FCPA and Bribery Act Hotlines: Staying Out of Hot Water with Other Jurisdictions

It is finally here. Today is the Opening Ceremony of the Games of the XXX Olympiad in London. The first Olympics I can remember watching were the 1964 Games in Tokyo. I was enthralled with watching the world’s greatest athletes compete and the boyhood joy about the Games still exists for me. And, for my money, the best sporting event will be held in world’s greatest city. It should be a great show for the next two weeks. They are a must watch for me and I hope that you will enjoy them as much as I intend to.

Today’s compliance thoughts relate to the Olympics in another way. I recently came across not only a must read article for the compliance practitioner but also a must save article. In the International Lawyer, Winter 2011*Volume 45*Number 4, I came across an excellent article, entitled “How to Launch and Operate a Legally-Compliant International Workplace Report Channel” or in Foreign Corrupt Practices Act (FCPA) parlance, a hotline. It was authored by Donald Dowling of the law firm of White and Case. Dowling provides a very useful guide to help navigate the challenges of setting up a multi-national whistleblower’s hotline, such as is required under the FCPA and UK Bribery Act. The majority of his article “analyzes the six categories of laws that can restrict whistleblower hotlines abroad, focusing on compliance.” You should obtain a copy of this article and keep it for reference in regards to your company’s hotlines. It is available on the White and Case website, by clicking here.

1.      Laws Mandating Whistleblower Procedures

This group of laws “comprises mandates that require setting up whistleblower hotlines in the first place.” This includes the US Sarbanes-Oxley (SOX) as well as other jurisdiction laws which generally protect whistleblowers from retaliation but do specifically require any hotlines be set up on a company wide basis. Dowling also found a couple of countries, Norway and Liberia, which require general receiving and processing of “public interest disclosures.”

2.      Laws Promoting Denunciations to Government Authorities

This category of laws generally related to legal requirements for the reporting of illegal acts to government authorities in two ways. First, these laws encourage whistleblowing to government which then compete with employer hotlines by enticing internal whistleblowers to divert denunciations from company compliance experts and over to outside law enforcers who indict white collar criminals. This first approach is found in Dodd-Frank, which offers bounties. Second, these “laws that require (as opposed merely to encourage) government denunciations rarely except corporate hotline sponsors. These laws therefore force hotline sponsors to divulge hotline allegations over to law enforcement.” This second approach is found in SOX which “requires an employer to offer internal hotline procedures”.

3.      Laws Restricting Hotlines Specifically

This category is exemplified by European data protection laws which act to restrict companies’ freedom to launch and operate reporting programs. Dowling believes that these laws are based upon the fact that Europeans “see hotlines as threatening privacy rights of denounced targets and witness”. Also this would seem to be in response to the totalitarian past from the World War II era. The author identifies what he termed “the four biggest hurdles” set up to frustrate hotlines in EU jurisdiction. They are “(1) restrictions against hotlines accepting anonymous denunciations; (2) limits on the universe of proportionate infractions on which a hotline accepts denunciations; (3) limits on who can use a hotline and be denounced by hotline; and (4) hotline registration requirements.

4.      Laws Prohibiting Whistleblower Retaliation

This category will be familiar to US compliance practitioners through the applications of US laws such as SOX, Dodd-Frank and numerous state whistleblower statutes. Additionally, the author lists numerous foreign jurisdictions which have such laws. But here he believes that the key is communication because in many countries and foreign jurisdictions, there is no tradition of protection of persons who make reports against superiors so that an “employer needs to overcome worker fear of reprisal for whistleblowing.”

5.      Laws Regulating Internal Investigations

Typically laws on internal investigation do not impact hotlines because a hotline is a “pre-investigation tool.” However, the author believes that No. 4 above, communication by the employer is critical to complying with laws that enact procedural safeguards for persons under investigation. Heavy-handed communications about a hotline could blow back against employers in claims by employees that “an employer rigged the investigation process.” So companies should ensure that communications about hotlines do not convey an “overzealous approach to complaint processing and investigations.”

