Is Whistleblowing Working?
WHISTLEBLOWER PROGRAMS are designed to protect employees against retaliatory actions when they report illegal activity by their employer. Traditionally, government employees have enjoyed more of these protections than private-sector employees. That began to change after accounting scandals in the early 2000s that led to bankruptcies of major companies, most notably Enron, after which Congress passed the Sarbanes-Oxley Act of 2002. And the private sector was further brought under whistleblower rules with the passage of the Dodd-Frank Act of 2010, which extends whistleblower protections to employees reporting on fraud in financial services companies; the program is administered by the Securities and Exchange Commission (SEC). As the program completes its first year, experts are examining its effectiveness.
The following looks at those assessments as well as at some developments in the courts concerning the older Sarbanes-Oxley program, and how the Occupational Safety and Health Administration (OSHA) handles claims of retaliation against federal whistleblowers.
This whistleblower program, which is administered by the SEC, is designed to encourage employees to report illegal activity by providing incentives and protections. For example, the program provides whistleblowers with a monetary reward equal to 15 to 30 percent of any fine exceeding $1 million that the company must pay as a result of the whistleblower’s information. To get an award, the whistleblower must provide original information; the information must be given voluntarily; and it must result in a successful enforcement action.
Under the law, companies are prohibited from retaliating against an employee who reports possible violations. Employees who feel that they have suffered an adverse consequence in response to their whistleblowing may pursue retaliation claims in federal court.
In 2011, the SEC established regulations that govern the program. The regulations stress the value of a company having internal compliance programs, and the rules encourage whistleblowers to report concerns to their companies before turning to the SEC. Those who first report concerns internally will be entitled to a larger percentage of the monetary sanction, and those who interfere with an internal program will see a decreased award.
An employee who makes an internal report up to 120 days before making a report to the SEC will get credit for any information reported directly by the company to the SEC. The regulations note that these actions are designed to encourage companies to strengthen their internal programs because whistleblowers are now more likely to use them. Companies pushed for this approach, while some critics were concerned that having a person report first to the company might give a company a chance to destroy evidence.
Complaint record. Last November, the SEC released a report covering the first year of the program. The SEC reported that 3,001 whistleblower tips were filed; they came from all 50 states, the District of Columbia, and Puerto Rico as well as from 49 foreign countries. The most common complaint categories were corporate disclosures and financials (18 percent), fraud (15 percent), and manipulation (15 percent).
Of the total complaints filed, 2,507 came from workers in the United States. The geographic spread was consistent with population, meaning that the most reports came from the most populous states, which include California, New York, Florida, and Texas. Among foreign countries, the United Kingdom brought the most complaints, followed by Canada and India.
From these complaints, only one award had been granted as of press time. The SEC noted that it was for the maximum amount allowed and that the information received was exactly the type envisioned under the law. It is unclear whether the whistleblower first reported the fraud internally; the full details were not disclosed by the SEC to protect the whistleblower’s identity. However, the SEC did note that the whistleblower helped uncover a multimillion-dollar fraud scheme that led to more than $1 million in sanctions against the company. The whistleblower received $50,000 but, because additional judgments are pending in court, that amount could increase.
In announcing the award, Robert Khuzami, director of the SEC’s Division of Enforcement said: “Had this whistleblower not helped to uncover the full dimensions of the scheme, it is very likely that many more investors would have been victimized.”
Assessments. Apart from this case, it is hard to assess how the program is working. The SEC states that the tips it gets are high quality. “However, the lack of actual rewards makes the program hard to evaluate from the outside,” says Richard Moberly, associate dean for faculty and professor of law at the University of Nebraska College of Law in Lincoln, Nebraska. “The lack of rewards may be due to the length of time it takes to investigate and receive payments from companies after violations are found,” he notes.
This factor may indicate a weakness in the program, says Moberly. “It may turn out that the lengthy interval between a tip and a reward discourages potential whistleblowers in the future. Also, if the SEC turns out to issue an insignificant number of awards or issues awards for insignificant amounts, that could undermine the program’s effectiveness.”
A more fundamental concern is the number of tips going into the pipeline. Given the universe of U.S. regulated companies that come under Dodd-Frank, “3,001 reported tips is far less than one might expect,” says Eugene Ferraro, CPP. Ferraro’s company, Convercent, Inc., helps private sector companies set up and run programs for handling whistleblower information, such as anonymous tip lines that whistleblowers can use.
Based on the number of tips that go into these hotlines, the number of SEC tips should be higher, he says.
“Roughly 1 percent of a given population will make a whistleblower report in a year. In spite of the fact [that] there are many factors impacting this percentage, [the number of] tips seems extremely small,” says Ferraro. “In fact, it is much lower than the SEC and our lawmakers appear to have anticipated. The SEC paid out only 10 percent of the $452 million allocated for rewards.”
To determine the program’s administrative effectiveness, the SEC’s Office of Inspector General conducted an audit. The results were published in a report in January 2013. The report noted that the rules of the program seem to be working well and are not causing confusion among those submitting complaints.
However, the report was unable to come to conclusions on many points because of the program’s short life. For example, the report examines whether the program should have a private right of action for whistleblowers. Such a provision would allow whistleblowers to pursue legal recourse against a company after exhausting their remedies within the SEC program. The report found that such a move would be premature and that the issue should be reexamined after the program has been in place for a few more years.
