Saturday, May 28, 2011

The Real Impact of the SEC's New Whistleblower Program

When you consider that over 90 percent of the Justice Department's prosecutions of corporations originate from voluntary disclosures, as opposed to proactive investigative steps, you know there is something wrong with this picture. For the foreseeable future, the Justice Department is happy just to sit and take confessions from companies who believe that voluntary disclosure is the best course to follow.

The equation is about to change -- with the new whistleblower rules going into effect, and the SEC standing up the new office to receive complaints, the mix of originating sources may change. Proactive enforcement against suspected companies may become more frequent as the government initiates its own investigations without a voluntary disclosure.

What are the implications of this new development?

First, with the assistance of confidential information provided by a whistleblower (assuming it is reliable and corroborated), the Department of Justice will be able to launch proactive investigations using a variety of tools -- wiretaps, undercover officers, informants, search warrants and other aggressive tools. While the Justice Department used these kids of tools in the Shot Show sting case, it may be able to use these same tools against larger companies with much more to lose through collection of surveillance information.

Second, the punishment and size of funds will grow even larger. The voluntary disclosure process allows companies time to conduct its own internal investigation, identify compliance weaknesses, remedy the compliance program, and then present a completed package of reform to the Justice Department. The only issue left to resolve is the punishment -- how large a fine? use of a DPA or a NPA? use of a monitor?

Third, the Justice Department is likely to increase the number of corporate executives and agents who are prosecuted under the FCPA. They will be able to gather stronger evidence against individual executives (e.g. wiretaps, audio recordings, videotapes) and able to target even greater numbers for prosecution.

The business community is right to be concerned about the new whistleblower rules. Businesses should be concerned not only about the fact that the number of whistleblowers will increase but by what the government can do with the new whistleblowers and the information they provide.


  1. I think a question will be what the SEC does with the information. Will they share with the DOJ? Or will they then contact the company to spur an internal investigation?

    I think the regulators will end up giving more credit for ongoing cooperation because the company automatically loses their 2 points for voluntary disclosure when the origination is via whistleblower.

  2. Hey Howard -- great to hear from you. I look forward to our blogger tour.!!! I ahve enjoyed your writing and your insights. Lets work together on something.

    As to information SEC gathers, they will definitely pass it on to DOJ since it will be confidential and relaible (at least in their minds). This is the danger -- DOJ will be able to open a case, and use tactics that normally cannot be done in voluntary disclosure case. If DOJ decides not to too any rpoactive investigation, then they will contact company and tell them to conduct internal investigation.

  3. How responsive will the SEC and DOJ be to Whistleblower ("WB") submissions? If a WB submits who is still with a corporation and is suffering retaliation, will the SEC and DOJ react or will it be too late? Besides sitting around waiting for possible compensation, can a WB lodge a wrongful dismissal or breach of contract proceedings? Could a WB initiate a personnel action against directors and senior officers for negligence and breach of fiduciary duties? Has there been such cases in the US on thus point of liability owed by US directors and officers and personnel, in particular, foreign personnel? Are mission statements, codes of conduct etc considered contract terms within an employment agreement? Just some thoughts for discussion.

  4. I have to agree that the SEC will share with the DOJ. It gets frustrating sometimes because there's no reciprocation. As you're well aware, whatever information the DOJ gets through the grand jury can't be disclosed to the SEC.

    Does that apply to wiretaps under Title III?

    As to anonymous, I think that the SEC will be as responsive as possible given budgetary and human resource constraints. I think the driving mantra there nowadays has to be "avoid another Madoff." But in order to handle the one or two tips a day they're getting, and that's just at the start, they'll have to staff up to an additional 700 or so investigations a year. That's an "all hands on deck" kind of challenge, and the SEC doesn't have that many hands.

    I don't know that a whistleblower could file a breach of fiduciary duty action, but a shareholder could, right? I have to go back and re-read Nature's Sunshine.

    Howard Sklar

  5. You are right about DOJ's ability to share with SEC -- does not work with Title III information. I expect SEC will have to staff up -- they have 43 slots allocated to new whistleblower section. They ahve to make sure they investigate the complaints for fear of another Madoff, as you suggest. Shareholders can definitely sue on the ficuary breach -- I doubt whistleblowers can but you never know these days -- Mike V

  6. Nature's Sunshine? Apologies for my ignorance

  7. Found it Thanks "A"