Categories: Financial Services

Guest Post By: H. David Kotz

H. David Kotz is a Managing Director at Gryphon Strategies, a full-service investigation firm, which he joined in January 2012 after serving for over four years as the Inspector General for the SEC.  He was a guest speaker at Epstein Becker & Green’s March 7, 2012 breakfast briefing, 2012’s Key Issues for Financial Services Employers.

The head of the Securities and Exchange Commission’s (SEC’s) Whistleblower program reported on March 14, 2012 that the SEC Whistleblower program has been receiving a continuous volume of complaints since the program began in August 2011.  From August 12, 2011 through September 30, 2011, the SEC whistleblower program received 334 complaints (an average of 7 per day) and according to the SEC, since that time frame, the volume has continued to be steady.  The SEC is also reporting that in nearly all of the whistleblower complaints they have received, the whistleblowers have notified their employer’s internal compliance program of their claims.  Sean McKessy, the head of the SEC’s Whistleblower program, stated on March 14, 2012, that in all but a handful of complaints, the whistleblowers have reported making the notification of the fraud internally.

Under the SEC Whistleblower program, while there is no mandatory requirement for a whistleblower to report internally, significant incentives have been put in place to encourage whistleblowers to report the fraud to their internal compliance offices.  For example, a whistleblower may be entitled to an increased award as a direct result of their participation in internal reporting.  If a company does not perform an investigation within 120 days and does not report to the SEC within 120 days and the whistleblower does, the whistleblower can receive retroactive credit back to the original date of internal reporting.  This may be of significant monetary value to the whistleblower.  In addition, it may be argued by the whistleblower or its counsel, that the company’s failure to conduct a full investigation within the 120-day time period, may be evidence of a lack of commitment to compliance on the company’s part, or even that the whistleblower’s claim has merit.

Thus, the SEC Whistleblower rules effectively create a 120-day window for companies to address internal whistleblower claims.  Therefore, it is critical that companies become aware of the extent of their exposure or liability from a whistleblower claim within the 120-day window so that they may make an educated judgment on whether they should self-report, or whether they are required to modify their financial statements or otherwise make a filing or submission.  This information is also critical to making a determination about what actions the company may legally take against the whistleblower should a performance based action or disciplinary measure be warranted.  Therefore, a thorough, effective and credible investigation must be completed within the 120-day window.  The investigation should be conducted preferably by an outside entity with experience in the underlying issues raised in the complaint and knowledge about the implications of the findings.  The conclusions of the investigation should be reviewed by counsel and careful consideration should be given to the company’s next steps.

A failure to conduct a thorough and credible investigation within the 120 time frame may result in increased exposure and liability.  As a result of the revamped SEC Whistleblower program, there are plaintiffs’ counsel who have been aggressively courting whistleblowers to come forward and report wrongdoing.  Companies need to protect themselves and ensure that all whistleblower complaints are scrutinized carefully and fully investigated so that a “small gripe” on the part of a whistleblower does not result in a “giant headache” for the company.

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