ALM Properties, Inc.
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Stop, Hey What's That Sound?
The significance of the first whistle-blower payment from the Securities and Exchange Commission wasn't the size of the payouta paltry $50,000. It was the clear message the agency added to the memo line on the check: much more to come.
The SEC announced in August that it made the first payout from the program under the Dodd-Frank Act to an unidentified person who helped stop a multimillion-dollar financial fraud. (The law prohibits the agency from releasing details that could identify the claimant.)
More may be coming soon. Sean McKessy, head of the SEC's whistle-blower office, said in a prepared statement that since the program was established in August 2011, his office has been receiving about eight tips a day. "The fact that we made the first payment after just one year of operation shows that we are open for business and ready to pay people who bring us good, timely information," McKessy noted.
That isn't all that general counsel should be focusing on. According to Lyle Roberts, a partner and securities litigator in the Washington, D.C., office of Cooley, the SEC has been dropping lots of hints about future cases. "The bigger news out of this is the volume of calls they're getting, and what type of calls those are," Roberts says. He notes that the agency received nearly 3,000 tips in the first year of the program. "They claim a lot of these calls are of high quality, and drop hints that unlike this first payout, which seems more of a vanilla case, some callers are corporate insiders who are aggressively giving them information about corporate problems," he says.
What can general counsel do to prepare for the potential onslaught? Not a lot, Roberts concedes"other than making sure your internal compliance systems and internal whistle-blowing systems are working [to avoid] being part of one of those tips."
He wasn't surprised that the first payout was small, since there's been little time to investigate major cases. "The real proof of the pudding will be in three years, say, when you might have a complex case that's been fully investigated," Roberts says. "That's really where you're going to see if the program is worth it."
But even the first one could eventually reach a total bounty of $300,000 or more. The SEC explained that a court ordered more than $1 million in sanctions against the wrongdoer, of which $150,000 has been collected so far. The whistle-blower is entitled to 30 percent, which is paid as it's collected. Also, the court is considering issuing a final judgment against other defendants in the matter.
There's another important message for general counsel that's submerged in the stats. They need to focus on how their companies manage their own whistle-blowers. That's because there's a growing gap between the number of retaliation lawsuits brought by whistle-blowers and the number of suits actually concluded, according to James Curtis, a partner in the Chicago office of Seyfarth Shaw and a member of its whistle-blower team. This means that the number of whistle-blowers who remain on the job is growing significantly, Curtis says, creating an unsettling environment for employers. In-house counsel need to put policies in place to deal with this issue, he warns.
"How do you treat that whistle-blower?" he asks. "How do you maintain the anonymity and assure he is treated fairly in the workplace? How do you investigate internally what whistle-blowers allege, and how do you deal with them going forward?" These are the questions a policy ought to answer.
Curtis points to a Seyfarth Shaw study that shows the number of whistle-blower retaliation lawsuits filed went from 2,219 in 2008 to 2,648 last year, while completed cases during the same period were essentially flat, increasing from 1,938 to 1,948. On top of that, the Occupational Safety and Health Administration investigates all retaliation claims, even for SEC cases. "And in my talking with OSHA investigators, they are swamped," he adds. His firm expects the number of retaliation claims to continue climbingespecially after the publicity of the SEC's first award, combined with OSHA's decision earlier this summer to form a whistle-blower protection advisory committee to step up its own efforts.
"It's created a minefield out there for general counsel," Curtis says, "and they need to be real careful where they're stepping."