophole to deny or reduce an award, particularly if there are others claiming an award as well. If the information comes from a news report or government investigation, you will have to prove your information was not "exclusively" derived from such report, or that you were in fact an original source of the information in the report. None of this will be easy, and do not blithely assume the SEC will give you the benefit of the doubt.

Again, if you play by company "rules" and go first to the compliance officer or general counsel with your information, they may report the allegations to the SEC almost immediately, and will be prompted by SEC staff to give them your name as a potential witness. You will be fully debriefed by company or outside counsel. At that point, you have effectively lost control of your information. Sooner or later, you may also get an SEC subpoena or, in a serious case of on-going fraud, an after-dinner cold call at home from two FBI agents. At that point, it's a little late to start talking about a cash award for yourself. One thing is certain: if there is a successful enforcement case and millions are recovered, you have better already nailed down a clear case for your being the original source. In short, the best strategy is to consult counsel and no one else, have your lawyer go directly to the SEC, play it close to the vest, and get the staff to verify in writing if at all possible that his client X (you) has given them "original information" which meets the criteria set forth in the law.

HOW SHOULD YOU GO ABOUT PROVING YOUR CASE?

In most contested legal matters, the best evidence is usually found in authentic documents. Witnesses can forget, get cold feet, lie or be contradicted. Nowadays, emails are the document of choice for enforcement lawyers. They are usually spontaneous, candid, presumed truthful, and once sent or received can never be hidden, destroyed, denied or erased. There is hardly a big case anymore that does not feature some smoking gun emails. Thus, if you can come to your lawyer with some emails supporting your information you are already at first base. Likewise spreadsheets, accounting documents, secret contracts or side-letters, minutes of meetings, "cya" memos of one kind or another or similar documents can be important. Gather them as quietly as you can before going to the lawyer. Don't get the lawyer involved in any effort to sprit anything out of the company. Don't try to play Sherlock Holmes and conduct your own investigation within the company; you will probably mess it up and expose your identify as the likely tipster when the company ultimately is contacted by the SEC. Let your lawyer figure out how to assemble the information for the SEC. Once they have it, they have the weapons to quickly launch an investigation, and to require the company to provide specific documents and/or testimony. Your counsel can identify potential documents and witnesess for them, while making sure you are getting credit for the leads.

In our case above, the phony invoices submitted by the consultant, and payments made, would be the kind of documents the SEC would focus on, for falsifying books and records alone is an FCPA violation. If some of the documents, including the emails, are ones you sent or received yourself, these should also be given to counsel to help him evaluate whether you have some exposure yourself in the matter, which can change the strategy considerably (see below).

There is always some risk in providing presumably confidential company documents to an outsider, even your own lawyer. The company may consider this a breach of your employment agreement, if you have one, or a violation of some company policy you agreed to uphold. However, once your information comes to the SEC the company would be risking a retaliation claim if it tried to take adverse action against you for providing the documents in confidence to the government. Of course, if you put them on the internet or leak them to a journalist you have no such protections, and may blow your chance later to claim them as part of your "original information" as well.

HOW, AND WHEN, WILL THE SEC DECIDE IF YOU GET AN AWARD?

As with most things involving the government, the process of receiving an award will undoubtedly be frustrating and protracted. The SEC must write regulations to enforce the law, and hopefully they will facilitate, not complicate, the chances of receiving an award within a reasonable time within a few months. The case itself may take months or even years to investigate, and a settlement or successful lawsuit could take even more time. Then the SEC Commissioners have to decide the significance of the information to the success of the enforcement action, the degree of assistance provided by you and your counsel, the "programmatic interest of the [SEC]" (whatever that means) in making such awards (which should be obvious but may provide a loophole to reduce an award), and just about anything else they decide is relevant. Here is where the lawyer will be essential to overcome the traditional bureaucratic resistance to giving large cash awards to real people who have done the right thing, as opposed to keeping the funds for Uncle Sam or for distribution to shareholders in the company.

Getting an award will be particularly difficult if the government suspects you have had any role in the illegal activity. If so, and there is a chance you could be convicted of a crime for your actions, the SEC has a basis to deny an award, at least until it is clear you will not be prosecuted for your actions. In our example, if you knowingly approved some of the commission payments, or falsified any company documents, you have potential civil and criminal exposure and the government will have an entirely different attitude about your effort to become a late-blooming whistleblower. Again, having a lawyer who can argue for some form of immunity or cooperation agreement that will spare you any criminal conviction will be essential to qualify for an award. The SEC has recently established formal procedures for seeking cooperation deals which may involve immunity from criminal prosecution. Even with exposure, it may still be possible to cut a deal early on if the information is good enough and you hold the key to cracking a big case. Of course, having potential exposure is a good reason to consult a lawyer anyway.

WHAT ABOUT RETALIATION?

Retaliation, being part of our base human nature, will always be with us. Even if your identity as whistleblower remains officially anonymous, chances are someone at the company will figure out the source. You must assume going in that somehow, in some form, there will be retaliation. Whether it is just some residual stigma that follows your career, or something more serious, remains to be seen. The new law contains strong retaliation provisions, including a long statute of limitations for bringing claims, immediate access to federal court without plodding through an administrative morass at OSHA, and a new double-back pay remedy. But one must accept the fact that once the whistleblower has crossed the Rubicon and gone to the SEC, his career, and his life, will probably never be the same. If fear of retaliation is your overriding concern, you should just call the company hotline, or the SEC's hotline, give them the information, do not leave your name, and see what happens. If you chose to call the company line and it becomes clear later that the company has taken no action, you can then consider going (through counsel) directly to the SEC.

IS IT ALL WORTH IT?

There is no easy answer here. In truth, most of us would probably look the other way, or quietly ask for a transfer, or maybe resign, in the case we described above, rather than become a whistleblower. I suggest reading a May 13, 2010 article from a most unlikely source, the New England Journal of Medicine, for a fascinating article that tracked the experiences of individuals who had blown the whistle on health care frauds. Their stories reflect the reality of living as a whistleblower, and their tales are not at all reassuring. As noted, even though the new law provides much better protection from retaliation than under existing law, the path of the whistleblower must trod is still a lonely one. Doing it for the money alone is probably not enough to justify the risks. If however, one chooses to do the right thing, doing it in such a way as to mess up the chance for the money is unforgivable. Thus, if you are inclined to reach for that whistle, do it right, do it with honor, and do it so as to maximize your chances for a big payday, courtesy of the U.S. Government.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Daniel J. Hurson is former Assistant Chief Litigation Counsel at the SEC and a former federal prosecutor. He practices securities enforcement and white collar defense law in his own firm in Washington D.C. His email is dan@hursonlaw.com. His website is http://www.hursonlaw.com

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