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Last month, the Securities and Exchange Commission’s enforcement division announced a record-shattering number of enforcement actions that targeted financial wrongdoing. Cases stemming from the financial crisis, insider trading, disclosure violations, and other misdeeds, amounted to 735 enforcement actions and $2.8 billion in penalties and disgorgement. Will 2012 bring more of the same? One of the division’s oldest strategies for bringing about settlements was called into question last week by U.S. District Court Judge Jed Rakoff, who was publicly rankled by the agency’s $285 million settlement with Citigroup, in which the bank neither admitted to nor denied the allegations against them. Still, in August, the SEC put into effect a new tool in its arsenal: a cash bounty for whistleblowers who turn to the SEC with internal company information, and whose tips lead to recoveries worth over $1 million. If even a small number of whistleblowers are incentivized to come forward, the inside perspective they bring could be enough to significantly influence the SEC’s enforcement agenda, says Richards Kibbe & Orbe attorney Paul Leder, who specializes in securities compliance and enforcement, and previously served as a deputy director at the SEC. For in-house attorneys, the changes in the whistleblower system mean that law departments need to sharpen their focus on internal reporting procedures for whistleblowers and recognize the key areas where whistleblowers are likely to report information, he tells CorpCounel.com. Below is an edited version of that conversation. CorpCounsel: What should companies bear in mind for next year in terms of SEC enforcement? Paul Leder: A key issue for companies in 2012 is going to continue to be the enhanced whistleblower provisions that the SEC now administers. And the reason for that is twofold. One is that companies need to focus on their internal mechanisms for dealing with whistleblowers to encourage internal reporting at the earliest possible stages. In those cases where they receive a complaint, they need to be prepared to deal with that in a timely and credible fashion. The other piece, from in-house counsel’s perspective, is that whistleblowers would be likely to make allegations related to financial fraud issues and illicit payments. Whistleblowers may believe, rightly or wrongly, that they have insights into the company’s activities in these areas that might point to potential misconduct. CC: Since we have yet to see any whistleblower cases in 2011, why should we expect to see them next year? PL: The provision only came into effect in 2011, and it’s really too early to expect to see the tangible fruits of that provision. The SEC has disclosed a significant number of whistleblower referrals, and I don’t think the fact that there haven’t yet been cases announced is significant. What I think is significant is that there had been a drop-off in the number of financial fraud and related accounting cases brought by the SEC; but, again, one of the areas where whistleblowers are likely to be active would be with respect to complaints involving accounting and disclosure issues. Similarly, on one of the areas where the SEC has been quite active—the Foreign Corrupt Practices Act—I think it’s reasonable to expect whistleblower activity in that area as well. So I think it has the potential for reinvigorating a relatively moribund area, which is the financial fraud and accounting cases, and to feed the pipeline for an active area, the FCPA. CC: What do you think accounted for the slow-down in financial fraud and accounting cases? PL: There are a couple of reasons. One is that Sarbanes-Oxley, which dates back to 2002, generated a significant number of restatements, which then fueled the numbers in the accounting and financial fraud areas for a number of years. And assuming that Sarbanes-Oxley is really working, one of the results would be that there would be fewer issues building up at companies in the accounting area. The second reason is that the SEC’s enforcement hasn’t targeted financial fraud and accounting issues in the same way it has other areas. When you look at the specialized units that the division of enforcement created in 2010—asset management, market abuse, structured and new products, foreign corrupt practices, municipal securities and public pensions—on their face, none of them would cover those types of issues. CC: How can companies and law departments build an effective culture of internal reporting? PL: First is that a company is clearly communicating to its employees that it wants to hear from them. Part of that is getting that message from the top—delivered by the senior-most executives, as well as the other members of management on a regular basis. Second is having in place the mechanisms for internal reporting, such as hotlines, potentially an ombudsman, or some other face within the company for receiving internal complaints. And then third is having timely and credible responses to complaints that come in, so it becomes clear to employees that these are taken seriously by the company and dealt with in a timely and effective manner.

See also: “What Does the Lindsey Ruling Mean for the Future of FCPA?” , CorpCounsel, December 2011.

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