Laying the Foundation: Ethical Issues in Labor Relations
November 10, 2014
THE PRACTICING LAW INSTITUTE: FINANCIAL SERVICES INDUSTRY REGULATORY COMPLIANCE & ETHICS FORUM 2014
Focus Topics:
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Whistleblower Laws 2 A look at the various regulators: Who’s who? 3 Compliance programs and the Whistleblower 4
The changing regulatory landscape for financial services firms 1
Responding to the Whistleblower complaint 5
Compliance programs and the Whistleblower 4 Responding to the Whistleblower complaint 5
Focus Topics:
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A look at the various regulators. Who’s who? 3
Whistleblower Laws 2
The changing regulatory landscape for financial services firms 1
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This is the Year Of The Whistleblower. Employers who do not take steps to address any employee concerns before they reach “whistleblower” status—like strengthening internal reporting and compliance programs—do so at their peril. Federal law has long provided protections to employees who report regulatory violations by their employers. More than twenty federal statutes in areas such as food safety, aviation, and environmental law contain whistleblower provisions. But the new age of whistleblowing came into being in September 2011, when Bradley Birkenfeld received a staggering $104 million from the IRS for reporting a tax evasion scheme involving his employer UBS—even though he was convicted and jailed for participating in the very same scheme! Since then, whistleblowing has snowballed.
The Dodd-Frank financial reform law added additional whistleblower provisions and led financial regulators such as the Securities and Exchange Commission (“SEC”) to open special whistleblower offices. The SEC’s Office of the Whistleblower, established in 2011, was a bit slow off the mark and only granted its first award in August 2012 (for a nominal amount). But in October 2013, the SEC announced it had awarded more than $14 million to an individual. This large cash payout—which was called a “game changer” at the time—will lure employees in various other companies to be the next to win a whistleblower jackpot. The securities plaintiffs’ bar has also created their own “whistleblower” practice groups which are actively trolling to find the world’s next Bradley Birkenfeld.
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SUNTRUST
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BANK OF AMERICA’S COUNTRYWIDE ORDERED TO PAY 1.3 BILLION
“The whistleblower did everything feasible to correct the issue internally. When it became apparent that the company would not address the issue, the whistleblower came to the SEC in a final effort to correct the fraud and prevent investors from being harmed...”
"It’s the first award for a whistleblower with an audit or compliance function at a company."
"The award will be the largest made by the SEC’s whistleblower program to date and the fourth award to a whistleblower living in a foreign country, demonstrating the program’s international reach..”
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Ongoing Trend
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Changing Landscape: Whistleblowers As Regulators
Changing Landscape: Whistleblowers As Regulators
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qui tam provisions allow private citizens to file false claims lawsuits on behalf of the government
2013 752 qui tam suits filed
$345M recovered by whistleblowers
$2.9B recovered 30 If the government prevails, the whistleblower (relator) receives up to %
Changing Landscape: Whistleblowers As Regulators
2012 Bank Settlements
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JPMorgan Chase $45,000,000 Countrywide Home Loans, Inc. $45,000,000 PNC Bank $38,000,000 First Tennessee Bank $16,000,000 SunTrust Mortgage $10,200,000 CitiMortgage $7,500,000
$161,700,000
Six banks settled an FCA lawsuit alleging they illegally charged veteran borrowers hidden fees on refinanced home loans backed by Veterans Administration:
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3,238 whistleblower tips, complaints or referrals
Changing Landscape: Whistleblowers As Regulators
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…the Office paid
whistleblowers a total
of over $14 million in recognition of their
contributions …
3,238 whistleblower tips, complaints or referrals
Changing Landscape: Whistleblowers As Regulators
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“The most common complaint categories reported by whistleblowers in the 2013 fiscal year were Corporate Disclosures and Financials (17.2%), Offering Fraud (17.1%), and Manipulation (16.2%). By comparison, in Fiscal Year 2012, the most common complaint categories reported by whistleblowers also were Corporate Disclosures and Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%).”
