The SEC's Office of the Whistleblower, created in 2010 by the Dodd-Frank Act, is aggressively looking to file its first retaliation lawsuit against a company that fired an employee who offered a tip, the head of that office said this week to a group of attorneys in Philadelphia.
The Office of the Whistleblower has been up and running for about three years and its so-called "bounty" program has just this year paid out awards to the first four whistleblowers whose tips of original information led to a damages award for the Securities and Exchange Commission of $1 million or more.
That isn't to say the office isn't getting many tips. The office, which has grown to about 11 attorneys and works with the 70 or so lawyers who were already housed in the SEC Enforcement Division's Office of Market Intelligence, received 3,001 tips in 2012.
Under the Dodd-Frank Act, the Office of the Whistleblower has the unique authority to file anti-retaliation claims against companies that retaliate against any of those tipsters. That is different than what other government agencies are able to do for whistleblowers in non-SEC cases, such as those involving the False Claims Act. In those instances, only the employee has the private right of action to file an anti-retaliation lawsuit.
"We are looking for a good case to send a message," Office of the Whistleblower Chairman Sean McKessy told an audience of in-house and outside counsel at a panel discussion at Drinker Biddle & Reath's Philadelphia office Tuesday.
McKessy said he met with the SEC's Philadelphia Regional Office earlier that day to express the same message that the investigators should be actively thinking about and collecting information on enforcing the office's anti-retaliation capabilities.
"If we could bring a standalone retaliation case against a company, I think that sends a strong message," McKessy said.
McKessy emphasized that it is not impossible for a company to fire someone who has blown the whistle, noting his office doesn't provide lifetime tenure to whistleblowers. He warned in-house counsel in the room, however, to be "smart and diligent" about how they document poor performance so they can effectively prove an adverse action wasn't retaliation.
The concept of offering financial incentives to people for blowing the whistle on what those people deem inappropriate financial conduct was met with a healthy share of skepticism by in-house attorneys and others, Drinker Biddle partner and panel moderator Mary Hansen noted.
McKessy said he was "keenly attuned" to the skepticism and fear his new office engendered. At the start he said the fear was whistleblowers would be coming out of the woodwork with bogus claims and that the Office of the Whistleblower would render obsolete the internal compliance programs companies have spent years crafting in the wake of Sarbanes-Oxley legislation.
But from McKessy's perspective at least, none of that has happened.
McKessy said requiring whistleblowers to sign declarations affirming the accuracy of their tips has limited frivolous information coming in the door.
"Whether we like it or not, Congress has decided that people who are incentivized by money are OK," McKessy said.
McKessy ran the compliance program at Caterpillar Inc. when Sarbanes-Oxley regulations were going into effect. He said that experience made him "acutely aware" of how his office could be perceived as a threat to internal compliance functions. But he said he hasn't destroyed any internal programs in the last three years. He argued the regulations encourage whistleblowers to go to their companies with the information first. That, McKessy said, has been a stimulus to internal compliance programs.
Companies should use that as an opportunity to bolster their compliance programs and re-educate their employees that they can report internally without fear of retaliation, McKessy said. He said the majority of whistleblowers who are reporting on their own company have gone to their company first.
Under the office's regulations, if whistleblowers report to the SEC within 120 days of reporting internally, then they are deemed to have reported to the SEC on the day they reported internally, McKessy said. That is important because only the first whistleblower to report a piece of information to the SEC can get credit and payouts for that information.
One audience member said after the panel discussion that it is a lot to expect a company to turn around its own investigation within 120 days.
McKessy said during his talk that the 120-day rule does force companies to act quickly and take tips seriously when they are received. Panel member and Drinker Biddle counsel Stephen Stroup advised internal compliance officers to ensure they are making whistleblowers who report internally feel as though they are being taken seriously.
McKessy made no apologies for his office's existence.
"My job is to make sure your employees know about my office," he said. "They can hear it from me or they can hear it from you."
The Office of the Whistleblower also presents its own challenges for attorneys, both as potential whistleblowers and those who work in the office investigating claims.
Attorney-client privileged information is not considered original information, which is a requirement for a tip to be deemed eligible for an award. McKessy said the first thing his office tells tipsters or their attorneys is that they do not want attorney-client privileged information. If the information comes in anyway, the office pulls staffers from other regions who wouldn't normally work on the matter to do a "taint review" and make sure the investigators eventually assigned to the investigation don't see any privileged information.
"We're not looking for lawyers to break their privilege to get paid," McKessy said.
Lawyers are allowed to be paid as whistleblowers under the law, but only based on the exception that they are ethically required to report the questionable behavior, he said.
The Office of the Whistleblower is also in the unique position of being allowed to talk to employees of companies that have internal counsel rather than having to talk to the counsel, McKessy pointed out. The office's regulations provide for that ability. But McKessy noted the office's lawyers, spread out around the country, may belong to bar associations that look unfavorably upon such practices.
McKessy said he tells his investigators the office's regulations and the office itself would have their back if a state bar inquired about their actions. But he said he gives them the option of not going directly to an employee in that situation.