United States: Chief Of SEC Whistleblower Office Shares Candid Assessment Of Program's Results To Date And Future Direction

Last Updated: September 22 2015
Article by Mike Delikat and Renee B. Phillips

On September 9, 2015, Sean McKessy, Chief of the SEC's Office of the Whistleblower (OWB) spoke at Thomson Reuters' 4th Annual Corporate Whistleblower Program in New York. With the standard disclaimer that his comments and opinions were his own and not the official comments of the agency, McKessy spoke candidly about the SEC whistleblower program's progress, challenges, and priorities as it enters FY2016.

Numbers of Tips and Awards

McKessy predicted that the number of tips filed with his Office in FY2015 would be in the range of 4,000, about a 20% uptick from FY2014. The number of applications for awards are also up. The office is handling the increase by adding two lawyers to its team, for a total of thirteen lawyers and five paralegals by October.

McKessy expects the SEC to pay a total of eight bounty awards in FY2015 (nine including one award from last year that was not paid until this year.) In response to criticisms that, with over 10,000 tips over the life of the Dodd-Frank whistleblower tip program and less than 20 bounties paid, the program has not met its objectives, McKessy's view is that the success of the SEC's bounty program goes beyond the number and amount of awards paid. The small number of awards is partly attributable to the fact that tips have resulted in a number of actions with recoveries of under $1 million, which is below the threshold for making bounty awards. Also, some whistleblower reports have led to enforcement actions by FINRA, other federal agencies, or state attorneys general instead of the SEC. In all, McKessy estimates that OWB is tracking or has tracked about 1000 matters across the nation in connection with whistleblower tips, which accounts for about 10% of the tips received by OWB since the program's inception.

Recent Bounty Awards to Compliance Professionals and a Company Officer

While certain categories of individuals, including company officers and compliance professionals, are generally ineligible for bounties, the SEC has recently made three awards to such individuals, invoking exceptions to the exclusions. The three exceptions may be applied when such individuals (1) have a reasonable basis to believe the report is necessary to prevent "substantial injury" to the company or investors; (2) have a reasonable basis to believe the company is impeding an investigation; or (3) wait 120 days after either reporting the issue to the company or after the company is otherwise aware of the issue.

McKessy attempted to allay concerns of some audience members about the awards of bounties to compliance professionals, explaining,

I am a former in house attorney. I was not in my current role when the rules were proposed. I understand why the initial thought process is that these people should not be paid. I understand that. In the first instance when a compliance professional or officer or attorney [makes a report to our office] there is a presumption that they will not get paid. They have to overcome that. Reasonable minds can disagree as to when the exceptions apply. But in the real world, the exceptions recognize when things are not going the way they ought to. If someone in their company is shredding documents or destroying hard drives, I hope they would come to us. This happened in Enron and WorldCom, and people would have wished they had run to the SEC. We should all be able to agree that people with important jobs should be able to come forward with that. Second, where a company is actively engaged in conduct that will do long term harm to investors, I hope people will raise their hands. And they don't have to wait 120 days to report under those circumstances.

McKessy provided context on a recent SEC bounty award to a compliance professional under the "substantial injury" exception. In awarding this bounty, the OWB did not just take the whistleblower at his/her word that substantial injury would result in the absence of his/her report. Rather, the Office sought and received specific information from the whistleblower that the company had thought it had been let off the hook for certain misconduct and was about to engage in additional misconduct.

McKessy further noted that the ambiguity inherent in the substantial injury exception makes it not his "favorite exception" and recognized it is an exception that could "swallow the rule."

I understand that, and I am not anxious to look for that as our vehicle. The one time we accepted that, we asked and received concrete examples of the company's intentions to engage in [illegal] activity. It is an exception that we have to view very narrowly.

As for a recent award to a compliance employee who invoked the "120-day" exception, McKessy explained that this employee was told consistently not to continue reporting the issue; he continued to pursue it; the person was right; and the person waited well over 120 days before reporting to the SEC, and only after there were adverse employment consequences.

McKessy confirmed that there has not yet been an award made to a compliance professional under the "impeding an investigation" exception.

Challenges: Serial Filers and Case Backlog

McKessy said that his Office is attacking its backlog (reported by the Wall Street Journal to be over 200+ claims) and pointed out that two serial filers caused the majority of that backlog. Those two serial filers have now been banned from the program for life, leaving more time and resources to devote to legitimate claims. The Office issued over 100 preliminary determinations on whistleblower award claims over the summer, but it can take up to seven months for those preliminary determinations to work their way through the appeals process and become final. According to McKessy, all claims at the OWB have now been either disposed of or assigned to be disposed of.

Confidentiality Agreements that "Muzzle" Individuals from Assisting the SEC: A Continuing Priority

One of the OWB's priorities for FY2015 has been to look for confidentiality agreements that may impede individuals from making reports to the SEC in violation of Rule 21F-17, which provides that "[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement...." The SEC brought its first Rule 21F-17 case in April 2015 against KBR. In addition, in February 2015, the SEC opened a sweep investigation on this issue, sending broad document requests to a number of companies seeking all of their severance agreements and confidentiality policies since the promulgation of the Rule in August 2011. In response to an audience question, McKessy would not comment on the status of the investigation.

McKessy confirmed that this issue will continue to be an OWB priority in the coming year, stating, "I can definitively say KBR is not the last case we will bring on the issue." McKessy said he understands that companies have legitimate reasons for having confidentiality agreements with employees, such as to protect trade secrets, and the SEC "is not interested in those." Nor is the SEC is interested in attorney-client privileged communications, but, McKessy explained, Upjohn warnings can be confusing to an average person, and it is critical that an average person be able to understand that nothing prevents him/her from sharing facts with the SEC.

Overall, the OWB is "looking for companies taking positions by actions or in agreements, in word or substance, that you report this to anyone other than the company at your own peril." "Context will be everything" in evaluating these claims. "If a company has been using the same agreements for 100 years, after August 2011, the world has changed and you may need to make changes. It is not an excuse that you have been using the agreements forever."

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.

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Authors
Renee B. Phillips
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