The Securities and Exchange Commission just announced the issuance of the agency’s second Dodd-Frank whistleblower award—serving as a reminder to in-house counsel to bolster their companies’ own internal reporting programs, attorneys say.
Three claimants qualify to collect 5 percent each of a $7.5 million enforcement action against a “sham hedge fund” and its CEO, according to the agency. In an order [PDF] issued last week, the commission determined that each claimant “voluntarily provided original information” that “led to the successful enforcement” of the matter concerning Locust Offshore Management and chief executive Andrey Hicks.
While the SEC hasn’t managed to collect the sanctions ordered in a March 2012 judgment—and therefore can’t actually pay the whistleblowers just yet—the agency said the claimants are also eligible to apply for a portion of the $800,000 already collected by the Department of Justice in a related action.
A fourth whistleblower claimant was denied an award because the information provided by the person wasn’t “original” and didn’t contribute either to “the opening of the investigation or the success of the enforcement action,” according to the order. None of the claimants were identified by name.
Under the rules of the program, created as part of the Dodd-Frank financial reform law, SEC whistleblowers may be able to collect between 10 and 30 percent of enforcement actions worth more than $1 million, if the information they provide about misconduct proves significant. Though since the 2011 inception of the program, the agency has announced only one other whistleblower award.
But this latest announcement comes after Stephen Cohen, associate director of the SEC’s division of enforcement, recently hinted that there’s much more whistleblower action on the horizon.
“There will be a likely change in the discussion about the magnitude of some of these awards over the next six to 12 months,” Cohen told an audience at the Corporate Crime Reporter conference in Washington, D.C., last month.
Cohen, a panelist at the conference, said that whistleblowers are in a position to share information on misconduct that is either “too costly or impossible” for the agency to obtain.
“The net effect of this,” Cohen said, “is that whistleblowers, and in some instances counsel, are putting together information for us, sometimes in huge reports with evidence, with documents, bringing it to us, and giving us sometimes a roadmap, sometimes a starting place for us to do an investigation, at least pointing us in the right direction—sometimes helping us all along the way to the end.”
How can companies help ensure that whistleblowers report issues internally instead of immediately turning to the SEC with a complaint? Time and again, whistleblowers try to make internal reports and run into serious roadblocks, according to plaintiff attorneys who spoke to CorpCounsel.com.
Indeed, more than 80 percent of people who approach the SEC with tips tried to report within their companies first, The New York Times reported earlier this year. The agency received 3,001 tips in 2012 from across the U.S. and 49 other countries.
“The SEC whistleblower reward program puts companies at greater risk than they used to be when they dismiss and pay no attention to whistleblower concerns,” says David Marshall, a name partner at Katz, Marshall & Banks in Washington, D.C.
An effective compliance program involves listening to employee complaints, keeping internal whistleblowers informed about how the complaint is being handled, and warning managers not to retaliate against employees who come to them with complaints. “Any company that doesn’t build such a program today is making a big mistake,” says Marshall.
Motley Rice attorney Rebecca Katz says she is currently handling more than a half-dozen whistleblower cases before the SEC. In nearly all of them, the person reported internally first, she says.
“In some cases, the company purported to investigate, and it wasn’t satisfactorily resolved,” says Katz, a former senior counsel in the SEC’s enforcement division. “In some, there was retaliation [against the employee] for reporting internally, without even an investigation.”
She recommends that senior management create “an open-door policy” when it comes to complaints, and, within the company’s code of conduct, address up-front how employees will be treated when they report internally. “The personality of the company comes from the top,” she says.
Putting policies in place to prevent retaliation should be a priority for companies, according to Jordan Thomas, a former assistant director at the SEC who helped develop the agency’s whistleblower program.
“The number one indicator for someone becoming a whistleblower is retaliation,” says Jordan, now chair of the whistleblower representation practice at Labaton Sucharow.
Failure to communicate with employees after they’ve lodged a complaint also trips up companies. “People assume if they don’t hear anything, nothing has been done,” he says.
Even just thanking employees for making a complaint can be a potent tool, and one that’s often overlooked. “Give appreciation for people who have the courage to come forward and report something—even if they’re wrong,” Jordan recommends.
That may be especially important in the near future, as more investigations come to fruition and awareness of the whistleblower program grows. “In the coming years, many of the SEC’s most significant cases will be the result of SEC whistleblowers,” he says.
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