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Law360 (July 8, 2020, 12:49 PM EDT) --
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| Arian June |
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| Andrew Ceresney |
To put that number in context, the SEC received 5,212 tips in all of fiscal year 2019.[2] There are several factors that may be driving the recent surge in SEC whistleblower tips.
One possibility is that the uptick in whistleblower activity reflects increasing rates of potential misconduct related to recent economic turmoil. Extreme market volatility such as what has been experienced during the COVID-19 pandemic can trigger increased market abuse and related misconduct, including accounting fraud and disclosure failures designed to mask losses.
It is also possible that widespread layoffs and furloughs triggered by COVID-19's historic economic impact have spawned an increased level of whistleblowing activity, as some employees report compliance concerns just as they are being let go. Some attribute the recent surge in whistleblower tips to the widespread remote working arrangements in effect since the start of the pandemic.[3]
With the majority of corporate employees working entirely from home, tipsters arguably have greater space and opportunity to report potential misconduct to the SEC from the privacy of their living rooms with less fear of being discovered by managers and colleagues.
It is also likely that the SEC's recent spate of whistleblower awards since March — including the highly publicized $50 million award paid to a single whistleblower in June[4] — have caught the attention of thousands of would-be tipsters hoping to cash in.
Indeed, the latest high-dollar award brings the total amount awarded to SEC whistleblowers to over $500 million, with approximately $100 million of that amount coming from fiscal year 2020 alone.[5]
The SEC also reports that it has opened hundreds of new enforcement investigations since mid-March,[6] some of which relate to COVID-19 matters, but many others in traditional enforcement areas. In this environment, companies must take extra precautions to prevent misconduct and respond appropriately to whistleblower reports.
Companies should consider employing the following five strategies to mitigate whistleblower-related risks.
1. Don't let issues fester.
According to the SEC, 85% of employee whistleblower award recipients first reported their concerns internally or understood that supervisors or compliance personnel knew potential violations, yet failed to address them.[7]
Companies should investigate employee complaints thoroughly and in a timely manner. That includes not only reports of potential compliance violations, but also complaints about bullying and harassment. Employees are far more likely to resort to external reporting if they feel mistreated and undervalued.
In the short term, legal and compliance functions can address issues promptly by leveraging technologies like videoconferencing and remote data collections. The investigative process should be properly documented and the reporting employee should be informed of the company's progress, as appropriate.
2. Be mindful of layoffs.
It is inevitable that substantial layoffs and reductions in force will spawn increased numbers in employee tips and complaints. Some employees may attempt to secure protection from layoffs by submitting purported whistleblower complaints just prior to termination.
Former employees, who otherwise may have weighed risks of retaliation or reputational damage from reporting potential misconduct, may now feel unburdened to report with little to no downside.[8]
To mitigate these risks, it is imperative that legal and compliance functions work in tandem with human resources departments to ensure that employee complaints have been thoroughly investigated and addressed. With careful planning and execution, exit interviews can be a useful resource for granting employees an opportunity to share any compliance concerns before they leave the company.
3. Review policies and procedures.
While companies should always periodically evaluate their policies and procedures around the receipt of whistleblower complaints and nonretaliation, this is especially true in the context of a completely digital workplace.
Policies and procedures should be adapted to account for remote working, and should be made easily available to employees. Companies should also use this opportunity to confirm that separation agreements and other employee agreements are compliant with the SEC's whistleblower rules.
Under SEC Rule 21F-17, such agreements must not include language that impedes employees from providing information about potential securities violations to the SEC.[9]
4. Prioritize corporate compliance programs.
Companies should prioritize compliance programs in this time of disruption. Although some compliance-related tasks may not function as efficiently when conducted remotely, companies should be creative and flexible when investigating employee complaints. In doing so, companies may find it necessary to allocate more resources to compliance needs.
Legal and compliance functions should also confirm that procedures and mechanisms for reporting potential compliance concerns are well publicized. Companies should have an action plan in place designed to identify, triage, and investigate an increased number of such concerns promptly.
5. Monitor regulatory developments.
Regulatory guidance and announcements related to COVID-19 are developing rapidly as the pandemic continues to affect businesses throughout the world. The SEC's Division of Corporate Finance, for example, issued guidance in March and again on June 23 regarding disclosure and other securities law obligations regarding the impacts of COVID-19.[10]
The SEC's co-directors of the Enforcement Division also recently issued a statement regarding the misuse of nonpublic information amid the recent market volatility created by the pandemic.[11] That statement reminded publicly traded companies of their regulatory obligations created by Regulation FD and selective disclosure prohibitions to guard against improper dissemination and use of material nonpublic information.
The SEC's statement was issued the day before the U.S. Department of Justice released a memorandum directing all U.S. attorneys to prioritize the investigation of price gouging schemes.[12] Both announcements serve as a reminder that government agencies remain focused on attempts to garner illicit profits in the midst of the ongoing pandemic.