Changing Landscape: Whistleblowers As Regulators
2013 IRS Whistleblower Office Report to Congress
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Changing Landscape: Whistleblowers As Regulators
2013 IRS Whistleblower Office Report to Congress
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Changing Landscape: Whistleblowers As Regulators
2013 IRS Whistleblower Office Report to Congress
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Reasons Regulators Rely on Whistleblowers
Changing Landscape: Whistleblowers As Regulators
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A lesson of the bank failures in 2007-08 was that even with accounting controls, many of the accounting financial transactions were too complex for those outside of the financial services community to sufficiently comprehend the risk. Sherron Watkins
Enron Corporation Cynthia Cooper
WorldCom
Many accounting scandals were first identified and disclosed internally by whistleblowers.
credibility
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• positive feelings about their jobs
• good job performance
• professional positions
• highly educated
• higher-level or supervisory positions
• senior tenure with the company
• part of a large group within the organization
• believe the company will be responsive
• view whistle-blowing as integral to their role
Whistleblowers gain credibility with certain common traits.
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• consistently the most successful method for detecting occupational fraud
• more effective than combined management review, internal and external audits
• 72% of tips warranted investigation: 44% of investigations resulted in corrective action
tips
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employees • Employees were the source of almost half of all tips that led to successful fraud
detection. • Next are customers (21.6%), anonymous (14.6%) and vendors (9.6%).
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reporting • Corporations may lack effective internal reporting channels. • Lack of reporting systems and incentives
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retaliation
Compliance programs and the Whistleblower 4
The changing regulatory landscape for financial services firms 1
Responding to the Whistleblower complaint 5
Focus Topics:
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A look at the various regulators. Who’s who? 3
Whistleblower Laws 2
Whistleblower Laws – Sarbanes-Oxley
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No [public] company . . . may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee … to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investment is conducted by— (A) A Federal regulatory or law enforcement agency; (B) Any Member of Congress or any committee of Congress; or (C) A person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover or terminate misconduct
SOX 18 U.S.C. § 1514A
Protection extends to employees of contractors and subcontractors
Courts disagree about
whether reports of fraud need to be about shareholders
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Sarbanes-Oxley: Whistleblower Shield Expanded
Congress was “aiming to encourage whistle-blowing by contractor employees who suspect fraud involving the public companies with whom they work.”
“Whistleblower protection includes employees of a public company’s private contractors and subcontractors.”
Whistleblower Laws – Dodd-Frank
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No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower— . . . in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), including section 10A(m) of such Act (15 U.S.C. 78f(m)), section 1513(e) of title 18, United States Code, and any other law, rule, or regulation subject to the jurisdiction of the Commission
Dodd-Frank 15 U.S.C. § 78U-6
Boundaries of Act disputed by courts
May not require disclosure to SEC for whistleblower protections to apply
May not apply to overseas employees of US publicly traded companies, but SEC states it is still applicable to whistleblowers
Courts Are Still Defining The Boundaries Of Dodd-Frank Act
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Asadi v. G.E. Energy, LLC, 720 F.3d 620 (5th Cir. 2013) The employee must actually report to the SEC
Kramer v. Trans-Lux Corp., Case No. 11-CV-1424, (D. Conn. Sept. 25, 2013); employees need not report direct to the SEC
Wagner v. Bank of Am. Corp., No. 12-cv-00381, 2013 WL 3786643, at *4 (D. Colo. July 19, 2013) Must report to the SEC to be considered a “whistleblower.”
Banko v. Apple Inc.,No. 13-cv-2977, 2013 WL 7394596, at *6 (N.D. Cal. Sept. 27, 2013) Under Dodd-Frank, employee must report to SEC to be a “whistleblower.”
“… This award of more than $30 million shows the international breadth of our whistleblower program as we effectively utilize valuable tips from anyone, anywhere to bring wrongdoers to justice. …”
Liu v. Siemens, A.G., 763 F.3d 175 (2nd Cir. Aug. 14, 2014), Dodd Frank does not apply extra-territory to oversees employees of US publicly traded companies
Whistleblower Laws - Enforcement
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Record-breaking $30 million award against company
SEC to take action against companies that try to stop whistleblowers from coming forward
Retaliation cases are a priority
Whistleblower office will alert enforcement staff of evidence of retaliation
Whistleblower Laws – False Claims Act
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(1) IN GENERAL.
Any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor, or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, or agent on behalf of the employee, contractor, or agent or associated others in furtherance of other efforts to stop 1 or more violations of this subchapter.
(2) RELIEF.
Relief under paragraph (1) shall include reinstatement with the same seniority status that employee, contractor, or agent would have had but for the discrimination, 2 times the amount of back pay, interest on the back pay, and compensation for any special damages sustained as a result of the discrimination . . .
