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However—and I don’t want to negate what I’ve said regarding the vital importance of the SEC safeguarding its sources of information—but we also have to remember that the SEC’s main role is to identify wrongdoing and to stop it. Sometimes that requires us inform the companies about allegations that have been made against them. Obviously, one of the biggest debates over the SEC’s whistleblower rules involved allowing whistleblowers to report their allegations directly to the SEC rather than requiring them to first report internally to their companies’ compliance departments. Critics have said this effectively makes compliance programs obsolete. Yet you’ve countered that criticism by saying the new rules will in fact make internal compliance programs more efficient and effective. How so? I have seen the data that places the percentage of whistleblowers who report to outside regulators only after reporting internally and being dissatisfied with the results to be very high, 90% in some studies. Anecdotally, judging by the cases that have already come across my desk, I think we’re seeing the same high percentage. In fact, I think one important benefit to the market from this office is that our tips tracking system will be able to compile some data on this—our tip submission form directly asks the question about prior internal reporting—so, in a while we’ll be able to put some data on what we’re already anecdotally seeing. That said, I think it will become very evident that it’s in a company’s best interests now to make sure it has the most robust, credible and effective compliance program in place because then any internal whistleblower will have no reason to go outside first, especially because, as far as determining the size of an award, a whistleblower would receive credit for going internally first. But beyond that, I’ve heard all these criticisms… that the OWB will make internal compliance programs obsolete, or that the office will be flooded with spurious or nonsensical whistleblower tips, but we’re not see it. On false claims, for example, our centralized tip submission database gives us much greater ability to identify these kinds of false claims, but so far we’ve not seen the avalanche that many critics predicted. In fact, in a way we’ve seen just the opposite—the overall number of tips has remained about the same, but the quality of the tips and the value of the information they’ve provided has improved greatly. Of course, maybe one day, especially after several large awards are given, what has been predicted will be true; but for now, it’s not. I know one question that the readership of WSL is very interested in, and that’s the provision of the whistleblower rules that allow corporate lawyers to possibly receive incentive awards through the whistleblower program for providing information to the SEC about a client under investigation. How is that going to be dealt with? This again is one of those instances where really nothing is new. There are already strict guidelines under State Bar ethics codes and the SEC’s own rules that outline under what circumstance a lawyer should come forward. Nothing has changed that—and obviously, privilege cannot be breached by a lawyer with an eye toward gaining an award. There are extremely narrow windows in which a lawyer could be rewarded, but again those are in keeping with long-standing circumstances mostly involving scenarios where a lawyer is required to come forward due to ongoing fraud or illegal activity on the part of a client, and this was most recently detailed in the Sarbanes-Oxley Act. So, in cases like these it’s better to have a system in place in which a lawyer is compelled to come forward, than not. And this isn’t an insignificant issue for a lawyer—his or her job, reputation and even ability to continue to practice law all could be on the line in a case like this. But, at the same time, if those narrow circumstances do force them forward, I don’t think they should be precluded from receiving an award under the whistleblower program just because they are an attorney. To exclude them by occupation would not be in sync with the policy as Congress intended it. To give us a clearer understanding of the OWB on a day-to-day basis, could you walk us through a typical case and show how the Office of the Whistleblower works and what it does? Of course. Things may evolve over time, but the simple way I’m looking at how we’re going to do our job is in three phases. Phase 1
is Intake. We’re a staff of seven, which isn’t very large considering the volume of tip-led investigations that
the SEC conducts yearly; so we have to employ very strategic allocations of our resources. So, when tips come in,
either online or mailed in, each incoming tip will go to the centralized tip center where it will first be sorted by the Office
of Market Intelligence (OMI) which is led by Tom Sporkin. After separating the wheat from the chaff, the OMI then allocates
the tips to the appropriate investigative staff throughout the SEC. [Note: The OMI was created by the SEC’s
Division of Enforcement in January 2010 specifically to monitor and analyze incoming tips and place them into a new centralized
computer system. It was this lack of centralized tip monitoring that was blamed for the SEC’s failure to stop the Madoff
Ponzi scheme despite several tips about Madoff’s activities.]