Companies should stay attuned to regulatory developments and expectations as the impact of COVID-19 continues to weigh on financial performance and overall results.
While increased numbers of whistleblower tips and complaints may be unavoidable, companies can take these precautions to reduce risk, ensure ongoing compliance, and address concerns promptly. Companies should also take steps to remind all employees, including members of management, that nonretaliation policies will be taken seriously.
Update: This article has been updated with additional information regarding the U.S. Supreme Court's June 22 decision in Liu v. SEC and the SEC Division of Corporate Finance's June 23 guidance. It has also been updated to reflect that Suzanne Zakaria contributed to this article.
Arian M. June is a partner at Debevoise & Plimpton LLP.
Andrew J. Ceresney is a partner at the firm. Previously, he served as director of the SEC's Division of Enforcement.
Suzanne Zakaria, an associate at Debevoise, contributed to this article.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Steven Peikin, Remarks at the Securities Enforcement Forum West 2020 (May 12, 2020) (transcript available at https://www.sec.gov/news/speech/keynote-securities-enforcement-forum-west-2020#_ftn20).
[2] U.S. Sec. and Exch. Comm'n, 2019 Annual Report to Congress: Whistleblower Program 11 (2019) (available at https://www.sec.gov/files/sec-2019-annual-report-whistleblower-program.pdf).
[3] See Brooke Masters, Homeworking Makes Spilling Corporate Secrets All the Easier, Fin. Times (June 9, 2020), https://www.ft.com/content/9fdd9de9-00ea-4fd4-a558-6b43e8b774a3.
[4] Press Release, U.S. Sec. and Exch. Comm'n, SEC Awards Record Payout of Nearly $50 Million to Whistleblower (June 4, 2020) (on file at https://www.sec.gov/news/press-release/2020-126). It remains to be seen whether a June 22, 2020 U.S. Supreme Court decision will diminish the size of future whistleblower awards. See Liu v. SEC
, No. 18-1501, slip op. at 1 (U.S. Sup. Ct. June 22, 2020). The Court held that the SEC could seek disgorgement in alleged financial fraud cases, but observed that the recoveries needed to "deduct legitimate expenses" and could not exceed a wrongdoer's net profits from the alleged fraud. Id. at 18-19. This may in turn decrease whistleblower awards since "such payouts are tied to the total amount of monetary penalties issued in a case." Mengqi Sun, Supreme Court's Ruling on SEC Disgorgement Could Shrink Whistleblower Awards, WALL ST. J. (June 23, 2020), https://www.wsj.com/articles/supreme-courts-ruling-on-sec-disgorgement-could-shrink-whistleblower-awards-11592948327. Further and as a result of Liu, future whistleblower awards may decrease in those cases where the SEC intends to deposit disgorgement proceeds to the Treasury instead of returning them to victims because they cannot be identified or because the costs of distribution are too high.[5] Press Release, supra note 4; Press Release, U.S. Sec. and Exch. Comm'n, SEC Awards $125,000 to Whistleblower (June 23, 2020) (on file at https://www.sec.gov/news/press-release/2020-141).
[6] See Peikin, supra note 1 ("In that same period [since mid-March], [the SEC] has opened hundreds of new investigations, many COVID-19 related, but many in other traditional areas.").
[7] U.S. Sec. and Exch. Comm'n, 2019 Annual Report to Congress, supra note 2 at 18.
[8] See Katanga Johnson, Armed with Whistleblower Tips, U.S. SEC Cracks Down on Coronavirus Misconduct, Reuters, May 26, 2020, https://www.reuters.com/article/us-health-coronavirus-sec-whistleblowers/armed-with-whistleblower-tips-u-s-sec-cracks-down-on-coronavirus-misconduct-idUSKBN2321FI.
[9] 17 CFR § 240.21F-17.
[10] See Coronavirus (COVID-19), U.S. Sec. and Exch. Comm'n Div. of Corp. Fin. (Mar. 25, 2020), https://www.sec.gov/corpfin/coronavirus-covid-19. Coronavirus (COVID-19) – Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources, U.S. SEC. AND EXCH. COMM'N DIV. OF CORP. FIN. (June 23, 2020), https://www.sec.gov/corpfin/covid-19-disclosure-considerations.
[11] Public Statement, U.S. Sec. and Exch. Comm'n, Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC's Division of Enforcement, Regarding Market Integrity (Mar. 23, 2020) (on file at https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity).
[12] Memorandum from William P. Barr, U.S. Att'y Gen., to All Heads of Dep't Components and Law Enf't Agencies and All U.S. Att'ys (Mar. 24, 2020) (on file at https://www.justice.gov/file/1262776/download).
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