FCPA Compliance and Ethics Blog

April 30, 2015

King Arthur Week – The Green Knight and the Protection of Whistleblowers – Part IV

Filed under: Jordan Thomas,SEC,Whistleblower,WSJ — tfoxlaw @ 5:41 am
Tags: , ,

Green KnightWe continue our King Arthur themed week with an exploration of one of the most interesting characters in the Arthur canon, The Green Knight, so called because his skin and clothes are green. The meaning of his greenness has puzzled scholars since the discovery of the poem, that identifies him as the Green Man, a vegetation being in medieval art; a recollection of a figure from Celtic mythology; a Christian symbol or the Devil himself. According to Wikipedia, C. S. Lewis suggested the character was “as vivid and concrete as any image in literature” and J. R. R. Tolkien called him the “most difficult character” to interpret in the introduction to his edition of Sir Gawain and the Green Knight. His major role in Arthurian literature includes being a judge and tester of knights, and as such the other characters see him as friendly but terrifying and somewhat mysterious.

In his primary story with Sir Gawain, the Green Knight arrives at Camelot during a Christmas feast, holding a bough of holly in one hand and a battle-axe in the other. Despite disclaim of war, the knight issues a challenge: he will allow one man to strike him once with his axe, under the condition that he return the blow the following year. At first, Arthur takes up the challenge, but Gawain takes his place and decapitates the Green Knight, who retrieves his head and tells Gawain to meet him at the Green Chapel at the stipulated time. One year later, while Gawain is traveling to meet the Green Knight, he stays at the castle of Bercilak de Hautedesert. At Bercilak’s castle, Gawain’s loyalty and chastity is tested, Bercilak sends his wife to seduce Gawain and arranges that they shall exchange their gains for the other’s. On New Year’s Day, Gawain meets the Green Knight and prepares to meet his fate, where upon the Green Knight feints two blows and barely nicks him on the third. He then reveals that he is Bercilak, and that Morgan le Fay had given him the double identity to test Gawain and Arthur.

I thought about this story of testing when I read an article in the Wall Street Journal (WSJ), entitled “SEC Gives More Than $600,000 to Whistleblower in Retaliation Case” by Rachel Louise Ensign. She reported on the Paradigm securities matter where an award was made to the whistleblower, which was settled by the firm late last year. The settlement was for $2.2MM and $600, 000 of that amount was paid to the whistleblower for the firm’s retaliation against him. This was the first award to a whistleblower for retaliation from the act of whistleblowing. The award is 30% of $2.2MM, which is the maximum amount a tipster can get under the program. The agency said the “unique hardships” he faced were a factor in the size of his award. Securities and Exchange Commission (SEC) Enforcement Director, Andrew Ceresney, was quoted in the article as saying ““We appreciate and recognize the sacrifice this whistleblower made and the important role the whistleblower played in the success of the SEC’s first anti-retaliation enforcement action.””

This award to a whistleblower caps a stunning couple of weeks for whistleblowers who have brought information forward under the Dodd-Frank whistleblowing provisions. First there was the KBR pre-taliation fine and Cease and Desist Order.  In this matter, KBR was fined for having language in its internal employee Confidentiality Agreement (CA) that required employees to go to the company’s legal department before releasing certain confidential information to outside parties such as the SEC. The SEC held that such restrictions violated the “whistleblower protection Rule 21F-17 enacted under the Dodd-Frank Act. KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department. Since these investigations included allegations of possible securities law violations, the SEC found that these terms violated Rule 21F-17, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.” This was in the face of zero findings that KBR had actually used such language or restrictions to prevent any employees from whistleblowing to the SEC.

In another part if its Press Release regarding the KBR case Director Ceresney said, “By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us. SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC.  We will vigorously enforce this provision.”