6.      Laws Silent on, but Possibly Triggered By, Whistleblower Hotlines

Here the author recognizes that the title of this category “is necessarily vague and determining which laws fall into it is difficult.” Nevertheless, he writes that the most “likely candidates are data protection laws silent on hotlines and labor laws imposing negotiation duties and work rules.” Regarding the former, the author argues that hotlines are not databases but conduits for the transmittal of information. He acknowledges that EU data privacy laws reject this distinction and treat hotlines as if they were databases where information is stored. He does not identify other jurisdictions which yet take this aggressive approach but he believes this may become a trend. The labor law issue is also tricky and may turn on the interpretation of whether the institution of a hotline is viewed as substantive change in working conditions under a union-management labor agreement and therefore subject to collective bargaining.

In addition to all information I have only skimmed what is in the body of the text; the author also provides a handy chart which has the following headings:

Jurisdiction

Is the authority binding law?

Must confine hotline to certain topics only?

Are anonymous whistleblower calls ever OK?

Is outsourced (vs. in-house) hotline favored?

Must disclose hotline to data agency?

So just as the London Olympics is a must watch for me, this article is a must read and a must download for compliance practitioners.

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, 2012

The Gun Sting Case Defeats and What it means For FCPA Enforcement? Absolutely Nothing!

In a stunning rebuke of the Department of Justice’s (DOJ) trial strategy, all defendants in the second group of Gun Sting defendants walked out of the federal courthouse, still free. Two defendants were acquitted and the remaining three defendants were granted a mistrial. One defendant was dismissed at the close of the prosecution’s case in December as was the DOJ’s Foreign Corrupt Practices Act (FCPA) conspiracy count against all defendants. So, as the FCPA Professor noted, the DOJ is 0-10 in trial prosecutions in its Gun Sting case. However, that stark number does not tell the full picture of what is going on in enforcement of the FCPA.

First and foremost, not all of the Gun Sting defendants have been acquitted or even been granted mistrials, three defendants, Haim Geri, Daniel Alvarez and Jonathan Spiller all pled guilty. A fourth defendant, Richard Bistrong, reported by the FCPA Blog to be “the key intermediary between the FBI and the shot-show defendants”, pled guilty to one count of conspiracy to violate the FCPA and other statutes in 2010. So to imply the DOJ is zero in obtaining guilty verdicts and pleas for all defendants in its Gun Sting case is not precisely correct.

The defeats in the Gun Sting trials, coupled with the overturning of the guilty verdict in the Lindsey Manufacturing case and the O’Shea acquittal, have lead many commentators to make one of two arguments: (1) the DOJ is getting is comeuppance for ‘aggressive’ prosecution of the FCPA; and (2) coupled with the claim that the FCPA hurts US competitiveness overseas, it is the end of FCPA enforcement as we know it. Both positions are far wide of the mark. So what does the DOJ record for the two Gun Sting trials mean for FCPA enforcement? Absolutely nothing! As reported by the FCPA Blog, in 2011 15 companies settled FCPA enforcement actions by paying a total of $508.6 million in fines and penalties. Although this is a drop from both the number of companies which resolved FCPA enforcement actions and aggregate amount of fines and penalties paid over the previous year, this number is still significant. One need only take a look at the reported ongoing FCPA investigations to see that there is still significant enforcement occurring. As to the ‘aggressive’ DOJ enforcement, remember these enforcement actions against companies are made largely through self-disclosure. If the DOJ does not believe that there is a sufficient basis to bring an enforcement action, it will decline to prosecute the company.

What can be portended by the defeats at trial? First the whole notion that the Lindsey Manufacturing company defendants were somehow acquitted or over-zealously prosecuted is just plain wrong. They were found guilty and this guilty verdict was thrown out due to prosecutorial misconduct. As to O’Shea, it appears that the trial judge concluded that the government simply did not have enough evidence to get it to a jury. While it appears that the O’Shea case should not have gone to trial, the government at least put enough evidence forward to get to trial.

