Thursday, November 7, 2013

When the Compliance Officer Blows the Whistle

In 2011, I met with members of the SEC and Congressional staffers as part of a coalition of business people and lawyers raising concerns about the proposed Dodd-Frank whistleblower provision. Ten days after leaving my compliance officer position and prior to joining academia, I testified before a Congressional committee about the potential unintended consequences of the law. The so-called “bounty-hunter” law establishes that whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act are eligible for ten to thirty percent of the amount of the recovery in any action in which the SEC levies sanctions in excess of $1 million dollars. The legislation also contains an anti-retaliation clause that expands the reach of Sarbanes-Oxley. Congress enacted the legislation to respond to the Bernard Madoff scandal. The SEC recently awarded $14 million dollars to one whistleblower. To learn more about the program, click here.

I argued, among other things, that the legislation assumed that all companies operate at the lowest levels of ethical behavior and instead provided incentives to bypass existing compliance programs when there are effective incentive structures within the existing Federal Sentencing Guidelines for Organizations.  Although they are no longer binding, judges use the Guidelines to sentence corporations that plead guilty or are so adjudicated after trial. Prosecutors use them as guideposts when making deals with companies that enter into nonprosecution and deferred prosecution agreements. I recommended: (1) that there be a presumption that whistleblowers report internally first unless there is no viable, credible internal option; (2) that the SEC inform the company that an anonymous report has been made unless there is legitimate reason not to do so and (3) that those with a fiduciary duty to report be excluded from the bounty provisions of the bill and be required to report upward internally before reporting externally.

Fortunately, the final legislation does make it more difficult for certain people to report externally without first trying to use the compliance program, if one exists.  Nonetheless, the Wall Street Journal reported yesterday that a growing number of compliance personnel are blowing the whistle on their own companies, notwithstanding the fact that they must wait 120 days under the rules after reporting internally to go to the SEC.  One of the attorneys interviewed in the WSJ article, Gregory Keating, is a shareholder Littler Mendelsohn, a firm that exclusively represents management in labor matters. His firm and others are seeing more claims brought by compliance officers.

This development leads to a number of questions. What about compliance officers who are also lawyers, as I was? NY state has answered the question by excluding lawyers from the awards, and I am sure that many other states are considering it or will now start after reading yesterday’s article. What does this mean for those forward thinking law schools that are training law students to consider careers in compliance? I believe that this is a viable career choice in an oversaturated legal market because the compliance field is exploding, while the world of BigLaw is contracting. Do we advise students considering the compliance field to forego their bar licenses after graduation because one day they could be a whistleblower and face a conflict of interest? I think that’s unwise.  What about compliance personnel in foreign countries? Courts have already provided conflicting rulings about their eligibility for whistleblower status under the law.

Most significantly, in many companies compliance officers make at least an annual report to the board on the activities of the compliance program in part to ensure that the board fulfills its Caremark responsibilities.  These reports generally do and should involve detailed, frank discussions about current and future risks. Will and should board members become less candid if they worry that their compliance officer may blow the whistle?

Could the Sentencing Commission have avoided the need for compliance officers to blow the whistle externally by recommending that compliance officers report directly to the board as the heads of internal audit typically do? This option was considered and rejected during the last round of revisions to the Sentencing Guidelines in 2010. Compliance officers who do not report to general counsels or others in the C-Suite but have direct access to board members might feel less of a need to report to external agencies. This is why, perhaps, in almost every corporate integrity agreement or deferred prosecution agreement, the government requires the chief compliance officer to report to the board or at least to someone outside of the legal department.

To be clear, I am not opposed to the legislation in principle. And for a compliance officer to report on his or her own organization, the situation internally was probably pretty dire. Gregory Keating and I sit on the Department of Labor’s Whistleblower Protection Advisory Committee, which will examine almost two dozen anti-retaliation laws in  the airline, commercial motor carrier, consumer product, environmental, financial reform, food safety, health care reform, nuclear, pipeline, public transportation agency, railroad, maritime and securities fields.  During our two-year term we will work with academics, lawyers, government officials, organized labor and members of the public to make the whistleblower laws more effective for both labor and management.

State bars, government agencies, boards, general counsels, plaintiffs’ lawyers and defense lawyers need to watch these developments  of the compliance officer as whistleblower closely. I will be watching as well, both as a former compliance officer and for material for a future article.

Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine Weldon, Securities Regulation | Permalink


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