The National Law Journal published a letter to the editor from Phillips & Cohen partners Erika A. Kelton written in response to a column by a defense attorney who criticized the SEC whistleblower program.
With his column, George J. Terwilliger III joined the growing chorus of defense attorneys who are issuing dire predictions about the new U.S. Securities and Exchange Commission whistleblower program. [“SEC bounties imperil corporate integrity programs,” NLJ, Nov. 1.]
They say the whistleblower program will destroy corporate integrity programs and internal reporting mechanisms, bankrupting corporations that are seemingly unaware of the fraud and that otherwise would take corrective steps if they only knew.
The fact is internal reporting programs have not turned around corporate compliance. We need a fresh approach, and Congress and the SEC agree.
Terwilliger has no evidence that financial incentives for whistleblowers have led to any systematic failure to use internal procedures. We’ve represented whistleblowers for more than 20 years and can attest that most whistleblowers report fraud internally and don’t seek outside remedies until they have been rebuffed or punished. In too many cases, reporting fraud internally makes those employees targets for retaliation.
Corporations are right to fear the power of the whistleblower program. A similar program has made a huge difference in combating Medicare fraud and defense-contractor fraud. The SEC program stands to be an effective, sweeping and innovative new force in securities fraud enforcement. The hidden promise (or threat) of whistleblowers might encourage corporations to have truly meaningful compliance programs.
But if the SEC requires whistleblowers to jump through numerous hoops and place themselves at even greater risk to report fraud, then the defense bar will have succeeded in rendering a powerful enforcement tool into window dressing.