FCPA Compliance and Ethics Blog

April 29, 2015

King Arthur Week – The Round Table and Compliance Professionals and Lawyers as Whistleblowers – Part III

Filed under: FCPABlog,SEC,Whistleblower — tfoxlaw @ 12:01 am

Round TableToday we use King Arthur’s Round Table as the entry into our topic. The Round Table is the famous table around which he and his Knights congregated. Its shape implies that everyone who sits there has equal status. Wace, who relied on previous depictions of Arthur’s fabulous retinue, first described the Round Table in 1155. The symbolism of the Round Table developed over time; by the close of the 12th century it had come to represent the chivalric order associated with Arthur’s court, the Knights of the Round Table.

As with all things Arthurian, the origins of the Round Table are a bit murky. One commentator claims Arthur created the Round Table to prevent quarrels among his barons, none of whom would accept a lower place than the others. Others believe it came to prominences as a symbol of the famed order of chivalry that flourished under Arthur. In Robert de Boron’s Merlin, written around the 1190s, the wizard Merlin creates the Round Table in imitation of the table of the Last Supper and of Joseph of Arimathea’s Holy Grail table. This table has twelve seats and one empty place to mark the betrayal of Judas. This seat must remain empty until the coming of the knight of purity and chastity who will achieve the Grail. When the Knight Percival comes to the court at Camelot, he sits in the seat and initiates the Grail quest. Whatever the origins of the Round Table, it may be the single most tangible item associated with King Arthur.

I thought about these concepts surrounding the legend of the Round Table in consideration of the announcement earlier this month of a whistleblower award paid out by the Securities and Exchange Commission (SEC) of between $1.4 to $1.6 MM to a compliance officer. Sam Rubenfeld reported in an article in the Wall Street Journal (WSJ), entitled “SEC Awards More than $1.4 Million to Whistleblower Compliance Officer”, that the award was paid “to a compliance officer who provided information that helped the SEC in an enforcement action against the tipster’s company, marking the second time a compliance professional received an award under the SEC’s whistleblower program.” As stated this was the second award paid out to a compliance officer, the first occurred in August 2014 and was in the amount of $300,000.

This un-named whistleblower took his (or her) concerns internally to management but was not successful in persuading management to cease the illegal practices. Moreover, “The compliance officer had a reasonable basis to believe disclosure to the SEC “was necessary to prevent imminent misconduct” from causing “substantial financial harm” to the company or investors, the SEC said.” The FCPA Blog, in a post entitled “Compliance officer awarded $1.5 million under SEC whistleblower program”, reported, “After that award, Sean McKessy, chief of the SEC’s whistleblower office, said employees who perform internal audit, compliance, and legal functions can be eligible for an SEC whistleblower award “if their companies fail to take appropriate, timely action on information they first reported internally.”” Adding to McKessy was Andrew Ceresney, chief of the SEC’s enforcement division, who said in a statement “This compliance officer reported misconduct after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it.”

This second award makes clear that the SEC will treat compliance professionals as all other whistleblowers when it comes to making an award based upon the fine or penalty. In a December 2014 article, entitled “When Should Internal Auditors And Compliance Officers Become SEC Whistleblowers”, Daniel Hurson wrote “while the amount of the [first] award [$300,000] was not particularly hefty, and was dwarfed by several multi-million dollar whistleblower awards given previously, it carried particular significance to astute observers in the corporate legal, internal audit, and compliance communities. Insiders know that compliance officers and internal auditors, beleaguered and sometimes frustrated as they may be, hold the “keys to the kingdom” when it comes to knowledge of corporate ethical and legal lapses within their companies. Prior to this award, it had generally been thought the SEC would continue to discourage such awards on the rationale that it would not want to encourage employees whose job it was to prevent corporate legal and ethical violations to profit from simply doing their jobs.”

Hurson wrote that this initial whistleblower payment to a compliance practitioner marked a change in SEC policy because “It has generally been understood that compliance officers and internal auditors are not permitted to receive whistleblower awards because information they reported to a superior constituting allegations of misconduct was not to be considered “original information” under the Dodd-Frank Act and SEC rules.” He ended his piece with the following, “In the final analysis, however, the real job of a compliance officer is not just training employees to know the FCPA or any of the myriad of laws and regulations that now govern corporate conduct, but doing his or her absolute best to help them comply with the law, and to identify the cases when they fail. An internal auditor is charged with making his or her investigations and reports, but not administering punishment. But the presumption in each case is that the company will take your work seriously and take action to correct and if necessary report the problem to regulatory authorities.

If this does not happen, or the company displays either a lack of good faith or competence in undertaking its end of the bargain, you may have to undertake corrective action, however unpleasant or personally risky. In truth, you owe this to the company, its vast majority of honest employees, and its investors. If certain people in the corporate structure are blind to the “bet the company” risk in ignoring or covering up wrongdoing, your job is to insure that philosophy does not prevail. I suggest with respect that that duty should remain foremost in the personal decision as to whether and when a compliance officer or internal auditor should, if the situation demands and the law allows, become a whistleblower.”

There was nothing in the SEC Press Release or any of the commentary on the 2015 whistleblower award to indicate that the compliance professional involved was a lawyer. However, an equally delicate issue is whether a lawyer can be a whistleblower. In an article entitled “Is the SEC encouraging unethical whistleblowing by counsel?” Nick Morgan explored this issue. Lawyers are also governed by their state bar associations on their ethical obligations, which include confidentiality and loyalty to a client. Morgan noted, “The Dodd-Frank bounty provisions further exacerbated the conflict between federal securities whistleblower law and state attorney ethics requirements by giving attorneys financial incentives to breach attorney-client confidentiality.”

Three state bar organizations, Washington, California and New York, have questioned if SEC regulations trump state bar ethical obligations regarding attorney whistleblowers. Indeed in New York, “the New York County Lawyers’ Association’s committee on professional ethics responded to the development by releasing a formal opinion. It concluded that New York lawyers, presumptively, may not ethically serve as whistleblowers for a bounty against their clients under Dodd-Frank, because doing so generally gives rise to a conflict between lawyers’ interests and those of their clients.”

What happens when federal law is in conflict with state regulations regarding lawyers’ ethical obligations? Morgan reported, “no court has yet found that SEC regulations preempt state ethics rules governing lawyers’ communications with their clients.  In cases in which conflicts of state and SEC law have appeared, federal courts have been receptive to arguments based on lawyers’ ethical obligations under state law and have balanced the state and federal interests. While the Dodd-Frank bounty provisions increase the incentives for attorneys to act as whistleblowers at their clients’ expense, it is unclear whether those incentives outweigh the risks and burdens associated with taking such actions. Aside from the ethical issues, whistleblowers more often than not go uncompensated and incur significant burdens for their trouble, decreasing whatever temptation some attorneys may feel.”

King Arthur’s Round Table may have been designed so that all Knights were treated as equals. As noted in some of the legends the Round Table is part of the Holy Grail quest storyline, requiring purity of heart and chastity to achieve the Grail. Both strands of the Round Table legend inform the debate on whistleblowers. Even if compliance practitioners may report on their own companies to the SEC, it is not clear about the answer when it comes to lawyers. Further, as lawyers have separate legal obligations they fail to meet the second purpose of the Round Table, to find someone to chase the Grail of whistleblowing.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

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