Whistleblowing and the new race to report
Section 922 of the Dodd-Frank Wall StreetReform and Consumer Protection Act createdrewards of 10–30 percent of monetary sanctionsfor whistleblowers who report to the SECoriginal information leading to securities lawenforcement actions that recover more than $1million. This could increase corporateregulatory risks considerably and create a ‘raceto report’ to the SEC.
Press releases announcing settlements by the Securities &Exchange Commission (SEC) in the ﬁrst seven months of2010 show how large future rewards for whistleblowerscould be. In July 2010, the SEC settled three securitiescases with recoveries of $550 million, $100 million, and$75 million. Another case settled in February for more than$300 million.Foreign Corrupt Practices Act (FCPA) cases have alsogenerated large settlements in 2010, with one around$450 million, two others exceeding $300 million, and oneof nearly $200 million, including related payments to theU.S. Department of Justice.Had the Dodd-Frank Act applied to these cases, therewards could have ranged from $7.5 million to $165million. While monetary reward is not the only motivefor whistleblowers, it represents a strong incentivefor an employee to call the SEC and provide “originalinformation.”According to the Deloitte 2010 Ethics & WorkplaceSurvey, the recession has diminished two important formsof business currency—trust and ethics. Nearly half (48percent) of employed Americans who plan to look fora new job when the economy is more stable cite a lossof trust in their employer as a result of how businessand operational decisions were handled over the lasttwo years as a reason for leaving. Thirty-one percent ofemployees say that their colleagues are more likely tobehave unethically at work in this environment. So trust isdown and wrongdoing up just as the SEC introduces largewhistleblower rewards.Another development is the proposed changes to the U.S.Federal Sentencing Guidelines (‘Guidelines’) that take effecton November 2, 2010, absent Congressional action. Oneamendment increases the opportunity for a reduction inorganizational sentences when the organization has aneffective compliance and ethics program incorporatingdirect reporting obligations from the head of thecompliance program to the board of directors or auditcommittee. This includes reporting “no less than annuallyon the implementation and effectiveness of the complianceand ethics program.”This amendment creates a substantial incentive fororganizations to alter, where necessary, the reportinglines for the head of their compliance and ethics programand formalize annual assessments of the organization’scompliance and ethics program (including its whistleblowersystem), with a report being provided to the board or auditcommittee.The combination of the Dodd-Frank Act and theamendments to the Guidelines also creates a strongincentive for organizations to drive the effectiveness oftheir whistleblower system to as high a level as is feasible.The goal would be not just to comply with the minimumstandards of the Sarbanes-Oxley Act, where applicable,but to encourage reports of potential wrongdoing to bemade internally. This, with other improvements to thewhistleblower system, could allow issues to be resolvedat a lower cost, with the organization potentially gainingthe beneﬁt of smaller penalties that can arise from self-reporting corporate wrongdoing to the authorities.Encouraging employees and others to use theorganization’s whistleblower system to report potentialwrongdoing, in preference to contacting the authoritiesdirectly, can involve actions in multiple areas.This paper explores “Ten things about whistleblowing,”discussing steps organizations can take to enhance theirwhistleblower systems and help mitigate their risks in lightof the Dodd-Frank Act and proposed changes to the U.S.Federal Sentencing Guidelines.