The media routinely reports SEC whistleblower settlements and the agency has not been shy to boast about its accomplishments. The leaders of the SEC have been extremely vocal about its zero tolerance policy for securities law violations. In fact, the SEC Whistleblower Program is one of the U.S. Government’s most aggressive whistleblower programs. Yet, despite the agency’s clear demonstration that it means business and will actively prosecute individuals and financial institutions participating in fraud, a recent survey of financial services professionals suggests that financial corporations have not changed their practices and continue to engage in unethical behavior. Specifically, the survey showed that more than one-third of the survey respondents with $500,000 or greater annual incomes have witnessed or have firsthand knowledge of workplace misconduct.
Some financial institutions appear to value profits and financial gains over fostering ethics and integrity. Nearly one-third of respondents believe that their company’s compensation structure or bonus plans incentivize employees to compromise ethics or violate the law (32%). Corporations are also taking significant measures to prevent employees from reporting financial fraud to the government. Employees are asked to sign confidentiality agreements that prohibit reporting illegal or unethical activities to government authorities and whistleblowers often face retaliatory actions such as demotions, suspensions, harassments, and in the most extreme circumstances, termination.
SEC officials have spoken candidly about whistleblower protection and warned financial corporations and their leaders against taking actions that impede individuals’ rights to report incidences of financial fraud to the government. In April, the SEC made clear that these statements are not empty threats. The SEC started the month by announcing its first enforcement action against a corporation for the use of confidentiality agreements to silence potential whistleblowers from coming forward with information about potential securities law violations.
The agency charged KBR with violating Rule 21F-17, which prohibits individuals and entities from the ability of potential whistleblowers to report financial fraud and illegal activities to the SEC. Specifically, KBR required witnesses involved in internal investigations to sign confidentiality statements warning that they could be terminated if they discussed the investigation with outside parties without the approval of the legal department. A blanket prohibition with such dire consequences strongly discourages potential whistleblowers to report misconduct to the SEC. KBR has agreed to pay a monetary fine and to amend its confidentiality statement to settle the SEC charges. Announcing the settlement with KBR, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, encouraged “other employers [to] similarly review and amend existing and historical agreements that in work or effect stop their employees from reporting potential violations to the SEC.”
The agency continued to demonstrate its commitment to whistleblower protection by announcing in late April, a maximum whistleblower award payment in the SEC’s first retaliation case – In the matter of Paradigm Capital Management, Inc. and Candace King Weir, File No. 3-15930. The whistleblower, the head trader of the hedge fund, faced immediate retaliation after reporting misconduct to the agency, including being removed from the head trader position, being stripped of his supervisory responsibilities, and having his job function changed from trader to compliance assistant. In explaining the rationale for the maximum award, Andrew Ceresney, Director of the SEC’s Division of Enforcement, stated “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. The Enforcement Division is committed to taking action when appropriate against companies and individuals that retaliate against whistleblowers.”
As the SEC intensifies its focus on whistleblower protection, employees should feel more comfortable communicating with the agency about potential financial fraud and securities violations. Still, the decision to blow the whistle can be daunting. The attorneys at Loevy & Loevy have extensive experience with whistleblower claims. If you are considering making a claim, we encourage you to learn more about our SEC & Financial Fraud practice. It is important to involve an attorney early in the process to achieve the highest level of protection and success.