Such was not the case in the Gun Sting trials, where it appears the jury both (a) did not think the defendants were guilty, or (b) leaned so heavily towards acquittal that no unanimous decision could be made. It is still not clear why the government failed so miserably with the juries in the Gun Sting trials. It may be that people do not understand why the government would set up an apparently legitimate business transaction and then overlay a corruption case on it. After all, everyone understands that any business dealing involving illegal narcotics is illegal from the get-go. It does not matter if bribery and corruption are involved, the entire transaction is illegal. It may be the jurors did not feel the same about an underlying transaction which was clearly legal; here the sale of armaments to a foreign government, something the US government does on a routine basis.

It may also be the jury simply did not believe or even like the government’s star co-operating witness, Richard Bistrong. As reported by the FCPA Professor, Bistrong pled guilty long before any of the 2010 arrests in the Gun Sting case. He pled guilty back in 2009 which means that at least some of the time he was working undercover for the government, he had already pled guilty. This fact may have persuaded the jury in the Gun Sting trials that his testimony did not support the illegal conduct that the government claimed it supported. Or as asked by the FCPA Professor, in a post entitled “Will Bistrong’s Plea Impact The Africa Sting Cases?”, “What impact will Bistrong’s plea have in the Africa [Gun] Sting case – particularly the defendants’ expected entrapment defense?” It may have been quite a bit.

As your company’s compliance officer, what should you make of all this? My take is that you had better double down on your compliance program because I believe that the DOJ will refocus its efforts where it will have the most success, with enforcement actions against corporations. Why do I say this? First of all, there is the self-disclosure issue noted above which is now compounded by the Dodd-Frank Whistleblower provision. Second is the new norm of industry sweeps, and remember these started long before Johnson & Johnson who agreed, as part of its DPA, to turn in its competitors for alleged FCPA violations. Also name one company which will go to trial? The answer is easy because it’s none, nada, zilch and zero. After Arthur Anderson, no public US Company will go to trial in a FCPA case and risk a guilty verdict. Lindsey Manufacturing and the individual defendants went to trial because they were the company and the company was them.

So what is my take on the effect on ongoing FCPA enforcement of the failure of the DOJ to convict any of the Gun Sting defendants at trial? Once again, Absolutely nothing!

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, 2012

When the FCPA Professor Writes, You Should Read It

As many compliance practitioners are aware, the FCPA Professor (in real life, Professor and Ironman Triathlete Mike Koehler) writes a daily blog on all things relating to the Foreign Corrupt Practice Act (FCPA) from the legal perspective. It is a great resource and one that you should put on your daily reading list. However, as a professor he also writes lengthier, law review articles, with his in-depth analysis and commentary. This month we are treated to an excellent law review article entitled “Big, Bold and Bizarre: The Foreign Corrupt Practices Act Enters a New Era”. Coming in at a hefty 50 pages, it is his analysis and commentary of “using 2010 FPCA enforcement actions, related developments and how big FCPA enforcement has become.” It is an excellent and most welcomed resource for the compliance practitioner who needs a solid review of where the FCPA enforcement year has been and what it may portend for the future.

The Professor divides his article into four parts. In Part I, he reviews the specifics of FCPA enforcement in 2010, what he terms the “big, bold and bizarre.” In Part II, he reviews the increased scrutiny of the FCPA, by courts who faced increased legal challenges due to increased individual prosecutions, Congressional scrutiny and business and legal commentary. In Part III, he reviews some legal developments related to the FCPA, such as Dodd-Frank and debarment legislation. In Part IV, he takes a look at the FCPA road ahead.

Big, Bold and Bizarre

A. Big. The Professor lists some of the raw numbers generated through FCPA enforcement actions. The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) garnered almost $1.8 billion in fines, penalties and profit disgorgement through FCPA enforcement actions.
B. Bold. Here the Professor recounts that the DOJ “continued to push the envelope as to enforcement theories in two specific areas.” The first is regarding the definition of who is a ‘foreign official’ under the FCPA and the second revolves around the interpretation of “obtain or retain business” and facilitation payments under the FCPA.
C. Bizarre. Here the Professor looks at both general fact patterns and some specific enforcement actions. Generally, he notes that in the majority of DOJ enforcement actions, the eventual DOJ fine or penalty was at an “amount below the minimum range suggested by the [US] Sentencing Guidelines.” He also discussed some of the specific matters he believed had “bizarre patterns” such as Innospec, BAE, Digi International and the Giffen prosecution.