False Claims Act 31 U.S.C. §§ 3729-3733
Primary tool in combating fraud against federal government
Whistleblowers are entitled to receive between 15 to 30 percent of amount awarded to the government
As of 2014, thirty states and the District of Columbia have created false-claims statutes, modeled on the federal False Claims Act
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2014 Whistleblower Financial Services Suits
in False Claims Act settlements in the first half of 2014.
Recent Laws Encourage Whistleblowing
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IRS & THE TAX RELIEF HEALTHCARE ACT OF 2006
Law/Whistleblower Provisions a. Section 406 of the Tax Relief Healthcare Act of 2006 made
significant changes to the IRS Informant Awards program. b. Section 406 called for the creation of an IRS Whistleblower
Office responsible for reviewing tips.
Whistleblower Rewards a. Previously, whistleblowers were limited to the IRS Informant
Awards program. The program was discretionary with a defined award percentage (15% of collected taxes and penalties) and an award cap ($10 million).
b. Under IRS Whistleblower Program, awards are not discretionary and provide a higher award percentage (15 to 30 percent of the collected proceeds), and have no cap on the award amount where the amount in dispute exceeds $2 million.
c. If a whistleblower does not meet the $2 million threshold for the IRS Whistleblower program, the IRS is authorized to pay for information relating to violations of the internal revenue law that result in recovery of tax.
Compliance programs and the Whistleblower 4
The changing regulatory landscape for financial services firms 1
Responding to the Whistleblower complaint 5
Focus Topics:
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Whistleblower Laws 2 A look at the various regulators. Who’s who? 3
Who’s Who: The Various Regulators
FINANCIAL SERVICES
Economic services provided by organizations that manage money. These services include:
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Credit Unions
Banks
Credit Card Companies
Insurance Companies
Accountancy Companies
Consumer Finance Companies
Stock Brokerages
Investment Funds
Some Government Sponsored Enterprises
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Independent Regulators
Federal Regulators
Private Sector Regulators
State Regulators
Justice System Regulators
Who’s Who: The Various Regulators
The changing regulatory landscape for financial services firms 1
Responding to the Whistleblower complaint 5
Focus Topics:
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A look at the various regulators. Who’s who? 3
Whistleblower Laws 2
Compliance Programs and the Whistleblower 4
Compliance Programs & The Whistleblower
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Marshall L. Miller, DOJ Criminal Division Principal Deputy Assistant Attorney General
“On the flip side, compliance programs that have widespread prophylactic and training mechanisms – as well as procedures designed to uncover wrongdoing and expose individuals responsible for criminal behavior – are the most effective.” “A corporation’s ability to use compliance to uncover misconduct and, just as importantly, identify wrongdoers is central to the Justice Department’s evaluation of a compliance program.”
“The scandals and financial disasters of the twenty-first century have one thing in common: The independent members of the boards of directors of Enron, WorldCom, and Lehman Brothers Holdings, Inc., among others, were completely surprised by the impending scandal. The primary reason that the board was clueless was because it relied solely on information supplied by top management and incorrectly assumed that the independent or internal auditors would detect illegal activity or major risk exposure.”
Compliance Programs & The Whistleblower
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!?!?
Board Insulation
Compliance Programs & The Whistleblower
Audits are only part of the solution for detecting occupational fraud.
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Internal audits
External audits
14%
3%
Why audits are not enough: Fraud is hidden
Audits use sampling
Auditors are not police investigators
Insiders have the ability to override controls
Audits are limited in scope
Audits are non-adversarial
Auditing is distinct from a fraud examination
COMPLIANCE PROGRAMS & THE WHISTLEBLOWER
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FRAUD IS A COMPANY’S “MOONWALKING BEAR”
Compliance Programs & The Whistleblower
Key Elements of Compliance Program: Code of conduct & compliance policies
High-level management oversight
Training & education
Effective communication of compliance standards
Internal monitoring, auditing and reporting systems
Enforcement and discipline mechanisms
System to respond to offenses
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Compliance Programs & The Whistleblower
Where do whistleblowers fit in?
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Internal whistleblowing offers organizations an enormous opportunity to tackle compliance problems before regulators become involved.
Only 8% of employees report wrongdoing externally without first reporting it internally
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reporting When employees reported externally, it was because they needed support and wanted to help stop misconduct or limit its harm.
