In the seven weeks from Aug. 12, when the Securities and Exchange Commission launched its new whistleblower rewards program, until the end of the SEC's fiscal year on Sept. 30, the agency received 334 tips and complaints—an average of 6.68 tips per day alleging some sort of corporate misconduct.
Now comes the maddening part of sifting through the data behind the complaints for whatever lessons corporate compliance departments can find.
First, the numbers. The SEC's recent report analyzing its whistleblower data divided those 334 complaints into 11 categories. Topping the list was “other” at 79 complaints, or 23.7 percent of the total. The SEC offered no further detail on what types of complaints qualified as “other,” but did say they typically were instances where the whistleblower chose not to use any of the pre-defined complaint categories the SEC offers in its online questionnaire.
In second place were complaints about market manipulation with 54 complaints filed, or 16.2 percent of the total tips offered by whistleblowers. That surprised more than a few legal experts, since market manipulation cases are difficult to prove. “It makes you wonder who the whistleblowers are. This type of case can be very difficult to prove, and the tips must usually come from an insider,” says William McGrath, a partner at law firm Porter Wright.
Finishing third were complaints about fraud: 52 complaints, or 15.6 percent of the total. This was the type of complaint legal experts were expecting to see, since allegations of fraud are so prevalent generally and whistleblowers stand a better chance of collecting a reward. “It is fairly clear cut to prove this type of case,” McGrath says.
Other categories of complaints included matters related to corporate disclosures and financial statements (15.3 percent), insider trading (7.5 percent), the Foreign Corrupt Practices Act (3.9), municipal securities and public pensions (2.7), and unregistered offerings (5.4).
Steven Pearlman, a partner at law firm Seyfarth Shaw, says that while he expected the number of complaints to be higher, the reported cases are still significant. “Companies should be concerned. If you look in broad view, [the program] is still in its infancy, no award has been given out yet, and they are showing this number,” he says.
Many were surprised that more cases were filed in September (183) than in August (151) when the office first opened its door. “I had anticipated that whistleblowers were waiting for the day that the rules became effective and would want to get their forms in first,” McGrath says, since only those bringing original information to the SEC are eligible for a reward should that tip lead to a settlement. Tipsters can get 10 to 30 percent of the sanctions as a reward if the total sanction is larger than $1 million.
Regardless, lawyers expect these complaints will continue to rise. “I think it is absolutely going to rise, and I think you will see steady, strong growth in the next 36 months,” says Gregory Keating, co-chair of whistleblower and retaliation practice at law firm Littler Mendelson. The 334 tips may not look significant now, he says, but companies should remember that the SEC did not report complaints it received prior to the Aug. 12 launch, nor all the complaints filed in its pre-existing Tips, Complaints, and Referrals (TCR) system.
The majority of whistleblower tips came from sources within the United States, and the top three geographic locations were three of the most populous states in the country: California, New York, and Florida. Ten claims came from foreign countries.
Another surprise was the relatively low number of complaints pertaining to the FCPA, considering how briskly the SEC and Justice Department have enforced that law for the last five years. “FCPA is consistently huge headlines. It is really hard to tell if these types of trends hold going forward,” McGrath says.
Remedial Action
The whistleblower data may cover only seven weeks, but Keating says the number underlines longstanding weaknesses in companies' internal whistleblower programs—particularly their over-dependence on using anonymous hotlines as the main channel for workers to report misconduct. (According to a 2009 survey from the Ethics Resource Center, only 3 percent of workers report misconduct through anonymous hotlines; in comparison, 49 percent report misconduct to their immediate supervisor and 29 percent go to senior management directly.)
All, however, say companies should use the data to take a fresh look at any shortfalls in existing compliance programs. As usual, start with the tone at the top of the organizational chart. “It has to begin from the top and it will permeate through the entire company,” Keating says.
“Companies should be concerned. If you look in broad view, [the program] is still in its infancy, no award has been given out yet, and they are showing this number.”
—Steven Pearlman,
Partner,
Seyfarth Shaw
He says companies should keep up with their training program to raise employees' awareness of proper conduct, while creating new avenues for internal reporting to mitigate any issues identified by previous surveys. Having a strong compliance program is also critical if the company ever finds itself facing an enforcement action. “The SEC will weigh in on steps you have taken prior to the reported violation,” he says.
McGrath says companies need to adopt the right measures when handling complaints, since employees who believe they're not being taken seriously are the ones most likely to call the SEC. “It really is going to depend on how you handle these cases,” he says.
Compliance officers can also expect to see a rising number of complaints in 2012, especially as the SEC starts handing out whistleblower bounties. “You will most likely see more FCPA cases and substantial cases in the offering fraud category,” Pearlman says.
Allegations of wrongdoing in the corporate disclosure and financials category will also likely increase, McGrath says. “You will see a cycle of these filings, more along deadlines on quarterly statements and fiscal year end,” he says.
The Details of Whistleblowing
Also in the SEC's whistleblower report were some interesting details on how the program actually works. When a complaint comes in, it goes to the Commission's Office of Market Intelligence where SEC staffers review the complaint and decide how it should be handled. Some the SEC investigates itself; others are handed off to other federal agencies that might be more appropriate. Sometimes SEC staffers will call the tipster back for more information, possibly with Enforcement Division lawyers or subject-matter experts in tow.
REPORTING CHANNELS
The following charts are based on research gathered by the Ethics Resource Center's 2009 National Business Ethics Survey:
As seen in the chart below, only 3 percent of all reports were made to the whistleblower hotline in 2007:
A breakdown of 2009 reporting channels looks remarkably similar to 2007:
Source: Ethics Resource Center.
Once a complaint is investigated, a company reaches a settlement with the SEC, and a judgment against the business is announced, whistleblowers can come back to the SEC and apply for a reward. The SEC's Whistleblower Office publishes a “Notice of Covered Action” on the SEC Website, and whistleblowers then have 90 days to apply for the reward (using a new form, WB-APP, submitted to the Whistleblower Office). Eventually the Whistleblower Office hopes to keep tipsters informed of investigations so they'll know when they might be eligible for a reward.
On Aug. 12 (the day the Whistleblower Office opened for business) the SEC did post 170 Notices of Covered Actions for tips received from July 21, 2010, (the day the Dodd-Frank Act went into effect) through July 31, 2011. Tipsters involved with any of those 170 notices are eligible for rewards, but because the SEC has 90 days to process applications, it did not have to start doling out rewards until mid-November—after the closing date of its annual report. As of now, therefore, the SEC hasn't disclosed any specific whistleblower rewards it may have made.
Will the existence of whistleblower rewards tempt employees to skip internal reporting hotlines? That's the fear, but nobody knows for sure yet. “The bounty program does give tipsters the incentive to go for the program,” Keating says.
In a survey of 51 legal, compliance, and personnel executives done in October, Littler Mendelson found that half of respondents do worry that their existing compliance programs will be undermined; another 37 percent were unsure and 12 percent predicted no harm.
McGrath, however, notes that tipsters may still choose to report internally first. If a whistleblower reports one violation internally and the company's investigation reveals more violations than the one originally filed, the tipster is eligible to claim rewards on all reported violations.
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