Increased Scrutiny

While noting that the increased scrutiny actually began in Q3, 2009 with the release of the Chamber of Commerce Whitepaper and Senate Judiciary Committee hearing, 2010 brought a more thorough debate in both Congress and the private sector. This included the House Judiciary Committee hearing in June as to whether the FCPA should be made less robust to facilitate job creation, judicial scrutiny in the form of some high profile individual prosecutions, where federal district courts had to directly confront challenges to the FCPA on what are ‘instrumentalities’ under the Act and who is a foreign governmental official. In the private sector, the Chamber of Commerce kept up its attack on the FCPA as anti-competitive and there was also bar and NGO commentary on the FCPA.

FCPA Related Developments

Obviously the passage of Dodd-Frank had a very large impact on the 2010 FCPA discussion. The Professor noted that “Many predict that Dodd-Frank’s whistleblower provisions will greatly increase the number of FCPA enforcement actions.” In addition to his Dodd-Frank discussion, he reports on the passage of the ‘Overseas Contractor Reform Act’ by the House, which would have debarred any company from doing business with the US government if it sustained a final judgment of a FCPA violation. However, the legislation was not passed by the Senate so it died in the last session.

The Road Ahead

The Professor concludes his article by noting that “the years ahead will likely see more of the same big, bold and bizarre developments as 2010.” One development he believes should continue is the increase in the scrutiny of the FCPA, both by Congress and continuing review and commentary by others, such as the Professor (and I). While noting that some have viewed discussion about FCPA reform as akin to “paving the way for business to go on a bribery binge”; the Professor clearly believes in the value of continued discussion and debate on how to achieve the goals of the FCPA is appropriate and necessary.

The article is well worth your time to read and see where we have been and where we might be going. If you needed one article to give you the information to provide to management on FCPA enforcement, trends and commentary from last year; this is it. While you may, or may not, disagree with the Professor’s conclusions, you cannot have a better resource from which to review the facts.

The FCPA Professor’s website has several nifty features, one of which is a Jobs Board. 
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, 2012

USING THE INTERNET TO YOUR COMPANY’S ADVANTAGE IN DEFENDING AGAINST A WHISTLEBLOWER ACTION

Ed. Note-today we have an interesting post from frequent guest Michelle Sherman. 

The wide dissemination of news on the Internet through “new media” online sites such as the Huffington Post, well recognized blogs like the Drudge Report, or social media sites such as Twitter is changing how we get our news today.  The Internet is also making it harder for someone to be the first and original source for allegations of corporate malfeasance that can be the basis for a whistleblower or false claims action.  In other words, businesses who are defending themselves against a whistleblower or qui tam (false claims) plaintiff (collectively, “whistleblower”) should exhaustively search the Internet for evidence showing that the whistleblower is not the “original source” of the information.

1.  Section 922 Of The Dodd-Frank Wall Street Reform And Consumer Protection Act.

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides that the Securities and Exchange Commission (“SEC”) shall pay awards to eligible whistleblowers who voluntarily provide the SEC with original information that leads to a successful enforcement action yielding monetary sanctions of over $1 million. Whistleblowers can recover from 10 to 30 percent of the total monetary sanctions collected in the SEC’s action or any related action, so there is a real financial incentive for someone to report suspected wrongdoing.  Section 922 of Dodd-Frank also added Section 21F to the Securities Exchange Act of 1934, and Section 21F reflects these incentives to whistleblowers.

According to the SEC’s May 25, 2011 press release, Section 922 defines original information as information that “must be based upon the whistleblower’s independent knowledge or independent analysis, not already known to the Commission and not derived exclusively from certain public sources” such as the news media.