Then we have the case of Tony Menendez, who was profiled by Jessie Eisinger in an article entitled “The Whistleblower’s Tale: How An Accountant Took on Halliburton”. The article told the story of a whistleblower, who took his concerns to government regulators and was then outed by the company as the SEC whistleblower and retaliated against. Interestingly, the SEC took no action on the whistleblower claims and the company argued on appeal that “since the SEC hadn’t brought any enforcement action, his complaint about the accounting was unfounded.” The company also claimed that simply because the whistleblower was identified by name, this alone was not the basis for a “material adverse action” against him. While Halliburton won at the administrative hearing level, it lost at the Fifth Circuit Court of Appeals.

So now there is a Court of Appeals opinion holding that if whistleblowing was a “contributing factor” only to the retaliation. Further, the employee is not required to prove motive. Well-known whistleblower expert Jordan Thomas also explained in the Eisinger article, “Whistleblowers can be victims of retaliation even if they are ultimately proved wrong as long as they have a “reasonable” belief that the company was doing something wrong.”

It appears that the SEC will be more like the Green Knight going forward. It will be a tester to determine if retaliation against whistleblowers occurs. From preventing companies from trying to stop whistleblowing via CA’s, to monetary awards for retaliation even where there is no SEC or government action taken, to the award to whistleblowers as a part of an SEC settlement for retaliation by their former employers; the SEC is making very clear that they will test how your company treats whistleblowers. If the SEC finds your company’s conduct lacking, you may well be facing something like the Green Knight going forward.

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

November 15, 2011

The SEC Whistleblower Program: A Game-Changer for FCPA Violations

Ed. Note-today we host a post by Jordan A. Thomas.

Jordan A. ThomasIn August, the Securities and Exchange Commission (SEC) finalized and implemented a whistleblower program enacted under Dodd-Frank, which will dramatically alter the landscape for public and private companies alike. This program, and its first cousin, the SEC cooperation program, will have a game-changing impact on the detection, punishment and deterrence of violations of the Foreign Corrupt Practices Act (FCPA). Indeed, in the SEC’s November 2011 release highlighting enforcement activity over the fiscal year ending in September, the agency’s Foreign Corrupt Practices Act Unit, formed in 2009, recorded its first 20 FCPA enforcement actions in the fiscal year.

During my tenure as a senior attorney at the SEC, I played a leadership role in drafting the provisions of the whistleblower program and served as the first National Coordinator of the cooperation program. Both programs emerged as a response to the serial misconduct pervading the commercial marketplace.  And, importantly, both programs recognize that for law enforcement to be more proactive and effective in identifying unlawful conduct in domestic markets and abroad, it needs greater participation from the public at large.

While the private sector’s role in the broader enforcement context is an established part of American jurisprudence, that role has diminished in recent years.  Some of this can be attributed to recent court decisions that limit the role of private litigants in securities enforcement.  But another reason likely rests on the fact that coming forward to report misconduct has historically rendered the whistleblower persona-non-grata at best, and, worse, exposed to tremendous personal and professional risk.

In this way, the whistleblower program is revolutionary.  The program provides significant financial incentives (10-30% of the monetary sanctions collected) to whistleblowers providing original information about possible violations of the federal securities laws.  The new anti-retaliation protections are also robust, protecting qualified whistleblowers for up to 10 years, regardless of whether their good-faith reports are ultimately verified.  Additionally, whistleblowers may remain anonymous until they wish to receive their award – if they are represented by counsel.

The broad reach of these regulatory developments creates serious implications for business across the globe.  The reported misconduct may occur anywhere.  Any violation of US federal securities laws qualifies.  International organizations and individuals that do business or have personal contacts with the US can be subject to jurisdiction.  A whistleblower may be any individual or group of individuals, regardless of citizenship, that provides information not known to the SEC or solely derived from public sources.

