Financial whistleblowers are beginning to be treated with more respect by government agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Vincente Martinez, director of the CFTC’s Whistleblower Office, made that point during a presentation to the New York chapter of the Association of Certified Fraud Examiners at CUNY’s John Jay College of Criminal Justice last Friday. He noted that whistleblowers are able to receive larger payouts now for reporting on financial skullduggery, earning between 10 and 30 percent of the amount collected, which can amount to millions of dollars.
The Internal Revenue Service is also now beginning to pay out larger rewards for whistleblower information under a newly expanded program, including a $104 million payout last month to former UBS banker and convicted felon Bradley Birkenfeld (see UBS Whistleblower Secures $104 Million IRS Award).
Martinez pointed out that while the whistleblower needs to be able to provide original information, he or she isn’t necessarily disqualified just because another whistleblower has already brought it to the agency’s attention.
“A lot of folks have the mistaken notion that once a case is out there, there’s nothing to be done,” he said. “But let’s imagine a case where a litigation has been brought and may be flagging or mired. If a whistleblower comes into it at the 11th hour, that person could potentially be a whistleblower who has significantly contributed to the success of the matter.”
“Original information” does not necessarily have to be firsthand knowledge, Martinez pointed out. It can be independent knowledge that is not generally known.
But as attorney Obiamaka Madubuko of the law firm McDermott Will & Emery pointed out at the same conference, whistleblowers can’t just read in the news about potential financial wrongdoing and contact the whistleblower office at the SEC. “One cannot pick up The New York Times and say, ‘Wow, it looks like there’s corruption in this company in this country.’ That is not original information. That’s just being an active reader,” she said.
The Dodd-Frank Act expands the rewards and protections for whistleblowers. But there can still be significant consequences for many whistleblowers, and they could find themselves becoming persona non grata in their industry.
“You have to have a pretty strong character to be a whistleblower at that magnitude because there are ramifications, whether it be security at your job, whether it be having the ability to seek employment at other companies, or being so-called ‘blacklisted,’” she said. “The ability to be able to report anonymously, at least on the initial report, is an attractive option for many people. The government put this option (anonymous reporting) into the Dodd-Frank Act to encourage more people to come forward.”
Original information can be “independent knowledge” or “independent analysis,” Martinez pointed out. Independent knowledge doesn’t have to be firsthand knowledge. It just can’t be generally known. “If you hear something at the water cooler, or if you hear something from a fellow employee, you don’t need to have personally witnessed, participated in or experienced the event that you are bringing to us,” said Martinez. “Your independent knowledge is a function of your observation, but it does not have to be firsthand knowledge.”
Independent analysis is an examination or evaluation that reveals information that is also not generally known, he noted. The information can be quite esoteric, he noted, especially for actions brought before the CFTC under the Commodities Exchange Act that can qualify for whistleblower awards. “Many people that operate in this area are lifelong specialists, and these are very tough markets to get into, to understand what’s actionable,” said Martinez. “This kind of whistleblower exists for the SEC too. We recognize that there are some people who, by virtue of their insight in industry or their analytical skill can take something like trade charts or open interest reports and look at it and say, ‘I’ve been a lifelong cotton trader and what I’m telling you here doesn’t make market sense. A squeeze is being engineered.’”
Timeliness is also critical. There is supposed to be a 120-day period when whistleblowers are first supposed to report the information internally to their supervisor, the company’s audit committee, chief legal officer, chief compliance officer, or its own fraud hotline, but that doesn’t apply in all instances, especially in companies where the compliance function is essentially broken. But if the whistleblower is aware of circumstances that would impede the investigation, such as documents being shredded or people being fired, they can come forward sooner with information for the government. Or if disclosing the information could prevent immediate injury, they can also come forward and be able to receive a whistleblower award.
“If someone had come to us before MF Global folded and brought to us instances of misconduct, they wouldn’t have had to wait 120 days to get it to us and be eligible for an award because of the injury it caused or was likely to cause to the industry,” said the CFTC’s Martinez.
Martinez noted that the internal reporting provisions need to have exceptions. “Whistleblowers go through an enormous amount of handwringing, angst, sorrow and fear to get to us, and if one wanted to find the single best solution to kill effective corporate whistleblowing, it would be to require internal reporting first,” he said. “I’m dead set against it. I do think that the compromise that was reached for the CFTC and the SEC is a decent one. A whistleblower is not required to report internally, but is incentivized when he or she does so by the possibility of a larger grant reward in the 10 to 30 percent range, or by being given credit for the entire quantum of information that is brought forward as a result of reporting internally.”
Voluntariness is an important aspect of the law. “You have to come to the government before we come to you,” said Martinez. But whistleblowers can go to other agencies first, such as the IRS, the SEC, the Justice Department, and the recently established Consumer Financial Protection Bureau. If they then attract attention from another agency, they are still considered voluntary. But it works the other way too. If they are approached by one agency, they can’t go to another agency and present themselves as a whistleblower.
Anti-retaliation protections in the law help protect whistleblowers from employer reprisal. No employer may discharge, demote, suspend, threaten or harass a whistleblower, either directly or indirectly. Employees who are fired can go to court and receive treble damages and back pay.
“The fact is there are numerous bad corporate citizens, and there are numerous employers and people who would rather have you removed from your job rather than hear your complaint,” said Martinez.
Not everybody is eligible for a whistleblower award, though. People who have a duty to report securities violations, such as law enforcement officers and SEC personnel, generally can’t qualify, nor can officers, directors, trustees or partners. Those whose primary duties involve compliance or internal auditing also generally cannot claim an award, but there are exceptions. Accountants can also qualify for whistleblower awards, including external auditors (see What Independent Auditors Need to Know about the Dodd-Frank Whistleblower Program). Indeed, the laws almost seem designed to incentivize many accountants to come forward and provide information to the government, even if it means informing on their own clients, companies and colleagues.