Because the public policy behind whistleblower statutes is to reward the reporting of alleged wrongdoing that may otherwise go undetected, the statutes do not allow for bounty rewards to plaintiffs who are not the original source of the information.

Thus, a whistleblower, who provides information that is already known and discoverable through a blog post, Twitter or other social network activity, may have trouble satisfying an essential element to recovering the mandatory award under Section 922.

2.  The False Claims Act And The Public Disclosure Bar.

Similarly, the False Claims Act includes a public disclosure bar which provides that courts shall dismiss qui tam suits when the relevant information has already entered the public domain through certain channels, including the news media, unless the action is being brought by the Attorney General or by a person who is the original source of the information.  31 U.S.C. § 3730(e)(4)(A).  Section 3730(e)(4)(A) also allows the government to stop dismissal of the action by opposing the dismissal.

The public disclosure bar was added by Congress to the False Claims Act “in an effort to strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits.” Graham County Soil and Water Conservation District v. United States ex rel. Wilson, 559 U.S. __, 130 S. Ct. 1396 (2010).

Recent amendments to the False Claims Act left unchanged the defense that information available in the news media cannot form the basis for a qui tam plaintiff being able to maintain his action.

3.  Why The Public Disclosure Bar Should Include Activity On The Internet Including Blogs, Online News, And Social Network Sites Such As Twitter.

With the exponential growth of the Internet, the meaning of news media has expanded and, thereby, created more opportunities for a company to assert the public disclosure bar.  The definition of “news media” in Wikipedia highlights this broad scope:

“The news media are those elements of the mass media that focus on delivering news to the general public or a target public.  These include print media (newspapers, newsmagazines), broadcast news (radio and television), and more recently the Internet (online newspapers, news blogs, etc.)” (emphasis provided).

The New York Times has also reported on how many stories are being covered online these days instead of through print editions:

“Crucial to the Times’s approach in a time of less print space is City Room, the fourth most popular blog on the NYTimes.com.  It is where The Times dishes breaking news and a creative menu of features, columns and digital novelties.  In City Room, a whole new kind of metro report emerges, with most of its 3,000 plus blog posts a year never surfacing in print.”  Arthur S. Brisbane, New York Times, Covering Its Own Backyard (Oct. 23, 2011).

In Graham County, the Supreme Court specifically cited to the broad scope of the news media component of the public disclosure bar when the Court recognized it includes “a large number of local newspapers and radio stations.”  As we have seen with online news sources such as the Huffington Post, which AOL acquired for $315 million, and which had an estimated 25 million monthly users at the time of the sale, new media can have a far greater reach than a small town local newspaper that is included in the news media category of the public disclosure bar.

WikiLeaks is also a good example of how confidential information was first publicized  through the Internet, and ahead of an alleged whistleblower.  A New York Times article described how much WikiLeaks (and the use of the Internet to dump confidential information) has changed the whole nature of whistle blowing:

“Whistle-blowers in possession of valuable and perhaps incriminating corporate and government information now had a global dead drop on the Web.  Traditional news organizations watched, first out of curiosity and then with competitive avidity, as WikiLeaks began to reveal classified government information that in some instances brought the lie to the official story.”  David Carr, New York Times, “Is This the WikiEnd?” (Nov. 6, 2011).

4. Conclusion.

Consequently, a company is well advised to search the Internet for discussions concerning the allegations that form the basis for a whistleblower’s action.  Industry specific blog sites are a good starting point since they often carry gossip concerning companies in that industry.  Twitter is also a good resource since it has the most real time news updates, and often scoops the mainstream media as we saw with reports of the earthquake in Japan and its aftermath, the United States finding and killing Osama bin Laden (with a local resident live tweeting the storming of the compound), and the political upheaval in Egypt (described as the “Twitter revolution”).  YouTube is also a good resource as evidenced by the video that quickly went viral in which University of California, Davis campus police were seen spraying students with pepper spray.

Michelle Sherman is special counsel at Sheppard Mullin Richter & Hampton where she practices business litigation and consults with businesses on legal and regulatory compliance issues relating to social media and the Internet.  Michelle is the editor and contributing author to the law firm’s Social Media Law Update blog.

