(The First Seven Months of the SEC Dodd Frank Whistleblower Program)
Principal at Compliance Strategists LLC and editor of the weekly CS Newsflash
So far, the sky has not fallen. That’s not to say there isn’t some curious weather activity.
Now that the SEC has logged at least seven full months of the Dodd Frank whistleblower program, it’s worth taking a moment for a brief status check on what we have learned so far. To do that we might consider two available clues: a public comment from an SEC official and the fate of a GE whistleblower who is suing the company for retaliation.
First, the SEC. Recently Sean McKessy, head of the new SEC whistleblower program, commented about the 2000 tips returned to date: "I’d be hard pressed to think of one where it was a true insider tip that was not reported to anyone else." That little nugget pretty much validates the results of the National Whistleblowers Center qui tam study that found nearly 90% of qui tam plaintiffs attempted to report their concerns either to their supervisors or compliance departments, before going to the government. This mirrors the anecdotal stories from advocates who say that by the time most whistleblowers come forward, they have already tried to report their concerns internally, not once, but three, four, nine times, and have been kicked in the shins (or far worse) for their troubles.
For context, the NWC had submitted the qui tam study to the SEC in December 2010 during the heated debate about the proposed whistleblower rules (which did not require reporters to raise their concerns internally first). At the time, the Chamber of Commerce and a list of big name companies, GE included, had vigorously argued that allowing whistleblowers to go directly to the SEC was a very bad, no good, terrible idea, because of the undermining impact it would have on internal compliance programs.
The alarmists feared that the rules would create an army of mercenary employees, lured by the promise of big bounties, to bypass internal reporting systems. A few commentators (myself included) wrote back then that the “the sky is falling” approach was probably hyperbolic. The SEC did the wise thing and declared that whistleblowers would be protected and potentially rewarded for raising their concerns through any channels – internal or external. And so far, it seems the flood of internal bounty hunters hasn’t exactly materialized. Based upon Mr. McKessy’s comment, it appears that Dodd-Frank whistleblowers actually do try to report internally first. Where it gets interesting is what often happens to them when they do that.
Enter the case of GE’s former Iraq country head, Khaled Asadi, who in the summer of 2010 reported to his supervisor that GE officials had hired an Iraqi official’s relative (“to curry favor” during an electrical bid process), as a potential FCPA violation. In fact, Mr. Asadi did what the entire Chamber of Commerce posse (and presumably the GE Code of Conduct) wanted him to do – he reported internally. So it’s all good, right? Well, not exactly. Mr. Asadi has filed a retaliation suit against GE, seeking Dodd Frank whistleblower protections, because evidently, GE did not care much for the internal report, thank you very much. Mr. Asadi says that after filing his complaint with the GE ombudsperson, he was “pressured to step down” from a role he held since 2006, given an "extremely negative and troubling performance review," and then fired – all before he even thought to proceed with the next step of reporting to the SEC.
So what’s the message here? The story is still unfolding but this much I know: it is a cold, cruel, perilous world out there for internal whistleblowers. And my hypocrisy radar is starting to beep. Because after all those loud complaints about Dodd Frank’s direct line to the SEC causing compliance programs across the land to blow up, GE now says Mr. Asadi should not get whistleblower protections because – wait for it – he didn’t file with the SEC. Oh, okay. Looks like that internal reporting thing didn’t turn out so well for Mr. Asadi.
Here are my takeaways so far, after 7 months of the controversial Dodd Frank whistleblower rules. First, as the NWC contends, most employees still report perceived misconduct internally, driven more by a sense of “outrage” than mercenary dreams of a bounty*. Second, some companies have taken the wrong message from Dodd-Frank. Instead of stepping up their programs to bolster management culture and encourage employees to speak up, they’ve gone the opposite way. They are setting up a siege mentality and waging war on whistleblowers. They have let the litigation defense interests of the General Counsel trump the value to the company (and the corporate culture) of the free flow of information. This course is not only ill-advised and illegal – it’s appallingly bad self-governance. But I’m ever the optimist. As the SEC unveils some of its more high-profile Section 922 cases, I’m hoping more companies will decide to travel the right road. It is time for them to finally fix what’s broken in their culture and encourage, rather than punish, participation in their internal reporting systems.
*But see my column on the BNY Mellon/State Street cases organized by Harry Markopolos here.