And in this corner …
An architect of the Securities and Exchange Commission’s whistleblower program and one of the nation’s top attorneys representing companies facing related issues squared off during a raucous session at the recent Compliance Week 2017 conference in Washington D.C.
The session, “Whistleblowers: The Facts, the Fiction, and the Space In Between,” was moderated by Carrie Penman, chief compliance officer and SVP, advisory services, for NAVEX Global. On one side of the debate was Sean McKessy, a partner at law firm Phillips & Cohen. He was the first chief of the SEC whistleblower office and helped establish the Commission’s procedures and policies for handling whistleblower claims, including the payment of “bounties” to whistleblowers for coming forward.
The other legal pugilist taking to the stage was Gregory Keating, chair of the Whistleblower Defense practice at law firm Choate Hall & Stewart.
While preparing for “a red-hot topic that is replete with some very vexing issues,” Keating read of a recent situation involving the social media company Snapchat. It illustrates many of his concerns.
A former employee has accused the company of both inflating its revenue and growth data prior to going public and of retaliating against him for disputing the practice. Snapchat denies retaliation, claiming the would-be whistleblower was fired for “poor performance.”
Here is where things get interesting. The plaintiff’s law firm publicly stated that a private equity firm is helping to fund the case for a cut of what is awarded to the whistleblower.
“It is telling as to how deep the water is in this area and how much is going on that a private equity firm would be involved that way,” Keating said.
The Office of the Whistleblower, once headed by McKessy, was established to administer the SEC's whistleblower program.
The Commission is authorized by Congress, through the Dodd-Frank Act, to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to an enforcement action in which over $1 million in sanctions is ordered. The range for awards is between 10 percent and 30 percent of the money collected. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.
To date, approximately $154 million has been awarded to 44 whistleblowers as part of the “bounty” program.
McKessy suspects that anti-retaliation efforts will continue to be a focal point of the SEC’s efforts. He highlighted one recent case that involved a person who was not in his company’s accounting department, but nevertheless raised an accounting issue. He was fired, then rehired and fired again for claiming there were securities law violations.
Ultimately, both his analysis of securities law and accounting was incorrect. The company, however, was still fined nearly half-a-million dollars for how they “treated a whistleblower who came to them in good faith,” McKessy said.
“When there is momentum around something that is new and gets attention, it creates competition amongst the staff. Everyone wants to be a part of the new hot thing,” he said of the focus on retaliation.
It will also be interesting to see how the Trump Administration, through new SEC Chairman Jay Clayton, deals with “pre-taliation,” the use of confidentiality agreements, severance agreements, and codes of conduct to dissuade whistleblowers from reporting to the SEC and/or collecting a bounty.
“Each of those cases, thus far, was resolved on a settled basis, and the Commission has to sign off on settlements,” McKessy said. “I think it is an open question whether a Republican-led SEC will continue to view prohibitions against using language in agreements that is to the same broad extent as the Commission has so far. It remains to be seen whether companies will be emboldened to protest language that doesn’t specifically target whistleblower programs.”
Aside from a new slate of presidential priorities, Congress is also eyeing the SEC’s efforts. A Republican-led effort to scale back the Dodd-Frank Act—the Financial CHOICE Act—includes a provision that would prohibit “co-conspirators” from receiving SEC whistleblower awards.
“I think it is an open question whether a Republican-led SEC will continue to view prohibitions against using language in agreements that is to the same broad extent as the Commission has so far. It remains to be seen whether companies will be emboldened to protest language that doesn’t specifically target whistleblower programs.”
Sean McKessy, Partner, Phillips & Cohen
“It opens up a whole can of worms,” McKessy said, calling the idea “shortsighted.”
“No matter what you think about the specifics of the whistleblower program, if you own stock in a company where a low-level employee in the accounting department is asked to change some numbers so revenues look better than they really are,” he said. “Do you want him to be quiet and watch your company’s stock go the way of Enron?”
“It has been true since the dawn of man that in order to get the major participants and perpetrators of fraud you need people who are at the lower levels to come forward,” McKessy added, offering a reference to the 1970s’ cop show “Starsky & Hutch.”
“They relied on [pimp/informant] Huggy Bear,” he said. “He did not have clean hands, but without him helping and coming forward, a lot of really bad people wouldn’t have been put in jail. The reality is that if you can’t have people at the lower levels who were asked to participate come forward, the odds of bringing cases against bigger fish is greatly reduced.”
Keating made it clear that he was no fan of the anonymity protections at the core of the SEC’s whistleblower program.
“The company has to figure our where this alleged wrongdoing is happening, what department, what area, what geography. They don’t know and they have to just guess,” he said.
As for pre-taliation, there is also another side. “This purported concept is that companies create these documents with the intent to muzzle would-be whistleblowers,” Keating said. “I take grave issue with the suggestion that corporate America is inherently evil and they are out there doing this because they want to muzzle people, like the SEC said. There is a legitimate business interest in protecting your confidential information. Isn’t that just common sense?”
The Financial CHOICE Act’s plan to block awards to co-conspirators is something else Keating is in favor of, rejecting the SEC’s premise that “it takes a rat to catch a rat.”
McKessy agreed that, in a perfect world, whistleblowers would report their concerns internally. “There’s room for some debate around some of these issues, but that whistleblowers having the possibility to get paid will somehow create a ‘Walking Dead- type of scenario’ where employees are just going to be zombie-like and turn to regulators without giving the company the benefit of doubt is just not true,” he said.
Keating later offered a cautionary note for compliance officers. “The best offense is a strong defense. You folks in the compliance area play a pivotal role,” he said. “If you are not committed and doubling down on compliance initiatives aimed at addressing this, you are exposing your company and your shareholders to enormous risk.”
Enhanced compliance in the area of anti-retaliation, Keating added, “is like sexual harassment training in the 1990s.”
“If you are not committed to raising awareness in your organization about what is retaliation, what is protected activity, and what you should do as a manager if someone comes forward, you are not ensuring best practices for your organization,” he said.
“When I ran the program, I was aware that there would be a time when somebody was going to ask questions about how it was working,” McKessy said, reflecting on his time at the SEC. “Would we have a good story to tell?”
The answer, with more than a billion dollars in fines collected, is an unmitigated “yes,” he said. “There is a track record of a program that has done exactly what it was intended to do.”