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If you are going to be in Houston on December 7, myself, Mike Volkov and the Bribery Act guys, Richard Kovalevsky QC and Barry Vitou will be making their only US appearance this year. Mike and I will review some of the more significant enforcement matters of 2011 and discussion lessons which may be drawn from them. Richard and Barry will discuss the Bribery Act. Best of all the event is free and CLE will be provided. Event details and registration are found at http://events.r20.constantcontact.com/register/event?llr=myqi4pcab&oeidk=a07e55t5re06e78f1e3. I hope you can make it!

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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. 

Who Ya Gonna Call?

Ed. Note-today we have a guest post from our colleague Russ Berland.

The Dodd-Frank whistleblower law enables the SEC to pay out between 10 percent and 30 percent of any recovery from a violation of a securities law to a whistleblower.  Under Dodd-Frank, a whistleblower is an eligible person who provides original information or original analysis to the SEC about a violation of federal securities laws that leads to a successful enforcement action with monetary sanctions of at least $1,000,000.  As you can imagine, there are a lot of “magic words” in this definition that courts will be sorting out for a long time.  The law also provides substantial protections for whistleblowers, including reinstatement, double back wages, attorneys fees and litigation costs.  But it is still early in the common law life of the Dodd-Frank whistleblower law and rules.  The final regulations became effective on August 12, 2011, and we are just now beginning to see case law interpreting its requirements.

One of the first issues to surface is retaliation for whistleblowing.  What if a person clearly experiences retaliation, but may not fit the legal definition of a whistleblower?   Imagine this situation:

An employee of a company discovers that the CEO is embezzling funds from the company by paying money to a firm that is solely owned by the CEO.  This employee reports his findings to the company’s president, who in turn reports it to the company’s independent directors.  The independent directors hire a prestigious law firm to investigate the alleged embezzlement. The attorneys discover that the CEO was in fact embezzling money through his solely owned vendor.  Later, the CEO stages a coup to override the independent directors.  Instead of losing his own job, the CEO fires the employee and denies severance.

In this scenario, is the fired employee — who blew the whistle on his CEO and later experienced retaliation — a whistleblower under Dodd-Frank?   One court has said “No.”  Patrick Egan sued Tradingscreen, Inc. (10-cv-08202-LBS S.D.N.Y. Sept 12, 2011) and alleged this set of facts.  But when the U.S. Court for the Southern District of New York was presented with his complaint, they said that even if everything Egan said in his complaint was taken to be true, he still could not sue as a whistleblower under Dodd-Frank.

What had he done wrong?  What was his fatal flaw?  According to the Court, his mistake was that he had not reported his concerns directly to the SEC.  That was it.  Even if Egan had reported this to his management and the independent directors, believing that they would have to disclose it to the SEC, that was not enough.  Even if Egan had cooperated with the prestigious law firm in its investigation of the CEO, believing that they would have worked with the independent directors in reporting it to the SEC, that was not enough.  Even if the media became aware of the issues and through them, ultimately the SEC became aware of Egan’s concerns, that is not enough (but that’s another case –  Tides v. Boeing Co., 644 F.3d 809, 815 (9^th Cir. 2011)).  Mr. Egan had to report directly to the SEC or hire a lawyer to go to them on his behalf.  When Egan could not say in his complaint that he had called the SEC, he was done: no lawsuit, no reinstatement, no double back wages, no litigation costs and no attorneys fees.

So the lesson here is simple.  If a whistleblower wants to be a “real” whistleblower under Dodd-Frank, they have to call somebody, specifically the SEC.  And in these Internet-friendly days, the SEC even has a website that Mr. Egan could use to easily file his whistleblower report with the SEC if he ever finds himself in this situation again.

Russ Berland is Of Counsel at the law firm of Stinson Morrison Hecker LLP and can be reached at via phone at 816.691.3180 and via email at rberland@stinson.com. 

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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 BNY Whistleblower – The Dodd-Frank Clock is Running, is Your Company Ready?

