Avenatti arrest fallout: don’t confuse whistleblowing with extortion

For several years, thanks in large part to protections and benefits created by the Dodd-Frank Act, aggrieved employees at public companies have had a voice.

They can even monetarily benefit by escalating their regulatory and ethical concerns beyond HQ walls. The Securities and Exchange Commission is authorized by Congress to provide cash awards to eligible individuals who come forward with high-quality original information that leads to an enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10 percent and 30 percent of the money collected.

It may not be a perfect system, but the bounty program and strikes against whistleblower retaliation (and “pretaliation”) have been wildly successful. Now, however, whistleblowers have suffered a grievous injury.

Michael Avenatti, the attorney who represented adult film star Stormy Daniels in her battle against a President Trump non-disclosure agreement and alleged “hush money,” was arrested on Monday. The Department of Justice’s criminal complaint alleged he attempted to extort more than $20 million from Nike. (It was one of two complaints filed against Avenatti on Monday. In a second set of charges, the DoJ alleged that Avenatti embezzled a client’s money in order to pay his own expenses and debts—as well as those of his coffee business and law firm—and also defrauded a bank by using phony tax returns to obtain millions of dollars in loans.)

Here is where things get interesting on the whistleblower front. Earlier in the day, Avenatti tweeted: “[Tomorrow] at 11 am ET, we will be holding a press conference to disclose a major high school/college basketball scandal perpetrated by @Nike that we have uncovered. This criminal conduct reaches the highest levels of Nike and involves some of the biggest names in college basketball.”

Tmrw at 11 am ET, we will be holding a press conference to disclose a major high school/college basketball scandal perpetrated by @Nike that we have uncovered. This criminal conduct reaches the highest levels of Nike and involves some of the biggest names in college basketball.

— Michael Avenatti (@MichaelAvenatti) March 25, 2019

That press conference is very unlikely to happen now, after what one respondent called “the greatest self-own in history.” Avenatti, as detailed in charges brought by U.S. Federal Court in the Southern District of New York, allegedly threatened to hold the press conference, amid the NCAA basketball tournament and one day before Nike’s quarterly earnings announcement, to expose allegations against the athletic apparel giant unless it paid his client, an Amateur Athletic Union basketball coach whose contract with Nike was recently not renewed, $1.5 million and agreed to hire Avenatti and another lawyer for as much as $25 million to conduct an “internal investigation” into the accusations.

As an alternative, Nike was told it could just make a one-time payment of $22.5 million to make Avenatti and his client’s allegations go away. If Nike hired another firm to conduct an internal investigation into the allegations, Avenatti allegedly demanded that it would still be required to pay him at least twice the fees of that other firm.

Avenatti claimed to have evidence that one or more Nike employees had authorized and funded payments to the families of top high school basketball players and/or their families and attempted to conceal those payments, similar to conduct involving a rival company that had recently been the subject of a criminal prosecution. He identified three former high school players in particular and indicated his client was aware of payments to others as well.

“The defendant, and others known and unknown, unlawfully, willfully, and knowingly, and with intent to extort from a corporation any money and other thing of value, would and did transmit in interstate commerce a communication containing a threat to injure the reputation of a corporation,” U.S. attorneys wrote.

At the heart of the matter, most whistleblowers are not trying to bring a company down or make themselves wealthy; they are trying to save the firm from itself. They are trying to preserve an honest, fair, and productive working environment.

The bulk of the indictment comes from investigative work by FBI Special Agent Christopher Harper and recorded phone calls he facilitated. He claims the press conference announced by Avenatti was used as a threat against Nike and a deadline for paying to cease the allegations. The press conference was timed to coincide with Nike’s earnings call, “thus maximizing the potential financial and reputational damage his press conference could cause.”

In one of the recorded phone calls with Nike, Avenatti doubled down on his threats to a Nike attorney: “I’ll go take ten billion dollars off your client’s market cap. … I’m not f***ing around with this, and I’m not continuing to play games. … You guys know enough now to know you’ve got a serious problem. And it’s worth more in exposure to me to just blow the lid on this thing. A few million dollars doesn’t move the needle for me. I’m just being really frank with you.”

Avenatti made it clear Nike would have to accede to his demands. “If this is not papered on Monday, we are done. I don’t want to hear about somebody on a bike trip. I don’t want to hear that somebody’s grandmother passed away, or the dog ate my homework. I don’t want to hear that none of it is going to go anywhere unless somebody is killed in a plane crash.”

Whistleblower repercussions

The coach whose allegations against Nike form the bulk of Avenatti’s alleged scheme was not an employee in the traditional sense. His relationship puts him more clearly in the bucket of third-party, or vendor, risk. He was, in essence, a paid consultant.

Nevertheless, his purported exposé fits squarely within the world of whistleblowers and perfectly illustrates concerns companies have always had about regulator-sanctioned bounty programs. That is what makes the events so troubling.

Before, during, and after the Dodd-Frank Act, critics have feared the following: that greed would fuel whistleblowers; that complaints would bypass internal reporting structures; and that bad actors could double dip by committing malfeasance, then profit by reporting the very same illegalities they were involved with. We do not yet know whether the still-unnamed coach brought any of his concerns to Nike, but if his reports ring true, it is very likely that he fits squarely in the third category of concern we detailed. At the very least, lacking more details from prosecutors, we have to at least track smoke to fire by noting his allegations only materialized after Nike stopped paying him.

As for greed, that seems undeniably a motivation, more so than any quest for justice or corporate responsibility. While Avenatti may be the brains behind the alleged extortion scheme, there is no indication that his client did anything more but go along for the ride.

It needs to be stressed that this plot is nowhere near normal in the whistleblowing world. The coach, while not a traditional employee, was in the same sort of position that many employees find themselves amid widespread and poorly concealed corporate malfeasance. The formula is usually quite simple: a company does something illicit, and an employee is aware and tries to minimize the damage. At the heart of the matter, most whistleblowers are not trying to bring a company down or make themselves wealthy; they are trying to save the firm from itself. They are trying to preserve an honest, fair, and productive working environment.

A lot of progress has been made regarding corporate ethics in recent years. We can only hope this alleged extortion scheme doesn’t undermine what has been a very effective whistleblower process, although one that certainly remains a work in progress and fuel for debates.

Just do it (the right thing)

One bright spot in all this is that Nike, based on what we currently know, did the right thing, regardless of the merit of the allegations. Misdeeds will come to light if they do exist. For now, however, the company has apparently realized that the old adage, “it is not the crime, it’s the coverup,” rings true. Reporting the extortion attempt, rather than giving in to the relatively painless process of paying off the perpetrators, was the right thing to do. Any company in a similar situation—be it ransomware demands, IP theft, or employing a disgruntled accomplice—should follow the same strategy, no matter how painful it might be in the short term.

Another lesson reiterated by the scandal is that internal investigations must always be above board, fair, and objective. There is no place for hush money, bribes, or “putting a finger on the scale” when it comes to this important process. Nothing will empower critics and incur the wrath of regulators as fast as suspicions that this crucial compliance protocol was itself a scam.