SEC Proposes New Whistleblower Rules

The Securities and Exchange Commission today moved to implement a new whistleblower program, one that includes lavish new rewards and expanded protection, but that has also triggered concerns that it will decimate internal compliance programs.

The program is mandated by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and is intended to boost SEC efforts to uncover fraud - and avoid the next Bernie Madoff.

“Today’s proposed rule maps out a simple, straightforward procedure for would-be whistleblowers to provide us critical information,” said Chairman Mary Schapiro during an SEC public meeting this morning of the 181-page document. “That’s not to say that this rule doesn’t pose challenges. With the potential for substantial awards comes the possibility for unintended consequences.”

Foremost among them is the fear that offering a cash reward – 10% to 30% of the penalty if more than $1 million is recovered – gives informants little incentive to use a company’s internal compliance reporting system and instead go straight to the feds.

“I am concerned that the commission's proposal might not do enough to preserve the important role that corporate compliance programs serve,” said Commissioner Troy Paredas during the meeting. “What will be the net impact on corporate conduct and legal compliance if individuals bypass a corporation's internal procedures for identifying, investigating and sanctioning unlawful activity in favor of reporting alleged violations to the SEC to earn a sizable bounty?”

He also wondered, “How do we encourage high-quality tips without incentivizing an avalanche of lower-quality submissions that distract the commission from more productive investigations?”

Prior to Dodd-Frank, the agency’s bounty program was limited to insider trading cases and the amount of an award was capped at 10% of the penalties collected in the action.

In recent weeks, corporations and their lawyers have met with SEC officials to express their concerns. For example, Gibson, Dunn & Crutcher partner Barry Goldsmith, a former SEC chief litigation counsel, helped organize a coalition of leading companies that met with the SEC last week to discuss the plan.

“The commission recognizes this is a complex issue, and has identified the right concerns,” he said. “But I’m not sure the proposed rules strike an appropriate balance and avoid unintended consequences.” The fear, he said, is “throwing the baby out with the bathwater” -- the compliance programs that companies “spent a lot of time and money and effort to build after Sarbanes-Oxley.”

Another concern, he said, is whether people whose job it is to deter and investigate fraud could reap whistleblower bounties.

During the public meeting, Schapiro said the proposed rule will prevent people such as lawyers, auditors and internal compliance personnel from cashing in.

Still, Commissioner Luis Aguilar expressed concern that a wrongdoer could be paid a reward for reporting the violation.

He invited stakeholders to comment on three questions before the rule is finalized:

-Should the SEC exclude any wrongdoer from being eligible to receive an award categorically or in particular circumstances?

-Should an individual's level of culpability be considered as a factor in determining whether the person is eligible for an award?

-Are there other ways in which the SEC should limit the payment of awards to culpable individuals?

Comments are due by Dec. 17. Going forward, the SEC said in a press release that “after careful review of the comments, the commission will consider what further action to take on the proposal.”

Comments

[Anna]

My former employer moved $360mil unrecognized expenses from continued operation to discontinued. Discontinued operations are few companies (entities), which were open and then in few months closed. By doing this company showed profit in continued operation, where is did not belong. They balanced out on corporate consolidated level such accounts like Intercompany income/expenses, other income, unknown $40mil and other. In a few months they debited accrued expenses and credited Intercompany Income/Expenses account. By moving $40 mil from Balance Sheet to P&L they simply busted income. It was a small part of everything, which Director of Finance and other company officer did.
I filed complaint with internal SOX compliance officer and was sent home and after that terminated.
Before I was terminated I met with SEC, Los Angeles office. 4 SEC employees and myself spent about 3 hours together, reviewing transactions, which I brought them. SEC found even more frauds then I thought. They were very interested.
My company found out about my SEC visit and hired some attorney, who made “audit” and then it was presented to SEC.
After I was terminated and have not heard back from SEC, I called FBI and met with them. FBI confirmed that it was a fraud. They contacted SEC. After that I got call from FBI. They mentioned communication with SEC and said that they cannot do anything.
Soon I read letter from my company’s attorney in which she stated that all people who I reported in my complaint participated and facilitated this audit.
I contacted new SEC department in Washington. I sent them documents and Journal Entries I had. They were extremely interested. They asked me who I was communicating in SEC Los Angeles office. I gave them names. And then happened the same thing. They lost interest and did not answer my calls.

My questions are:
What is in the audit that it became shield for obvious fraud?
What should I do to bring government attention to this case?
How to make somebody interested just to review documents I have?
Does anybody want to know? If yes, who are these people?

[Daniel Haszard]

Glaxo whistle-blower gets $96 million.

The case with the Zyprexa scandal is that Eli Lilly drug company pleaded guilty to criminal wrongs ("viva Zyprexa" campaign) the Zyprexa saga was rotten through and through.
Eight Lilly EMPLOYEES got millions each as supposed informant 'whistle blowers'.Lawyers on BOTH sides got millions and millions......most patient claimants who got sick are 'mentally challenged' and less able to advocate for themselves.
The Class action Lawsuits in the US had payouts of $85,000 BUT the lawyers got 45 percent and then the govt got most of the rest for having to take care of the victim/patients medical expenses.Soooo,,,,$85K turned into about $9,000 for Zyprexa claimants many had their food stamps and other state benefits taken away because of their *windfall profit* making them worse off in the end.
*
Daniel Haszard Zyprexa victim activist and patient who got diabetes from it.

[bob]

If the internal mechanisms are functioning properly the conduct will be disclosed anyhow. If its not, or its covered up, this new law almost guarantees the conduct will see the light of day. A byproduct is that it will force companies to take internal controls more seriously. Trying to overturn it would be a mistake for all concerned except a wrongdoer.

[Boozy_Mitts]

I think instead, the gov't should pay for the cost of litigation, since in my district (9th cir see STONER v. SANTA CLARA COUNTY OFFICE OF EDUCATION) a pro-se cannot bring forth a qui-tam or whistle-blower action, thus chilling any such action by the whistle-blower and possibly their attorney from making such a claim. The cost of retaining an attorney is a bar to many and if the action is brought in good faith by the whistle-blower, it should be incumbent upon the gov't to provide for the costs of such atty, not just on a winner-take-all basis.