The time period that an internal whistleblower must wait before he or she can bring information to the Securities and Exchange Commission (SEC), under the Dodd-Frank Whistleblower provision, is within 120 days after the information has been internally reported to the company. Is your company ready for the speed in which an internal investigation must now be completed? It is not simply that an investigation has begun, which might somehow act to stay or provide a company a safe harbor. The investigation must be completed and a decision made on whether or not to report the results, if a violation of the Foreign Corrupt Practices Act (FCPA) is found, to the SEC. Not a decision ever to be taken lightly.

I have not been one of the corporate doomsayers in regards to the Dodd-Frank Whistleblower provisions. I generally believe that most employees do not want to report to the SEC or that they will run to the SEC to claim some far off chance at a bounty. I feel that most people take pride in their company and want it to succeed. (Of course if you fire an internal whistle-blower for blowing the whistle and then claim they were incompetent all along, well hell hath no fury like…) However, I may have to modify some of these views after reading an article in the Wednesday edition of the Wall Street Journal, entitled “Secret Informant Surfaces in BNY Currency Probe” by Carrick Mollenkamp.

In this article, Mollenkamp reported on informant Grant Wilson who, while working at Bank of New York Mellon Corp., (BNY), gathered information against his employer and provided documents to a whistleblower legal group, who then filed whistle-blower lawsuits against BNY. These lawsuits were later taken over or were used as the basis for other lawsuits filed by several states Attorneys General. Wilson’s input “culminated with the filing last week of separate civil lawsuits by the Justice Department in federal court…”

However, Wilson was no ordinary whistleblower. He was specifically recruited to be the insider and to provide such information by one Harry Markopolos, who was himself scorned by the SEC multiple times regarding his attempts to blow the whistle on Bernie Madoff to the SEC. (Think the SEC will not take him seriously the next time?) While the facts and circumstances of the various claims against BNY are very different from FCPA compliance, it does present a new twist on whistleblowing, that a person can be recruited in order to bring a civil claim. The Department of Justice (DOJ) has used confidential informants in white collar cases for some time.

However, Markopolos worked on the BNY case for several years and recruited Wilson 2 years before this last round of lawsuits were filed. The original lawsuits did not name Wilson as the whistleblower or ‘Relator’ in legal parlance. They were filed under the name of a Delaware partnership named “FX Analytics” to “provide anonymity for Wilson”. Further, the lawsuits were sealed. All total, the suits seek $2bn in from the bank and the whistleblower group can seek a share “of as much as 25% of the recovery”.

The old example of a whistleblower was generally thought to be of a disgruntled employee who had inside information or an employee who brought information to management and was terminated for their efforts. The BNY case provides a concrete example of a new type of whistleblower. Here you had an effort, for literally years, with recruitment of an employee with intimate knowledge of a company’s operations to provide ‘insider-information’. Could such an example be brought to other types of whistleblower actions and reports?

So does the BNY matter relate to Dodd-Frank Whistleblowers? It may be that such private efforts come from the civil side of the Bar, rather than direct reports to the DOJ. If your company does not perform an investigation within 120 days or more importantly, if the company does not report to the SEC within 120 days and the whistleblower does, the whistleblower can receive retroactive credit back to the original date of internal reporting. This may well be something of monetary value to a whistleblower’s group like the one which filed the lawsuit against BNY. Also, and more ominously suggested by the BNY matter, an aggressive plaintiff’s lawyer could claim that such failure get the investigation completed might be an indication of lost evidence, spoliation or simply that the company had a lack of commitment to compliance that it could not or would not dedicate the resources necessary to comply with the FCPA. The failure to report might be further evidence of nefarious intent.