Given that FCPA violations are both common and the subject of increased law enforcement focus, it is a safe bet that numerous FCPA enforcement actions will be initiated as a result of whistleblowers.  (This trend is certainly confirmed in my own law practice.)  Furthermore, since the monetary sanctions in this area are large and headline-grabbing, whistleblowers will have a greater incentive to come forward. Consider the record Siemens settlement in 2008, under which the company resolved FCPA charges for $1.6 billion in fines, penalties and disgorgement of profits, including $800 million to US authorities.  A qualified whistleblower, meeting the various eligibility requirements, could have received up to $240 million under the new SEC whistleblower program. 

This is an area of serious multi-agency scrutiny.  FCPA enforcement actions have doubled since 2009.  According to the SEC’s website, in the first half of 2011, ten different enforcement actions have reaped half a billion in penalties from blue-chip companies, including Johnson & Johnson and IBM.  Significantly, because many FCPA actions have parallel proceedings by DOJ, whistleblower awards, which extend to related actions, are likely to be even higher.

Illustrating the financial significance of the parallel proceedings for whistleblowers, in April 2011, the SEC announced a settlement with Johnson and Johnson to resolve charges that the global giant violated the FCPA by bribing public doctors in several European countries and paying kickbacks to Iraq to illegally obtain business.  J&J agreed to pay more than $48.6 million in disgorgement and prejudgment interest to settle the SEC’s charges and an additional $21.4 million to DOJ to settle criminal charges.

Also in April, the SEC and Comverse Technology, Inc. reached a settlement in connection with alleged FCPA violations. Comverse offered to pay approximately $1.6 million in disgorgement and prejudgment interest to the SEC and $1.2 million in criminal penalties to the Department of Justice.

In May 2011, the SEC entered into its first ever Deferred Prosecution Agreement (DPA) under the cooperation program with Tenaris S.A.  The investigation focused on allegations that the global manufacturer violated the FCPA by bribing Uzbekistan government officials during a bidding process to supply pipelines for transporting oil and natural gas.  Under the terms of the DPA, Tenaris must pay $5.4 million in disgorgement and prejudgment interests and an additional $3.5 million criminal penalty in a Non-Prosecution Agreement with the Justice Department.

As US enforcement bodies ante up their efforts and expand their reach, the trend is gaining traction in other jurisdictions.  The UK Bribery Act, finalized this past July, extends to any company with a UK office, employees who are UK citizens, or a company that provides services to a UK organization.  The fines are unlimited and the Act has a broad jurisdictional reach, affecting the majority of US public companies.  In addition, in October of this year, the UK Serious Fraud Office launched “SFO Confidential,” a hotline for insiders to report fraud and corruption.  This development marked a major shift in position because the Financial Services Authority has historically discouraged external reporting and does not guarantee confidentiality to whistleblowers.

These parallel developments in the UK signal a larger recognition that regulators need to think outside of geographic and investigative boundaries.  As both the FCPA and Bribery Act have extraterritorial reach, so too does the recognition that whistleblowers can and should play a key role in reporting such violations.

What’s a company to do?  Invest.

As business grows ever more global, expansion into emerging markets is an exciting and promising commercial reality.  But it is also rife with exposure.  Companies need to invest in transparency, invest in compliance and invest in their people.  Even companies with top-notch corporate compliance programs must be on their guard.  Given the significant retaliation protections and major financial incentives, whistleblowers will come forward to report FCPA violations.  People with original information should be encouraged to report internally, protected from retaliation when they do, and assured their reports will be properly addressed.

This is a bare minimum of corporate integrity.  In a world where FCPA enforcement actions are on the rise, and reputational damage can level a company, not meeting this bare minimum is a cost no company can afford.


Jordan A. Thomas is a partner with Labaton Sucharow and Chairs its Whistleblower Representation Practice.  He previously served as a senior attorney with the SEC and DOJ.   He can be reached via email at jthomas@labaton.com and via phone at 212-907-0836.


Episode 23 of This Week in FCPA is up. Check Howard Sklar and myself as we discuss the Lanny Breuer speech at the ACI National FCPA Conference, Olympus, the Bribery Act and more.

Blog at WordPress.com.