Taking It Straight to the SEC
The SEC has awarded $14 million to an unidentified whistleblower who went directly to the agency without first bringing the complaint to his or her employer. Experts say the award will likely spur more whistleblowers to take the same route, and urge HR to actively encourage employees to report internally.
By Mark McGraw
The Securities and Exchange Commission's recent award of $14 million to a whistleblowing employee could usher in an unwelcome trend for employers and HR, experts say.
Beyond the dollar amount of the award -- by far the largest to come from the agency's Office of the Whistleblower since it was established in 2011 as authorized by the Dodd-Frank Act -- another detail of the settlement should be of special interest to employers: All indications are that the whistleblower went straight to the SEC with the complaint rather than bringing it to his or her employer.
The SEC has not provided specifics of the settlement, and has not identified the company or the individual who brought the complaint -- by law, the SEC must protect the confidentiality of whistleblowers. But, on Oct. 1, the agency announced the award to an anonymous employee who "provided original information and assistance that led the SEC to investigate an enforcement matter more quickly than otherwise would have been possible," according to a statement issued by the agency.
According to the SEC, the agency was able to bring an enforcement action against the perpetrators and secure investor funds within six months of receiving the whistleblower's tip.
As news of this award spreads, the likelihood of seeing more whistleblowers take complaints directly to the SEC is "exceedingly high," says Steven Pearlman, a Chicago-based partner in Proskauer Rose's labor and employment law department, and co-head of the firm's whistleblowing and retaliation group.
What remains to be seen is "whether this is going to increase the quality of tips [the SEC receives], or just lead to folks playing the lottery," says Pearlman.
"$14 million is a lot of money," he continues. "I suspect that if [employees] have hunches, they're going to be more apt to quickly head to the SEC."
In reality, however, both the organization and its employee would be better-served by first addressing complaints in-house, he says.
"In my experience, bringing a complaint internally is what's best for the company and best for shareholders," he says. "It allows the company to very quickly and thoroughly investigate the complaint.
"If [an employee] brings a complaint and bypasses internal channels, then there's a delay," he continues. "And delays are a very bad thing when it comes to investigations. Evidence gets lost, memories fade, witnesses leave. Prompt[ness] is critical."
HR is "in a great position" to deliver and help facilitate code-of-conduct and ethics and compliance training for managers and employees, and serve as a liaison between whistleblowing employees and leaders of the internal investigation, i.e, the organization's compliance committee, says Pearlman.
"HR can play a very effective and important role in this equation, in terms of implementing training for managers and employees," he says, "so everyone appreciates and understands the organization's anti-retaliation and whistleblower policies."
This largest-ever SEC whistleblower award figures to not only spur employees to report potential wrongdoing directly to the SEC, but "will also encourage plaintiffs' lawyers to seek out whistleblower actions," says Joel Barras, a Philadelphia-based attorney with Reed Smith.
While federal regulations create financial incentives for employees to first report internally, employees can still maintain anonymity by using an attorney as an intermediary, "and [can] still receive substantial paydays by avoiding internal reporting and going directly to the SEC," says Barras.
Nevertheless, HR can take several steps to help make reporting internally a painless process for employees, he says.
"Post notices with phone numbers, email addresses and/or webpages regularly monitored by a team of HR, finance and audit personnel that enable employees to submit complaints anonymously," says Barras, adding that HR should solicit complaints in addition to encouraging them.
"Have senior employees regularly file internal certifications identifying any potential problems or certifying that no such issues exist," says Barras. "At the end of one-on-one meetings or annual performance evaluations, ask employees if there are any potential issues the company should investigate."
Meg Campbell, an Atlanta-based labor and employment attorney with Ogletree, Deakins, Nash, Smoak & Stewart, foresees the SEC producing whistleblower awards similar to -- if not surpassing -- the $14 million figure in this case. In fact, she says, "we've already got some indications that this by no means will be an outlier award. There will be other, bigger awards coming."
Given what's at stake, "I'm not sure that many [would-be whistleblowers] would be likely to give their place in line at the SEC to report internally," says Campbell.
"But, that said, if there is a robust culture of compliance, and employees . . . see the company considers it in the best interest of employees and shareholders [to report internally], employees will buy into that, and will take ownership of their responsibilities to be part of that. You will get internal whistleblowers."
And, when companies and HR handle whistleblower complaints well, "I think that demonstrates more than anything else that the organization's internal process works," she says.
"Conscientious companies know employees who bring whistleblower complaints forward are a true asset and should be treated with respect," adds Pearlman. "The value they're bringing could very well dwarf any other risks, and they should be treated as someone who's helping you ferret out fraud. That's the mindset HR needs to have."