Changing Landscape: Whistleblowers As Regulators
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hotlines
Compliance Programs & The Whistleblower
How can companies take advantage of whistleblowing? Establish Tone at the Top Put Clear Procedures In Place Anonymous hotline, investigated by independent counsel, reporting directly to
independent directors
Ensure Timely Response Implement Internal Controls Failure to follow internal controls will work as a “red flag” to help employees spot
and report potential wrongdoing
Establish Anti-Retaliation Policy Many people do not report misconduct due to fear of retaliation
Positive Recognition and Incentives for Successful Whistleblowing 52
Compliance Programs & The Whistleblower
Compliance vs. Supervision
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Compliance Maintains compliance program and advises business units and senior management on program operation
Senior Management Ultimate supervisory responsibility for the company’s compliance obligations
Legal Risks Avoid exposing Compliance to legal risks associated with being deemed a “supervisor”:
Control theory Affect theory Blended theory
Compliance programs and the Whistleblower 4
The changing regulatory landscape for financial services firms 1 Focus Topics:
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A look at the various regulators. Who’s who? 3
Whistleblower Laws 2
Responding to the Whistleblower complaint 5
Responding to the Whistleblower Complaint
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5
The Complaint
Elevate
Investigate
Respond
Assess
Responding to the Whistleblower Complaint
56 1 The Complaint Positive reaction to receipt of complaint Resist the brush off Be sure to report back
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Dear Jane:
Thank you for raising your concerns about certain underwriting practices by Binford Bank. This is a serious concern and Binford will investigate this issue and, if necessary, take any appropriate corrective measures.
Binford will be conducting an internal investigation. In the next few weeks, we will ask you to meet the company so that we can understand your concerns. We will be conducting other interviews and reviewing important documents. Once the investigation is complete, we will let you know what we discovered and whether any changes to our policies are necessary.
Binford truly appreciates your commitment to the company and your willingness to speak up when you think a problem exists. If you have any questions or concerns as this investigation proceeds, please call me directly at (248) 555-5599.
Sincerely,
Jeff Feeger Binford Bank
Happily Accept The Whistleblower Complaint
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Resist “Brushing Off” The Whistleblower Complaint
Dear Jane:
We have received your allegations and Binford Bank is committed to complying with all applicable laws and regulations. Please be advised that some of the issues you raised concern Binford’s Confidential and Proprietary Information and any disclosures that violate company policies may lead to disciplinary action, including termination.
Binford will investigate this matter and take any appropriate action it deems necessary.
Sincerely,
Jeff Feeger Binford Bank
How did it feel to have the company tell you to go fly a kite?
Responding to the Whistleblower Complaint
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2 Elevate
Quickly elevate complaints through reporting chain for preliminary evaluation
Refer complaints to a compliance officer and/or a legal department for guidance of how to respond
Notify human resources of the complaint to ensure compliance with relevant employment laws
If employee makes complaint while subject to discipline or termination segregate complaint and disciplinary response 1
Responding to the Whistleblower Complaint
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3 Investigate
Legal department and/or compliance officer assess whether claim is credible
Conduct internal investigation Collect and review documents Employee interviews
Consider privilege issues and the use of outside counsel UpJohn warnings
Communicate to the whistleblower that the matter is being investigated
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Responding to the Whistleblower Complaint
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4 Respond Determine whether the complaint is credible
Determine whether the complaint
implicates violations of the organization’s policy and/or the law
Take immediate action to cease the implicated conduct (e.g. halting certain transactions)
Contact outside counsel for assistance with a broader investigation, document preservation, and response guidance
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Responding to the Whistleblower Complaint
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5 Assess Review and assess the strength
of current internal controls
Implement or update controls to prevent future fraud
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What are you going to say when the regulator comes knocking?
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“We conducted a through investigation and determined that is was not meritorious.”
“We found an issue, but we corrected it promptly.”
Contact Information
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Savaria B. Harris Partner [email protected] 1251 Avenue of the Americas, New York, New York, 10020-1104, United States T: +1 212 335 4553 F: +1 212 335 4501
Savaria Harris an experienced litigator with trials in state and federal courts as well as with government and internal investigations in the white collar context. Her practice centers on providing clients with an integrated approach to addressing fraud, whistleblower and government actions under the False Claims Act and its local equivalents. She is experienced in risk assessments, internal investigations, ethics and compliance training, as well as litigation and trial representation. In addition to her practice, Savaria is an adjunct professor of Workplace Ethics at Georgetown University, a member of the Advisory Council for the Association of Certified Fraud Examiners and a member of the NYU Program on Corporate Compliance and Enforcement.