Last week the SEC announced an award of between $1.4 to $1.6 million to a whistleblower who provided information that assisted the SEC in an enforcement action. The enforcement action against the whistleblower’s company resulting in monetary sanctions exceeding $1 million. This marks the second award to a whistleblower with an internal audit or compliance function at a company. The first was back in August 2014, when the SEC awarded a whistleblower in internal auditing/compliance with over $300,000. Here, as with the prior award, the officer had a reasonable basis for believing that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors. In both cases, responsible management was made aware of the potential harm that could occur, yet failed to take steps to prevent it.
Internal investigations are an ever-present challenge for companies. They can involve virtually any topic and arise in myriad ways. Embezzlement, accounting improprieties, bribery, and financial statement adjustments can all lead to a closely scrutinized investigation, with likely triggers of whistleblower reports, news articles, litigation demands, or regulatory inquiries. The common denominator is that they present high pressure and/or high stakes. Consequently, it is imperative that matters not be made worse through a flawed internal investigation. In today’s post, we cover some of the essential topics to keep in mind when managing an internal investigation to ensure that the investigation itself does not cause or exacerbate harm to the company.
For the first time in the nearly five years since Dodd-Frank went into effect, the SEC last week took action against a company over concerns that the company was preventing its employees from potentially blowing the whistle on illegal activity. The action is significant because the SEC was targeting seemingly innocuous language in a confidentiality agreement and there were no allegations that the company, KBR, Inc., was otherwise breaking the law.
Last week, the Securities and Exchange Commission announced an award payout of between $475,000 and $575,000 to a former company officer who reported information about an alleged securities fraud. While this is by no means the largest of the 15 payouts the SEC has made since the inception of the whistleblower program in fiscal year 2012 (the SEC awarded approximately $14 million to a whistleblower in October 2013, and roughly $30 million to a foreign whistleblower almost a year later), it is the first time that the SEC provided a whistleblower bounty award under the new program to an officer who learned about the alleged fraud through another employee, rather than firsthand.
In an amicus brief filed earlier this month in Berman v. Neo@Ogilvy LCC, the SEC asked the Second Circuit to defer to the Commission and hold that individuals who report misconduct internally are covered by the anti-retaliation protections of the Dodd-Frank Act of 2002, regardless of whether they report the information to the SEC.
The need to detect and investigate reported allegations of wrongdoing within a corporation has long been a fact of corporate life. In the last 15 years, however, a combination of circumstances has contributed to an explosion of activity in this area. Among the contributing factors was Congress’ passage of laws and related agency regulations encouraging and, in some cases, mandating that employees report suspected corporate misconduct; creating financial incentives for employees to do so; and prohibiting retaliation against those who report. For companies, understanding their obligations pursuant to this statutory regime and the unsettled issues still surrounding it is crucial both for purposes of complying with applicable law and responding appropriately to alleged wrongdoing. Recently Orrick attorneys drafted an article for the Review of Securities & Commodities Regulation that discusses certain significant whistleblowing provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), as well as best practices for responding to tips where these statutes apply.
To view the full article, please click here.
Check out this week’s Employment Law and Litigation Blog post on the SEC’s Dodd-Frank Whistleblower Program.
Real estate investment trust American Realty Capital Properties (“ARCP”) recently announced the preliminary findings of an Audit Committee investigation into accounting irregularities and the resulting resignation of its Chief Financial Officer and Chief Accounting Officer. The events surrounding ARCP are a case study of how, within a matter of weeks, an internal report of concerns to the Audit Committee can lead to both internal and external scrutiny: an internal investigation and review of financial reporting controls and procedures, on the one hand; media coverage, securities fraud litigation, and an inquiry by the Securities Exchange Commission, on the other.
Check out this week’s Employment Law and Litigation Blog post on the Dodd-Frank Act’s whistleblower retaliation provision.
The U.S. Securities and Exchange Commission recently announced the latest whistleblower bounty awarded under the Dodd-Frank Act, which authorizes rewards for original information about violations of securities laws. Whistleblowers can receive 10 percent to 30 percent of the money collected in an SEC enforcement action where the monetary sanctions imposed exceed $1 million.