Despite the US federal closure, the SEC is paying an anonymous whistleblower $14 million nor has it disclosed the scheme. More information is needed, says Reuben Guttman.
WASHINGTON, DC -- On the first day of the federal government shutdown, the United States Securities and Exchange Commission was sufficiently open for business to announce that a $14 million bounty would be given to an undisclosed whistleblower who reported an undisclosed scheme by an unnamed defendant.
I suppose that this is just one of these cases where the real story is not what was said, but what was not said. In thinking through what would be an appropriate analogy, I tried --- but failed – to recall a time when a US prosecutor issued a press release saying “undisclosed criminal placed in prison for 15 years for undisclosed crime against undisclosed victim.”
Compliance enforcement is about deterrence by highlighting conduct that merits punishment. A compliance programme works when those contemplating crossing the boundaries into the areas of illegal activity see that others are punished for similar conduct. Surely, the public parade of insider trading prosecutions in the United States must have sent a message of deterrence to at least a few people willing to share tidbits of insider information with their friends and relatives.
Of course the other premise of transparency in enforcement is that where citizens understand what types of conduct violate the law, they have a perspective to evaluate questionable activity in their environment in order to determine whether the alleged misdeeds should be reported to regulatory authorities. Undoubtedly, transparency is also of value to defense lawyers who need information to counsel their clients on compliance with the law.
None of this has anything to do with the merits of a bounty programme. In an era where multi-national corporations, some larger than small countries, transact business across the globe, regulators need help to enforce compliance with the law. The United States Food and Drug Administration will most likely never have the resources to monitor the 3,000 drug trials being conducted in China. The US SEC, with one examiner to every $12 billion in assets that it oversees, will never have the resources to make sure that publicly traded companies are not paying gratuities to officials in the farthest reaches of the globe in order to secure more business. The United States Environmental Protection Agency will certainly never have the resources to monitor supply chains in China, India and Bangladesh to ensure that components shipped into US markets are not contaminated with toxic materials.
Challenges of compliance enforcement
It is precisely because of the contemporary challenges of compliance enforcement that whistleblowers have become central to the compliance enforcement process. They come with diverse backgrounds, technical skills, language proficiencies and cultural sensitivities. They are a resource that regulators need to tap.
Those who criticize the bounty system argue that corporate internal compliance programs should be left to their own devices. The cold truth is that internal compliance programs do not work when the wrongful conduct permeates the corporation and officials at the highest levels are bonused based on revenue streams generated from unlawful conduct. Enron, Tyco and WorldCom undoubtedly all had compliance programs.
A bounty system rewards whistleblowers who have taken the time, worked with competent counsel, and enlisted appropriate experts to put together presentations to regulators that jump start cases. When the system works, as it has with the US government’s collection of $4 billion last year under the US False Claims Act, the compliance enforcement system is greatly enhanced. No doubt, there is room for improvement but the concept of paying the bounty has integrity.
Improving the system
Now to the question of improving the system. The SEC’s whistleblower programme is to some degree in its early stages. As they say in the United States, the jury is still out on whether it will be as successful as other bounty programs, including the False Claims Act, provided for by US law.
There may be in certain circumstances rationale for not disclosing the identity of an SEC whistleblower. One can imagine a situation where the whistleblower is not a US citizen and is outside the protective reach and enforcement of US anti-retaliation laws. On the other hand, when announcing these awards, the SEC should be clearer in divulging the name of the defendant and the scheme that lead to the resolution. This “lessons learned” component is central to compliance enforcement.
Once the government reopens for business, maybe this is something it should think about.