Whistleblower Advocates Urge SEC to Resist Business’s Call to Undermine New Whistleblower Program

With the Securities and Exchange Commission due to vote this week on final rules for its new whistleblower-reward program, attorneys who represent corporate whistleblowers are urging the SEC to reject business-backed demands to penalize insiders who report securities violations directly to the commission without first using internal compliance mechanisms.  Michael A. Sullivan of Atlanta and David J. Marshall of Washington, D.C., who represent whistleblowers before the SEC, the Internal Revenue Service and in qui tam and retaliation cases across the country, say that the SEC should extend a welcoming hand to employees and others who would report securities fraud.

The SEC action this week follows a year-long debate over the so-called “bounty” provisions of the 2010 Dodd-Frank financial reform Act, which will reward whistleblowers financially for providing detailed “tips” about serious securities violations.  The U.S. Chamber of Commerce and corporate law firms claim the new law will incentivize employees to hide problems from their employers and then “cash in” on tips to the SEC, and Rep. Michael Grimm (R, NY) has followed with a draft bill requiring insiders to report wrongdoing internally first.

Sullivan and Marshall say big-business interests are using scare tactics in order to disarm a powerful enforcement weapon that the SEC has needed for years, and which, if fully implemented, can help avoid anotehr Madoff, Enron or other large-scale fraud of the type that have cost the investing public billions.   

“Madoff, Stanford, and the other major frauds of the past decade prove that internal compliance programs cannot protect the public. That is why Congress demanded the first meaningful SEC whistleblower program,” says Sullivan of Atlanta’s Finch McCranie, LLP, who represents whistleblowers in the new SEC program and in a similar IRS program that the SEC program was modeled after. “Business would make the SEC the laughing stock of law enforcement by requiring everyone with a career and a mortgage to confront the boss with his own wrongdoing.  The draft SEC rules are already so slanted toward protecting industry that they almost guarantee many major frauds will go undetected.”

Marshall, a partner at Katz, Marshall & Banks, LLP in Washington who has already filed a number of tips with the SEC under the new program, has represented dozens of corporate employees who have faced retaliation after reporting unlawful conduct to their employers. “The great majority of whistleblowers already use internal compliance programs first,” Marshall says.  “They look to law enforcement only when their employers slam the door in their face.”  Marshall says the SEC would be making a dire mistake to require employees to first report internally. “It would be a very naïve farmer,” he says, “who would require his chickens to speak with the fox before telling the farmer about the theft of hens from the henhouse.  The chickens would just keep going missing, and the farmer’s investment would always be at risk.”

“The proposed rules also create too much uncertainty about rewards,” Sullivan points out. “For example, persons with ‘supervisory’ responsibility can be excluded, so job descriptions will probably evolve to give nearly everyone some ‘supervisory’ role.” According to Marshall, excluding supervisors from eligibility for rewards could “effectively gut the program and leave the public vulnerable to securities fraud.”   Sullivan and Marshall say the final rules the SEC issues this week can either strengthen or weaken the Dodd-Frank law passed by Congress.  They urge the SEC to open the program to as many corporate insiders as possible, rather than defy Congress’s clear direction and doom the program before it starts.

Sullivan and Marshall point out that legitimate corporate interests are sure to be fully protected in the new rules without restricting employees’ ability to contact the SEC directly.