According to data from the Association of Certified Fraud Examiners, fraud in companies is more likely to be discovered by tips (40%), than any other detection method. And while it was only in August that the new whistleblower provisions in the Dodd-Frank Act took effect, the SEC quickly recorded 334 whistleblower tips in just seven weeks of the program for fiscal year 2011, which ended September 30. The most common complaints were market manipulation (16.2%), offering fraud (15.6%) and corporate disclosures and financial statements (15.3%). Submissions came from individuals in 37 states, with the highest number coming from California (34), New York (24), and Florida (19) as well as from foreign countries, including China (10) and the United Kingdom (9).
So it is no wonder that a number of market commentators are predicting that 2012 might just become “the year of the whistleblower” and that perhaps whistleblowing will become a “global industry.” Thanks to the global economic crisis, some predict that countries will strengthen protection for whistleblowers and governments, mindful of misuse of public dollars, will devote more resources to rooting out fraud in public programs and military spending.
The SEC’s Office of the Whistleblower administers its whistleblower program and while the rules encourage internal reporting, they also provide strong protection to employees who want to report the fraud directly to the SEC. The Commission is authorized to provide monetary awards of up to 30% of the money collected, to eligible individuals who come forward with tips that lead to a Commission enforcement action in which over $1,000,000 in sanctions is ordered.
The SEC also reported in November that its past fiscal year saw the agency file a record 735 enforcement actions, including many cases of insider trading as well as those related to the financial crisis, often involving highly complex market practices and products.
And while the DOJ has not released fiscal year 2011 data for False Claims Act activity, in 2010 the DOJ recovered $3 billion in civil settlements and judgments, including a record $2.5 billion health care fraud recovery. Most of the cases resulting in recoveries were brought by whistleblowers under the False Claims Act’s qui tam provisions, and they are entitled to recover between 15 and 30 percent of the proceeds of a successful suit. Recoveries since 1986, when Congress substantially strengthened the civil False Claims Act, now total more than $27 billion. Recoveries in qui tam cases have exceeded $18 billion, and whistleblowers have obtained more than $2.8 billion in awards.
So what do the new SEC whistleblower provisions mean for in-house attorneys? Corporate Counsel magazine recently interviewed Paul Leder, a partner at Richards Kibbe & Orbe, who specializes in securities compliance and enforcement, and previously served as a deputy director at the SEC. According to Leder:
A key issue for companies in 2012 is going to continue to be the enhanced whistleblower provisions that the SEC now administers. And the reason for that is twofold. One is that companies need to focus on their internal mechanisms for dealing with whistleblowers to encourage internal reporting at the earliest possible stages. In those cases where they receive a complaint, they need to be prepared to deal with that in a timely and credible fashion. The other piece . . . is that whistleblowers would be likely to make allegations related to financial fraud issues and illicit payments. Whistleblowers may believe, rightly or wrongly, that they have insights into the company’s activities in these areas that might point to potential misconduct.
Leder further explains that companies must develop a culture that encourages internal reporting, and the message needs to be clearly communicated and re-communicated by all levels of management. Companies must also have a mechanism, such as a hotline or an ombudsperson, to receive the complaints, and then finally, the complaints must be acted upon in a timely and effective manner, so it is apparent to employees that they have been heard and are being taken seriously.
Posted by Marianne Purzycki