2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program
Back when the Dodd-Frank Act first proposed the creation of the Office of the Whistleblower (OWB) a hue and cry went up from chief compliance officers, general counsels and many others that this would be the ruin of robust compliance reporting within corporations. After all, why would an employee contact the company helpline or whistleblower hotline for free when they could instead go to the OWB and get in line for wheelbarrows full of the U.S. Treasury’s money?
If those fears are realized, one would expect thousands of whistleblower tips and tens or hundreds of millions of dollars paid out in rewards. Let’s examine the recently-published 2013 Whistleblower Program Report (OWB Report) to provide clues as to whether these predictions were accurate or hyped up exaggerations.
While the OWB declares victory in this latest report to Congress, the numbers are not exactly overwhelming proof that whistleblowers are making end runs around the internal company reporting mechanisms. While the OWB reported that in Fiscal Year 2013 (ending in October 2013), the number of tips received was 3,238, these tips yielded only four (4) awards involving two distinct cases. In fact, since its inception in 2011, the OWB reported a total of only six (6) awards.
In June 2013, monetary rewards were paid to three individuals relating to the same case. On October 1, 2013, a single reward to an individual was paid. This October 2013 reward is more significant however, due to the fact that it was the single largest award yet and totaled $14,000,000 to-date. More telling is the fact that this single reward comprised the bulk of the total $14,831,965.64 paid out in FY 2013.
Of course many would argue that the success of the OWB should not be judged solely on the number and amount of payouts. Chief of the Office of the Whistleblower, Sean McKessy, makes this exact argument in his cover letter to the OWB Report:
“[T]he bigger story is the untold numbers of current and future investors who were shielded from harm thanks to the information and cooperation provided by whistleblowers. At the end of the day, protecting investors is what the whistleblower program is all about. “
Don’t Retire those Corporate Helplines Just Yet
While many believed that the OWB would harm their in-house compliance reporting and awareness programs, the facts suggest otherwise. In fact, the NAVEX Global 2013 Ethics and Compliance Hotline Benchmarking Survey (analysis of records from the largest database of hotline/helpline reports in the world), indicates that the number of helpline reports per 100 employees is the same or has slightly increased year over year since 2010 when the OWB was begun.
As reported in the Report, this rise in reporting may be due to:
- Increasing sophistication of ethics and compliance programs’ communications and training strategies
- Involvement and accountability of the board and executive leadership
- Media coverage of whistleblower lawsuits and awards
- Encouragement from government officials to report observed misconduct
The prevalence and media coverage of whistleblower actions may be creating even greater awareness of the benefits and acceptability of reporting compliance failures through these types of in-house helplines. It remains to be seen if the sensational aspect of the latest OWB award of $14,000,000 begins to finally turn the tide toward the OWB. I suspect it will take quite a few more of these lottery jackpot-like numbers before whistleblowers began to see the OWB as the preferable alternative to in-house reporting and company helplines.
OWB Designed as a Complement, not a Competitor, to Company Compliance Programs
The OWB Report makes this position clear by stating:
“The whistleblower program was designed to complement, rather than replace, existing corporate compliance programs. While it provides incentives for insiders and others with information about unlawful conduct to come forward, it also encourages them to work within their company’s own compliance structure.”
Further data suggesting that the OWB is not diverting reports away from helplines is the very small percentage of reports to helplines which address financial reporting. The OWB Report lists reports on “Corporate Disclosures and Financial” at 17.2 percent of all reports received. In fact this is only a 1 percent decrease from OWB’s 2012 “Corporate Disclosures and Financial” percentage of 18.2 percent. While skeptics could argue that this 1 percent drop could reflect a siphoning away of reports from corporate helplines, this seems unlikely. The 2013 NAVEX Global Hotline Benchmarking Report shows that “Accounting, Auditing and Financial Reporting” has comprised only 3 percent of all reports to company helplines every year since 2008.
OWB challenges remain
For the OWB program to be as successful as its supporters hoped, there are a couple of areas that still could be improved.
- The process still needs to be more streamlined. While it may be fairly simple to report, directly or through counsel, there are still multiple steps and delays that occur before an award will be made and paid.
- Settle the issue of protections against retaliation for reporters. The question is whether a private cause of action exists if an employee reports possible securities violations to authorities other than the SEC. Contrary to earlier lower court decisions and SEC regulations, the most recent 5th Circuit ruling in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013) held that the anti-retaliation provisions of the Dodd-Frank Act provide a private cause of action only for those employees who provide allegations of possible securities law violations directly to the Commission.
- Reduce the award qualifying thresholds. The OWB might attract more reports if the award levels began to apply at levels lower than the current $1,000,000 threshold for monetary sanctions.
The Future is Unclear
The current level of reports to the OWB increased only 7 percent year over year and the expected spate of large, headline grabbing monetary awards are still more vision than reality.
To continue to be relevant, the OWB will need to continue to raise awareness of the mission, keep the process simple and informant identities confidential. If the goal is truly to compliment corporate compliance departments then the SEC and the OWB should continue to support in-house company efforts to prevent, detect and respond first at the company level. Coopting this role with the promise of large awards and restricting protections against retaliation only in instances where the reports are made directly to the OWB may send a message to compliance programs that this “complementary partnership” is a sham.