So what can a company do in response? The first thing might be to determine 120 days from each internal whistleblower complaint that comes in and diary that date. The Compliance Department or Legal Department needs to respond very, very quickly to any allegations. In an article by Paul Koepp, entitled “Whistle-Blower Cases May Jump with New SEC Rules BIG Bounties”, he interviewed Russ Berland and Brian O’Bleness, of the law firm of Stinson Morrison Hecker LLP which has set up a Whistle-Blower Investigation and Response Team. Their response team is designed to bring in outside professional resources, to supplement those a company might (or might not) have available in-house, to meet these time sensitive deadlines under Dodd-Frank. This is a step beyond what Jim McGrath writes about regarding the need to bring specialized investigative counsel in to handle a matter. Your company needs specialized counsel and a response team ready to go. Stinson Morrison’s creation of such a team may well fill that need.

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, 2011

Social Media Power-How it Impacts Your Compliance Program

In a September 26, 2011 article in Forbes magazine, entitled “Social Power and the Coming Corporate Revolution”, author David Kirkpatrick argues that the social media revolution has so empowered employees and customers that these groups will soon be calling the shots in companies and not management. He bases this on the use by these groups of social media to obtain and convey information. In the past, management traditionally controlled information and, in a top down hierarchy, would usually dole it out on a need-to-know basis and those who hoarded the information were more powerful within an organization. However, the power and speed of social media have taken this most powerful leverage out of the hands of management and relocated it. Kirkpatrick believes that business leaders now need to demonstrate “authenticity, fairness, transparency and good faith.” If the leaders do not do so, then employees may well come to distrust them, which can lead to disastrous results.

All of this is true of your compliance program but even more so for your compliance program. There has been much gnashing of teeth over the Whistleblower provisions of Dodd-Frank. Corporate America fought tooth and nail to prevent employees from whistleblowing to the Securities and Exchange Commission (SEC) without first going through the company internal whistleblower or reporting systems. Here companies missed the point entirely. If they have a reporting system which is perceived as fair, employees which have a valid compliant or compliance issue to report will do so through the system. The reason is that employees are not employed to discover and report to the US government compliance violations. They work at companies because they desire to be employees. Put more simply – people do not go to work to report compliance violations under Dodd-Frank and wait years to see if they get any money out of it.

In compliance conferences this year a new round of anecdotal stories are making the rounds regarding just how nefarious the Dodd-Frank whistleblower program has become. It goes something like this: an unnamed foreign employee, when faced with termination is alleged to have threated to go to the SEC to report a compliance violation unless he (or she) is paid off. I say, let them go to the SEC. If you have a real compliance problem, your company had better have a detection system in place which rings some bells somewhere in your company.

The key is to develop trust in your overall compliance program. For a US company with a large overseas workforce, trust does not simply happen by ramming a Foreign Corrupt Practices Act (FCPA) compliance program down the throats of its non-US workforce. Kirkpatrick notes that “Trust is developed by sharing vulnerabilities.” He quotes Don Hagel that trust comes not from “the top executive dictating about what needs to be done and when, it’s about providing individuals with the power to connect.” I would add that it also comes from listening to your employees. If employees think that they have a vested interest in the outcome, they will work much harder to make sure the company has success.”

Part of this idea of trust falls under the concept of the Fair Process Doctrine; that is, if employees think that the process is fair, they will be more willing to accept results which they do not necessarily like. Another part of trust is not treating employees like second class step-children. I can remember when a friend from my home town, who worked for a major oil company, told me that it was like being in the third grade. They wanted you at your desk at 8am in your uniform (i.e. coat and tie for men) and to stay there until the closing bell rang. The same mentality is now true for companies which ban the use of social media tools at work. Kirkpatrick quotes Clara Shih that “at least in America our job is such an important part of our identity that most people want to talk about it.” And they do on Facebook, LinkedIn and Twitter. In other words, employees will talk about your company anyway, whether you tell them they cannot do so at work or not.

All of this means that your compliance program should embrace the underlying thesis of Kirkpatrick’s article. A company needs to develop trust under this new dynamic. By developing this new dynamic, having employees who want the company to succeed, they are more likely not to engage in bribery and corruption but also to detect and report it. I think that McNutly’s maxims would apply here (1) What did you do to prevent it?; (2) What did you do to detect it?; and (3) What did you do to fix it? Just image that power of your compliance program if you had employees driving the answers to these three questions in conjunction with your policies and procedures.

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, 2011