WHISTLEBLOWERS TAKE BIG RISKSBy
Whistleblowers are a vital part of uncovering fraud, but people aren’t always aware of their rights and protections if they blow the whistle.
Whistleblower informants, or “tipsters,” are consistently the most productive detectors of occupational fraud, according to the Association of Certified Fraud Examiners (ACFE). For example, the ACFE’s “2014 Report to the Nations” said that more than 40% of fraud cases were detected through tips—more than twice the rate of any other method of detection.
That’s good news for the Securities & Exchange Commission (SEC), which implemented a system of cash payments to whistleblowers in July 2010. Under provisions of the Dodd-Frank Act, the SEC makes monetary awards to eligible individuals who voluntarily provide original information that leads to successful enforcement actions resulting in monetary sanctions of more than $1 million and successful related actions.
The SEC’s “Annual Report to Congress on the Dodd-Frank Whistleblower Program 2014” said that the Office of the Whistleblower received 3,620 tips in 2014, an increase of 20% since 2012. The SEC awarded approximately $32 million to whistleblowers. The largest was a $30 million reward to a nonresident of the United States.
One of the biggest threats faced by whistleblowers is retaliation. In June 2014, the SEC exercised its authority under Dodd-Frank to penalize employers guilty of retaliating against whistleblowers. It was the first time doing so. The SEC charged hedge fund advisory firm Paradigm Capital Management, Inc. and its owner, Candace King Weir, for retaliating against an employee for reporting to the SEC prohibited principal transactions, and the SEC won a $2.2 million settlement.
According to the SEC’s order, Paradigm removed the whistleblower from his head trader position, tasked the whistleblower with investigating the very conduct he had reported while blocking access to any meaningful resources to do so, changed his job function from head trader to full-time compliance assistant, and stripped him of supervisory responsibilities. The series of retaliatory actions ultimately resulted in the whistleblower’s resignation.
The SEC has filed several court briefs highlighting the importance of antiretaliatory protection for whistleblowers to assure they can safely report possible wrongdoing both internally and to the SEC. In March 2014, the U.S. Supreme Court held that the Sarbanes-Oxley Act of 2002 (SOX) antiretaliation protections aren’t limited to employees of publicly traded companies, but they also extend to employees of contractors to such companies. The Dodd-Frank Act expanded protections to also apply to supply chain vendors.
UNETHICAL BEHAVIOR IN THE FINANCIAL INDUSTRY
Despite those signs of progress, more work is needed to reduce the instances of unethical behavior. In May 2015, New York-based law firm Labaton Sucharow and the University of Notre Dame conducted a survey of 1,223 employees in the financial services/banking industry in the United States and United Kingdom to gauge their ethical attitudes in the workplace. Respondents held middle- to upper-level positions.
The results of the survey, “The Street, The Bull and The Crisis: A Survey of the US & UK Financial Services Industry,” indicate that unethical behavior continues to persist in this highly visible industry that was responsible for an epic financial crisis only seven years ago:
- 47% of respondents believe their competitors have engaged in unethical or illegal activity in order to gain an edge. The proportion jumps to 51% for those earning more than $500,000 annually.
- 34% of those who earn more than $500,000 either have witnessed or have first-hand knowledge of wrongdoing in the workplace.
- 23% believe fellow employees have engaged in unethical or illegal activity to gain an edge. This is double the proportion from 2012.
- 25% would use private information to make a guaranteed $10 million if there were no chance of getting caught. The number is twice as large for respondents with less than 10 years of experience compared with those having more than 20 years.
- Nearly 20% feel that financial services professionals must at times engage in illegal or unethical activity to be successful.
- 27% disagree that the best interests of clients are put first.
- 32% believe that compensation structures at their company could incentivize employees to compromise ethics or violate the law.
Perhaps the most shocking results in the survey involve whistleblowing. More than a third (37%) of respondents aren’t aware of the SEC’s Whistleblowing Program. And 28% of respondents who earn more than $500,000 say their company’s policies bar the reporting of potential illegal or unethical activities directly to the authorities. They have been asked to sign a confidentiality agreement to enforce these rules. Finally, 19% find it likely that their employer would retaliate if they did report directly to the authorities.
These cover-up policies appear to be a rather widespread attempt to circumvent the law. According to Andrew J. Ceresney, director of the SEC’s Division of Enforcement, “SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.” Forceful efforts are needed to turn around the attitudes of those in the financial services industry who seem to demonstrate a surprising and disturbing cynicism toward ethics.