Dec. 13, 2010 -- The Washington Post's "Capital Business" section published an op-ed today (see below) written by whistleblower attorneys Erika A. Kelton and Eric R. Havian of Phillips & Cohen LLP. These long-time lawyers for whistleblowers urged the Securities and Exchange Commission to adopt rules that would create an effective whistleblower program rather than weaken it.
SEC whistle-blower program worth protecting
Washington's business lobby has sprung into action to kill the new Securities and Exchange Commission whistle-blower program in a tried-and-true Washington way: Convince the agency to issue regulations that render the program ineffective.
Even before the SEC issued proposed rules last month, defense law firms met with SEC officials while others wrote articles and issued press releases, all trumpeting the same doomsday warning about the SEC whistle-blower program. Unless whistle-blowers are required to report their concerns about fraud to their employer before they are allowed to notify the SEC, these doomsayers predict, corporate compliance programs will be destroyed. Companies -- which would take corrective actions if they only knew about the fraud -- will be forced to drain corporate coffers to defend against meritless allegations.
Such predictions are absurdly overblown. And to suggest that corporate management is unaware when a company is committing a significant fraud is baseless. Yet the SEC is likely to take those wildly exaggerated concerns into account when it finalizes the rules for the whistle-blower program after the comment period on the proposed regulations ends Friday (Dec. 17).
The Dodd-Frank law created a long-needed whistle-blower program for the SEC. The whistle-blower program allows private citizens who know of a company violating securities laws to provide that information to the SEC and file a claim for a reward. If the government collects more than $1 million, the whistle-blower is entitled to a reward based on 10 percent to 30 percent of the funds collected.
We have represented whistle-blowers for more than two decades and know from experience that they almost always seek to report their concerns internally to managers and supervisors, only turning to private attorneys and the government as a last resort. Many employees correctly view taking a more formal step and reporting fraud through a corporate compliance program as a fast track to termination. While many internal compliance programs work, it is foolish to think they all do.
The biggest and most profitable frauds that come to our attention are planned and directed by top management. In these circumstances, internal compliance is absent, meaningless or co-opted. Requiring formal reporting would scare off many, if not most, whistle-blowers.
Such an outcome would benefit only the corporate interests aggressively lobbying the SEC to weaken the whistle-blower program -- not investors. Those pushing to hamstring whistle-blowers include pharmaceutical companies that have paid fines totaling billions of dollars for fraud as a result of whistle-blower cases and have continued to defraud the government despite government-required corporate integrity agreements. Their frauds have been exposed only because of whistle-blowers. These companies insist internal compliance should have a chance to work; meanwhile, they circumvent the compliance mechanisms already in place.
Corporate compliance programs, if meaningful and properly implemented, can be effective in addressing wrongdoing, including securities violations. But given their spotty track record, they are no panacea. And where frauds are directed from the top, much more than internal programs are needed to ensure compliance with the laws.
Congress knows the most useful information about specific instances of fraud comes from company insiders. It created the SEC whistle-blower program and a similar one for the Commodity Futures Trading Commission for that reason. To avoid another Bernie Madoff disaster or worse, we need to keep whistle-blower information flowing, unimpeded by corporate roadblocks.
Erika A. Kelton and Eric R. Havian are partners, respectively, in Phillips & Cohen LLP's Washington and San Francisco offices, and specialize in whistle-blower cases.
The Washington Post posted the op-ed at