Voices for Corporate Responsibility, Change to Win, Government Accountability Project and other groups contend that corporate compliance departments are no substitute for coordinated investigations by government agencies alerted by whistleblowers
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WASHINGTON DC (December 20, 2010) – A coalition of leading consumer groups and workplace advocates has filed formal comments today with the Securities & Exchange Commission expressing heightened concern that the Commission’s newly proposed whistleblower provisions lack a coherent process to work closely with meritorious whistleblowers and make use of their extensive experience and testimony.

The comments come as the SEC ended its public comment period on implementing the new whistleblower provisions enacted under the Dodd-Frank financial reform legislation passed earlier this summer. The workplace advocates also strongly challenge comments issued by a group of public companies expressing fears that the new provisions wrongly incentivize employees into seeking ways to profit from corporate wrongdoing.

According to comments filed by Voices for Corporate Responsibility, Change to Win, The Government Accountability Project, National Employment Lawyers Association and others, the proposed rules set forth a process, to occur after a successful SEC enforcement action, requiring whistleblowers to petition the SEC to advise on an individual’s official whistleblower status, with an entitlement to financial award. “This highlights our concern that the SEC has no mechanism to keep track of the whistleblower during the investigation process for purposes of using that person as a witness,” the group said in its statement.

Full text of the comments can be linked here:

The Voices-led coalition is especially concerned that the SEC’s new rules – in attempting to strike a balance between enforcement and self-regulation – give far too much deference to internal corporate compliance procedures to police wrongdoing. The group argues that deterrence is not warranted where, by definition, securities fraud and other illegal acts occur with the knowledge and consent of corporate officers and directors. In such situations, the group contends that internal compliance programs will almost certainly fail to effect positive change.

Voices and its allies further claim the proposed rules do not address coordination of investigations by federal agencies. While the rules acknowledge the likelihood of related actions by multiple regulators, they omit any method of coordinating investigations so as not do duplicate efforts or interfere with inter-agency probes.

Reuben Guttman, a leading whistleblower attorney with Grant & Eisenhofer in Washington and a co-founder of Voices for Corporate Responsibility, explained the coalition’s principal objection to the proposed rules.

“Abdicating responsibility for whistleblower complaints by passing them off to internal compliance departments is not a substitute for leveraging the resources of government agencies whose job it is to enforce fraud and other violations through coordinated investigations and prosecutions,” said Mr. Guttman. “Unless the SEC, Department of Justice and other agencies work together, the whistleblower provisions of Dodd-Frank will certainly fail.”

The group states that the SEC’s proposed rules establish that “[a] claimant’s failure to timely file a request for a whistleblower award would bar that individual later seeking recovery.” The group claims that the proposed text has no underlying support under Dodd-Frank and places an undue burden on a whistleblower who provides original information leading to the successful enforcement of an action by the Commission.

“If the SEC is truly committed to maintaining contact with a whistleblower who steps forward as a witness, the onus should not be on the individual to periodically check the Commission’s website to ensure that a claim was successful,” said Cyrus Mehri, a noted civil rights attorney in Washington and a co-founder of Voices.

“Clearly the burden should not be on the whistleblower to seek out information on the outcome of the action – rather, the Commission should be committed to keeping the whistleblower informed of an investigation or other action,” Mr. Mehri added.

The need for coordination is particularly critical where the SEC has limited resources and must respond to claims originating from a universe of approximately 6,700 publicly traded companies and related advisors and entities. That becomes especially true in light of recent reports that the SEC has been forced to delay to formal opening of its whistleblower office, even as the Commission is expecting a wave of tips to come forward from employees.

Voices and its allies contend that the SEC must develop a transparent process for coordination of filing and that process must begin with a disclosure on the intake form of other venues where the whistleblower has made claims and also the identity of the agency personnel overseeing those claims.

While Dodd Frank mandated financial bounty provisions to be paid to whistleblower following a successful settlement or judgment, the SEC’s proposed rules provide no guidance on either coordination of related investigations or cross-filing of related information.

Section (c) of Proposed Rule 240.21F-3 sets forth requirements for financial awards in connection with related actions. In determining whether the information meets the criteria used to evaluate awards, the Commission may seek confirmation of the relevant facts regarding the whistleblower’s assistance.

“This provision highlights the need for extra coordination on the part of investigators and enforcement agencies,” Mr. Guttman said. “If there were a mechanism to coordinate inter-agency investigations, the SEC would presumably understand the contribution of the whistleblower in terms of his or her value with regard to the provision of documents that may be used in an enforcement action, as well as the analysis underlying a claim, or the testimony in a proceeding.”

Mr. Guttman, who has represented numerous individuals in major whistleblower actions, is bluntly opposed to letting companies off the hook by virtue of their existing or even enhanced internal compliance programs. “Frankly, the catastrophic failure of these in-house programs to prevent harm to shareholders, consumers, employees and other stakeholders in recent years more than justifies the bounty-hunter provisions created by Dodd-Frank,” he said.

“It’s hardly surprising that companies that have been repeat violators of the False Claims Act or have knowingly undermined the interests of investors and consumers are now lining up against a law that seeks to protect those constituencies.”