Legal Considerations of Blowing the Whistle
If you are aware of a workplace matter that challenges your conscience and you believe a wrongdoing has occurred, make sure you know your company’s policy with respect to steps to take to bring the matter to the attention of top management including the board of directors. You may choose not to do that if you are convinced top management is involved or covering-up the incident. My advice is to speak to an attorney and clarify your legal obligations and possible ramifications for you of blowing the whistle. In my last blog I provided advice on dealing with workplace bullies. This blog deals with your rights and obligations to blow the whistle on certain types of workplace fraud.
There are a few laws that now address whistleblowing issues as the government attempts to reign- in corporate fraud. The Federal False Claims Act allows individuals who know of fraud committed against the US Government to file suit on behalf of the US against those who have falsely or fraudulently claimed federal funds. Filers typically recover 15 to 20 percent of the proceeds of a successful suit if the US intervenes on their behalf. This reward provision has recently been extended as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Sarbanes-Oxley Act was passed in the aftermath of frauds at companies such as Enron and WorldCom and includes a provision whereby employees who are discharged or retaliated against for blowing the whistle on wrongdoing may file a complaint with OSHA. OSHA then investigates and if it finds the evidence supports the employee’s claim and a settlement cannot be reached with the offending company, then OSHA will issue an order requiring the employer to reinstate the employee, pay back wages, restore lost benefits, and other possible relief to make the employee whole.
Did you know the IRS has just made it easier for whistle-blowers to collect rewards for turning in big-time tax cheats? The agency new rules are designed to recover the estimated $2 million (a figure that is probably too low) of taxes. Under the old rules, whistle-blowers could get rewards only if their tips resulted in businesses or individuals paying additional taxes. The new rules qualify whistle-blowers for rewards if their tips prevented businesses from claiming fraudulent refunds.
The Dodd-Frank Wall Street Reform and Consumer Protection Act provides an incentive for whistleblowers to inform on their employers. The final rule states that “[y]ou are a whistleblower if, alone or jointly with others, you provide the Commission with information pursuant to the procedures set forth in [the rule] and the information relates to a possible violation of the federal securities laws (including any rules or regulations) that has occurred, is ongoing, or is about to occur.” The rule does not require an actual violation for the whistleblower protections to take effect. Previously, the SEC used the language “potential violation.” The SEC is trying to ward off complete fraud before it gets out of hand. Some have called this provision, “bounty hunter.” At first I questioned it as well but have re-thought my position in light of continuing evidence of corporate fraud, Medicare fraud, and a host of other legal and ethical violations by business.
To be considered for an award, a whistleblower must voluntarily provide the SEC with original information that leads to the SEC’s successful enforcement of a federal court or administrative action in which the SEC obtains monetary sanctions greater than $1 million. An individual whistleblower may be eligible for an award of 10 percent to 30 percent of the monetary sanctions. To determine whether the $1 million in monetary sanctions threshold has been satisfied (a necessary precondition for award eligibility), the SEC will aggregate awards from separate proceedings that were based on the same underlying facts.
The SEC rule excludes from eligibility original information obtained by a person with legal, compliance, audit, supervisory, or governance responsibilities for an entity, such as an officer, director, or partner, if the information was communicated to the whistleblower through the company’s internal compliance mechanisms, and information gained by an independent public accountant through the performance of an engagement that is required under the securities laws. The whistleblower must have a “reasonable belief” that a violation has occurred or is about to occur. The SEC has defined “reasonable belief” as:
• Specific, credible, and timely information.
• Information related to a matter already under investigation by the SEC but that makes a “significant contribution” to the investigation or information that was provided through the employer’s internal compliance and reporting system, which is subsequently reported to the SEC by the employer, and which satisfies the first or second part of the definition. The whistleblower protection provisions do not require the whistleblower to have satisfied the eligibility requirements for an award.
The Dodd-Frank Act directed the SEC to create the Office of the Whistleblower, which will control the Investor Protection Fund. The Investor Protection Fund, which has now been fully funded, will be used to pay out awards to eligible whistleblowers.
I have previously blogged about the ethics of whistleblowing. On the one hand it may serve as a deterrent to financial fraud and securities law violations by companies given the broad scope of Dodd-Frank. On the other hand it could lead some employees to spy on company actions, aggressively trace questionable transactions, and gather evidence of wrongdoing even if it has nothing to do with that employee’s job responsibilities. Do the ends of stopping corporate fraud and other wrongdoing justify the means of potentially spying on one’s employer? In certain cases I believe the ends do justify the means if we are to stem the rising tide of corporate fraud that has occurred during the past twenty years, and its massive cost to society. Whistleblowing can protect the public interest, something rarely considered by corporate America as evidenced by the 2008 financial meltdown. Whistleblowing is a drastic step to take but I believe recently adopted laws attempt to level the playing field of corporate wrongdoing and the counter-balancing effect of knowing a company’s actions are under scrutiny by those in the know – employees who are well meaning.
Blog by Steven Mintz, aka Ethics Sage, July 21, 2011