Whistleblower Update: SEC Update, New Protections for Public Employees, and Hotline Best Practices

Whistleblower Update: 3,001 Whistles, New Protections for Public Employees, and Hotline Best Practices

SEC Reports on the Flow of Whistleblower Tips and Its Responses

The Securities and Exchange Commission’s (SEC) Office of the Whistleblower (OWB), in its update on the Dodd-Frank Whistleblower Program for Fiscal Year 2012, reported that it received 3,001 tips, complaints and referrals, which it calls TCRs, and breaks the activity down by the types of complaints and the jurisdiction in which they originated.

“The most common complaint categories reported by the whistleblowers,” the report explains, “were Corporate Disclosures and Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%),” with tips coming from all 50 states, Washington, D.C. and Puerto Rico, as well as 49 other countries.

California was by far the leading source of tips, with 435 TCRs, followed by New York (246), Florida (202), and Texas (159). All other states had 102 or far fewer, many with less than 10.

The United Kingdom led the way among other countries with 74 tips, followed by Canada (46), India (33), China (27) and Australia (21). Russia had just two and Pakistan one. The OWB posted 143 “Notices of Covered Action” for enforcement judgments and orders and said the investor protection fund was fully funded at the end of the fiscal year, with nearly $453 million in the account.

Whistleblowers may apply for incentive awards when an enforcement action nets a final judgment and order with sanctions collected exceeding $1 million. The Commission made its first such award in Fiscal Year 2012, paying a whistleblower who helped halt a multi-million dollar fraud $50,000—30% of the sanctions collected during the year. The government is pursuing additional sanctions so the whistleblower’s award may increase.

The full report is available from the SEC website at http://www.sec.gov/about/offices/owb/annual-report-2012.pdf.

President Signs Law Expanding Protections to Government Employees

On the public sector front, federal employees now enjoy additional protections when they want to report fraud, waste and abuse in government. President Obama signed the Whistleblower Protection Enhancement Act (WPEA) into law on Nov. 13.

Tom Devine, Legal Director of the Government Accountability Project (GAP), said the new protections were a long time coming and applauded the bipartisan support, saying it should inspire cooperation among legislators in general. “Nothing could set a better context for fiscal cliff negotiations than a unanimous, bipartisan consensus to protect those who risk their careers to protect the taxpayers. The mandate for this law is that the truth is the public’s business. The victory reflects strong bipartisan teamwork, as well as advocacy within the party, as Republicans often had to work harder at convincing wary colleagues. And it reflects relentless pressure from conservative stakeholders to whistleblowers and their champions throughout the last 13 years.” Devine pointed to “unique support” for the law by President Obama.

Devine noted that there is still work to be done for federal employees. As examples, he said, the WPEA does not include jury trials to enforce newly enacted protections, or the extension of free speech rights to national security workers making disclosures within agency channels. While the House of Representatives removed the national security whistleblower provision from the bill, the President signed a Presidential Policy Directive to restore the lions share of national security rights the House removed, Devine said.

Among the most significant new protections for employees who wish to report fraud and abuse, according to GAP’s Devine, are that the WPEA:

• Closes judicially created loopholes that had removed protection for the most common whistleblowing scenarios and left only token rights (e.g., only providing rights when whistleblowers are the first to report misconduct, and only if it is unconnected to their job duties).

• Clarifies that whistleblowers are protected for challenging the consequences of government policy decisions. • Cancels the 1999 precedent that translates “reasonable belief” to require irrefragable proof before they are eligible for protection.

• Protects government scientists who challenge censorship.

• Codifies and provides a remedy for the “Anti-Gag” Statute—a rider in the Appropriations bill for the past 24 years—that requires a statement notifying employees that agency restrictions on disclosures are superseded by statutory rights to communicate with Congress, whistleblower rights, and other statutory rights and obligations.

• Clarifies that protection of critical infrastructure information does not override WPEA protection.

For more details from the Government Accountability Project, go to www.Whistleblower.org.

Attorney David Caputo of Kline & Specter P.C. in Philadelphia said the new law, while it governs the public sector, may have an impact on companies. “By both improving procedural safeguards and expanding substantive rights, the WPEA will hopefully encourage more federal employees to report misconduct when they see it. The Act certainly may produce more tips that implicate the private sector as well, since public corruption or fraud within the government often involves private companies seeking to gain an illegal advantage over competitors when doing business with the government.”

Hotline Best Practices

The closest thing to blowing an actual whistle in all of this is calling a hotline to report fraud. Houston attorney and consultant Thomas Fox is a prolific blogger and contributor to the LexisNexis® Corporate & Securities Law Community (http://www.lexisnexis.com/community/corpsec/). In a recent post Fox recounted the often told the tale (true or not) about a company that was the subject of a Department of Justice (DOJ) investigation for corrupt practices. The company executive, the story goes, proudly provided the DOJ investigators the number for the company’s hotline which, as it turned out, was not a working number.

This illustrates, Fox wrote, that “not all hotlines are created, or more importantly, administered equally.” Fox cited an article written by Karen Kroll of Compliance Week, which said that a whistleblower hotline should: be developed and maintained externally, support the collection of detailed information, meet your company’s data retention policies, inspire employ confidence, offer on-demand support from subject matter experts, provide litigation support and avoidance tools, and support direct communication.

Fox wrote that, like any risk-management system, hotlines need to be managed once they are rolled out. He advises companies to make sure they get the word out to employees about the hotline, commit to training, examine the information coming through the hotline, and make sure your company is responding to calls. “Seeing a hotline system in action in this way can go a long way toward dispelling employee fears of being ostracized or experiencing retaliation because if see that their concerns are heard clearly and addressed fairly, they will learn to view the hotline as a valuable conduit. If your compliance group responds promptly and appropriately to hotline complaints, you can ensure robust participation and ongoing success.”

According to the Compliance Week article, which was published on July 24, posters in the workplace about hotlines are very effective, but says hotlines should be coupled with proactive inquiries made by management when they see something that just doesn’t look right—another leading source of tips.