A group representing whistleblower interests asked the Securities and Exchange Commission “in the strongest possible terms” on Monday to withdraw its current proposal governing a new whistleblower bounty program.
In a letter address to SEC Chairwoman Mary Schapiro, the National Whistleblowers Center suggested the agency rewrite the proposed rules, which it said overly favored corporate interests and did not do enough to encourage potential whistleblowers to come forward.
The new financial regulatory law enacted in July allows the SEC to reward individuals who provide information about securities law violations with a cut of any related sanctions larger than $1 million.
The agency proposed a set of rules to govern the program earlier this month.
Companies have worried that the new bounty could undercut internal reporting mechanisms and prompt employees to head straight to the SEC. In response to those concerns, the rules excluded some individuals from receiving the awards. Those who participated in the fraud, or those whose job it is to uncover the fraud — compliance personnel, for example — are ineligible in most cases under the SEC’s proposal.
The Whistleblower Center is raising concerns about those exclusions.
“Under the rule, they have essentially eliminated the two central sources of all main whistleblower complaints,” the group’s director, Stephen M. Kohn, said in an interview with Just Anti-Corruption. ”Those are two groups of people who would actually know” about the fraud, he said.
A similar — and enormously successful — program designed to help the Justice Department uncover government contracting fraud does not include such restrictions, Kohn said. The DOJ announced Monday it had recovered around $3 billion in the past year in such cases brought with the help of whistleblowers under the False Claims Act.
The SEC program will not be as successful, Kohn said, if it retains the limits outlined in the proposal. By Kohn’s count, the proposed rules disqualify seven categories of whistleblowers not excluded under the False Claims Act program. “What they’ve done is come in with a hammer where you needed a scalpel,” he said.
Defense lawyers said the auditors and compliance officers that act as whistleblowers in False Claims, or qui tam cases, don’t always tell their employers about the misconduct before filing suit. The defense bar has pushed the SEC to change that dynamic in its bounty program.
“There are legitimate concerns that whistleblowers may have the best intentions but may have incorrect information, and having a company address some of those issues in the first instance is beneficial to public policy,” said Roderick L. Thomas, who spent a decade as a federal prosecutor in the U.S. Attorney’s office in the District of Columbia and now chairs the white collar practice at Wiley Rein LLP.
The Whistleblower Center seems to disagree. It also submitted a Freedom of Information Act request for notes and other documents from October meetings between SEC officials and business executives, including those from Gibson, Dunn & Crutcher LLP clients Johnson & Johnson, Tyco International, Pfizer Inc., JPMorgan Chase & Co., and Kraft Foods.
Attorneys for whistleblowers previously told Just Anti-Corruption they have already received a “substantial” number of complaints in response to the SEC’s new program and a similar three-year old program at the Internal Revenue Service.
Updated at 4:00 p.m.