The report found that the SEC has been responding promptly to complaints, according to the report, but it noted that metrics should be added to properly track response times and other actions. If time frames are established for certain actions, quantitative performance metrics can be gathered. For example, according to the report, the SEC could “establish a policy that the office will send either an acknowledgement or deficiency letter to a whistleblower within 30 days after receiving the whistleblower’s award application.”
Regardless of how well the program works, Ferraro contends that the concept of the SEC program is flawed because the prospect of getting a percentage of a monetary sanction as a reward may cause employees to avoid reporting a problem early enough to allow a company to nip it in the bud. The employee gets a larger percentage of the award if he or she reports it internally before reporting to the government, but companies would like to hear about concerns before they reach a point where they would be actionable by the SEC. “The effect undermines internal efforts at organizational compliance and ethical behavior,” he says.
On the plus side, the SEC program will not give out awards to informants who were part of the original fraud. That is not the case with some other government whistleblower programs, like the one administered by the Internal Revenue Service (IRS). For example, in September, the IRS awarded $104 million to Bradley Birkenfeld, a former banker with UBS, who offered information that led to $780 million in fines for a scheme in which the bank helped wealthy account holders hide money from the government. Birkenfeld, who later spent 30 months in prison for withholding information related to the case from investigators, was allowed to collect the reward even though he participated in the fraud.
OSHA. It may also be instructive in examining whistleblower effectiveness to look at the OSHA program, which concerns charges of retaliation by whistleblowers. The most recent statistics on the OSHA whistleblower program, which were released in January 2013, indicate that the number of retaliation claims filed by whistleblowers continues to rise. In 2012, OSHA received 2,787 cases of retaliation stemming from 22 separate federal whistleblower statutes. The number of cases is up from 2,648 in 2011 and 2,319 in 2010.
OSHA statutes had the most filings at 1,706 in 2012. They have risen steadily from 1,270 in 2009. The Federal Railroad Safety Act came in second in claims with 353 in 2012. However, that number is up sharply from 45 in 2008. Complaints under the Sarbanes-Oxley Act of 2002 were in third place with 164. But complaints under that act have gone down, from a high of 235 in 2008, probably because the new SEC program also deals with fraud in the financial sector.
Of the complaints made to OSHA, the majority are dismissed for lack of merit. In 2012, 1,665 of the cases were dismissed, 565 were withdrawn, and 405 were settled. Only 45 of those adjudicated were deemed to have merit.
In late 2012, OSHA launched a pilot program to offer early resolution and mediation as alternatives to whistleblower investigations. The alternative dispute resolution (ADR) pilot program will run for one year and will cover whistleblower complaints filed in two regions—which cover 12 states as well as various Pacific islands such as American Samoa and Guam.
Under the program, each region can conduct up to 15 mediation sessions. Unlimited early resolutions, under which the two parties come to an agreement before OSHA launches an investigation, are allowed. If the parties fail to reach a resolution under the program, OSHA will continue to investigate the complaint as normal. OSHA allows parties to settle at any time during the investigation.
Mediation allows companies the opportunity to address an issue before the prospect of penalties is introduced. Some experts think such an approach has merit and could be applied more broadly. “The OSHA approach seems to me to be more productive and, frankly, more civilized. It … [allows] the transgressor a fair opportunity to engage in some form of mitigation. The transgressor is only penalized if the offense was intentional and when committed with malice,” says Ferraro.
However, because of the way the systems have been designed, mediation may not fit with the SEC approach. “The question I have is whether mediation makes as much sense for the SEC program, which is not about considering claims of terminated or otherwise ‘adversely’ treated employees,” notes Geoffrey Rapp, the Harold A. Anderson Professor of Law and Values at the University of Toledo College of Law in Toledo, Ohio. Rapp explains that an OSHA claim generally involves a fired employee seeking compensation because the termination was due to reporting fraud.
In SEC claims, an employee is reporting potential wrongdoing that may have harmed shareholders and an investigation is a necessary step. In these cases, mediation might allow a company to reach a resolution prior to the government getting the full benefit of the tip provided.
Court cases. Some OSHA programs, have been in place long enough that cases have worked their way through the courts. Those lawsuits are clarifying how the statute should be applied.
In one case, Tides v. The Boeing Company (U.S. Court of Appeals for the Ninth Circuit, 2011), an appellate court found that Sarbanes-Oxley whistleblower provisions do not protect those who report violations to the media. In the case, two financial auditors told a reporter about auditing practices that they believed violated the law, and provided the reporters with company documents. When the company found out, the employees were fired. A lawsuit claimed that the company fired the employees illegally. However, the court ruled that the firing was legal because the employees had no right to give the information to the media; such violations may only be reported to federal regulatory or law enforcement agencies, members of Congress, or company supervisors.
In another case, an appeals court ruled that employees need not know what specific law a company is breaking. In Wiest v. Lynch (U.S. Court of Appeals for the Third Circuit, 2013), an accounting employee refused to make an entry for company parties as his bosses had asked, believing the billing was unlawful. He was fired filed a lawsuit for retaliation. The district court found for the company, ruling that under Sarbanes-Oxley, the employee must allege a violation of a specific part of the law. The federal appeals court disagreed, ruling that an employee need only have a “reasonable belief that his employer’s conduct constitutes a violation of an enumerated provision.”
As the SEC program advances, more awards and the potential for challenges in the courts could help clarify the program and determine how well it is working. In the meantime, companies should ensure that ethics training has a place of importance in corporate culture.