I also have been involved with the OMI sorting process of looking at tips and making determinations as to their timeliness, credibility and importance. I’ve trained in it, and it’s important to view what they do. I’ve spent time understanding their procedures, their processes, and I expect that will continue. I want to have a role where I understand and agree with the OMI’s determination process. And again, this is an example of a procedure that was in place before the creation of the OWB, but the new thing here is that we can use the power of our office to identify and expedite important cases, and perhaps get worthy or impactful cases on the fast track. For example, I may get a heads up from OMI about a tip, or have a meeting with a company lawyer who may be bringing something in—anything that could help identify any case that could turn out to be a high-profile, gold-star case that has a whistleblower attached. Then what? Once a tip is allocated to an investigator—for example, an investigator in the Enforcement Division—we enter Phase 2, which is the Investigative phase. Obviously, the OWB doesn’t have either the capacity or the background and experience to be the sole driver of the investigative process, but we have a role to play. For example, we can capture the whistleblower information that we will need for the future, including information concerning the level of help a whistleblower has given investigators, the value of the whistleblower’s supplied evidence, and similar material that will help guide our recommendations to the SEC for an appropriate award for this whistleblower. We will also be communicating with SEC Home and Regional offices about ongoing cases as they are investigating them. We want to keep track of how whistleblowers in certain cases are working with investigations, how they’re cooperating, and other issues. And part of this is our current and ongoing project—developing Best Practices for SEC investigators to use when dealing with cases that have whistleblowers attached. These Best Practices will basically be our office’s suggestions for dealing with whistleblowers in the cases they’re investigating. As I said, we need to make investigators aware of how some things have changed and some haven’t changed. I mean, the SEC has been investigating cases brought from outside tips for a long time, and that hasn’t changed; but, for example, the safeguards surrounding the anonymity of whistleblowers—which again, Dodd-Frank mandates that the SEC protects—does have some new aspects to it. What I don’t want is for the OWB to become another constituency that’s asking investigative staff to do more with the limited time and resources they have. I will push this office to alleviate some of the burden on investigators by tracking and documenting what investigators are doing with whistleblowers. If we do this well, then all this information will greatly aid us on the back-end when we determine what value the whistleblower has brought to a case, and also greatly aid the OWB in making its recommendation on the size of an award a whistleblower might receive. I’m guessing that brings us to Phase 3, right? Right, Phase 3 is the Recommendation phase. That’s when the investigation is complete, the case is brought and the SEC makes its covered action in excess of $1 million. Now, the whistleblower can come forward and make a claim for a reward—and all of that can be done through the OWB website and with the OWB staff. Indeed, this phase of the process will involve the most intensive use of our office’s resources, especially with claims processing and recordkeeping. Once the claim is made, the OWB staff will communicate with the whistleblower and his attorney as to what the recommendation of the OWB staff to the Claims Review Board will be as to the size of the award based on the whistleblower’s value to the case, his actions in reporting, and his cooperation with investigators. The Claims Review Board will then make a recommendation to the full Commission as to the size of the award, and the Commission, of course, will have final say. Naturally, there is an appeal process for whistleblowers who wish to contest the size of the award they were given. [Note: The Claims Review Board, like the OWB and OMI, is the creation of the SEC’s Division of Enforcement. The Claims Review Board has yet to be established.] And while for now I plan to be the one making the recommendations to the Claims Review Board based on the work of the OWB staff, I have the feeling that will evolve as the volume overtakes me. I guess all that’s left is to start awarding those checks to whistleblowers. Do you have a timeline on when we might see the first one? I’ve been warned that our first given award may be one of those proverbial milestones to watch out for—it could spur a lot of renewed interest once whistleblowers see that the awards program work in practice, not just in theory. Still, I’m anxious to do it, because I think it will go a long way to establishing the bona fides of our office. It will show that we’ve put in place a good process and we’re not just pushing paper around. I really can’t say what a timeline would be for our first award, but it can’t happen soon enough for me. Any thought of giving out those huge cardboard checks—like when someone’s won the Publishers Clearing House sweepstakes—to the first whistleblower who successfully claims an award? (Chuckling) We’ve actually joked about using the big checks, but I doubt there will be anything that ceremonious. For one, the whistleblower is still likely to be anonymous. In all seriousness, it is an important opportunity from marketing standpoint. But more importantly, it will show that the OWB is another effective tool in arsenal of the SEC and the Enforcement Division to stop and punish fraud and other illegal activity. In fact, I like to think that the basic essence of the office is to make it as comfortable as possible for whistleblowers to come forward, to advocate for them as their case goes forward, and to offer a mechanism for rewarding them on the back-end. One survey I read said that 40% of employees who saw wrongdoing didn’t report it to anybody. We want that to change. Simply put, if people see wrongdoing, they should report it, and I think the OWB makes it easier for that to happen. Because at the end of the day, everybody—even the critics who disagree with this office—wants wrongdoing reported. |
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