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SEC Whistleblower Program Pays Out First Award

The Ethics of Whistleblowing

Just one year after the Dodd-Frank whistleblower rules took effect, the Securities and Exchange Commission last month doled out its first bounty award to a whistleblower who helped the agency stop what it described as a multi-million dollar fraud, and if Sean McKessy, chief of the Office of the Whistleblower, has anything to say about it, it won’t be the last.

In an interview with the National Association of Corporate Directors Directorship, McKessy says his office is receiving about eight tips a day and is preparing for an increase in tip volume. “We are ramping up our own internal workforce and will be bringing on four attorneys, a paralegal and a program support specialist. “We will continue to leverage the expertise of a large, diverse group of professionals in the market intelligence and trial units to handle additional, good information.”

The whistleblower set to receive the SEC’s first bounty has requested anonymity and will receive almost $50,000—30 percent of what the SEC  has collected in the case—and the maximum the SEC is allowed to pay out. However, if the SEC collects more, the whistleblower’s award will increase, according to the SEC.

The whistleblower provided the SEC with documents and other relevant information that allowed the agency to rapidly complete an investigation. The information provided by the whistleblower resulted in a court ordering more than $1 million in sanctions.

The question now is will this first settlement usher in a period of increased whistle-blowing. Will others feel emboldened to collect data, perhaps in violation of their confidentiality obligation to their employer, and then turn it over to the SEC at a propitious time? There are whistle-blowers’ protections in Dodd-Frank but the stigma of reporting wrongdoing by one’s company still exists.

Is whistle-blowing an ethical action? Where do the law and ethics part company on this issue – if at all?

Ethical standards go beyond following the law because laws can be unclear or nonexistent and, in such cases, a person of conscience should follow basic core values such as honesty, trustworthiness, and integrity. So, did the whistle-blower live up to his or her ethical standards when reporting the information to the SEC? After all, the whistle-blowers provision of Dodd-Frank doesn’t require whistle-blowing. It just encourages it and provides an award for so doing when the information helps to stop a crime.

When the whistleblower program was announced last year, companies worried that employees wouldn’t report tips internally but would go straight to the SEC since internal reporting was not a condition of receiving the bounty award. However, in its final rule the SEC provides additional incentives to whistleblowers who report internally first. Moreover, those who gain information by auditing the financial statements are not eligible for the awards. That is a good thing because diligent auditors should look for instances of fraud and report them through the regular SEC process.

A recent study by the Ethics Resource Center titled Inside the Mind of a Whistleblower found that only 2 percent of employees went outside the company to report wrongdoing. McKessy says that a significant majority of those who brought tips to the Office of the Whistleblower, who were reporting on their current or former company, claim they first tried to report to someone internally—a boss, a compliance hotline or the board. “I think that speaks to the fact that—notwithstanding the claims we are destroying internal compliance—most people view their own company as the first line of defense”.

With the first bounty award on the books, McKessy says his office is spending a good deal of time on the anti-retaliation provision of the Dodd-Frank statute. That provision gives the SEC the power to enforce any anti-retaliation taken by employers against whistleblowers. “We’re encouraging attorneys to collect information on who reported the wrongdoing and what actions, if any, have been taken from a personnel standpoint in connection with individual who reported,” McKessy says. “Quality information is the lifeblood of the program. If people think if they report wrongdoing they get fired or risk other retaliation, that well will dry up quickly.”

While McKessy says some may measure the success of the whistleblower program by the payments made, he points to another benchmark: “The program is successful if it shows people came forward who otherwise wouldn’t have”.

I disagree. The success of the program will be indicated by whether the whistle-blower provisions of Dodd-Frank help to curb the increasing number of fraud cases in business, by financial institutions, and in dealing with government contracts. After all, aren’t we trying to cut down on fraud that costs society billions? We never can know whether the “people [who] came forward” did so out of a sense of moral duty, or because they saw an opportunity to enrich themselves and/or retaliate against their companies for a perceived mistreatment.

Blog posted by Steven Mintz, aka Ethics Sage, on September 6, 2012