A whistleblower is an employee or a person who has ongoing relationships with an institution, and who points to the institution’s wrongful activities. Such information of wrongful activities helps enforcement agencies. It might also help the institutional management that aims at avoiding such activities. Banks may be legally required to be whistleblowers, even though such reporting conflicts with the trusting information-source such as a client. A whistleblower-employee who did not participate in the violation may not be legally liable yet can be viewed by colleagues and employer as a traitor who breached his loyalty. The employee’s position may be reduced or his employment may be terminated and, if the word gets around, he might have great difficulties finding another position. Thus, whistleblowers are often in need of protection.
Two main legal sources deal with whistleblowers issues. The Sarbanes-Oxley Act of 2002 (SOX) prohibits issuers from retaliating against whistleblowers. Affected employees may file a complaint with the Department of Labor. Upon proving violations, the employers may have to reinstate the employees and pay them back-pay and other compensation. Section 21F of the Exchange Act authorizes the Securities and Exchange Commission to pay awards to eligible individuals who voluntarily provide high quality, original information leading to an enforcement action and culminating in orders of over $1 million in sanctions. The awards can range between 10% and 30% of the monetary sanctions. The second legal source that protects whistleblowers is the Dodd-Frank Act. This act prohibits employers from retaliating against whistleblowers and creates a private right of action for employees who are retaliated against.
Retaliation against a whistleblower may also violate state, local, and foreign laws. In the case of whistleblowing, lawyers may not be as protected as they usually are if their whistleblowing violates rules of professional conduct. However, anti-retaliation rules may not apply extraterritorially or to non-citizens. The rules strengthen employees’ incentives to report suspected violations internally through internal compliance programs. Information about possible violations of federal securities laws, including the Foreign Corrupt Practices Act, should submit that information to the Securities and Exchange Commission, either online through “SEC’s Tips,” through Complaints, Referrals (TCR) Intake and Resolution System, or by mailing or faxing a completed Form TCR to the Commission’s Office of the Whistleblower.
Whistleblowers may submit information to the Commission anonymously or through an attorney, yet the process may be risky for the employees if the employee can be easily identified. Therefore the Commission is required to protect the whistleblower’s identity to the fullest extent possible. The Commission’s staff will not disclose a whistleblower’s identity in response to requests under the Freedom of Information Act. However, its protection is limited. For example, it must produce documents in an administrative or court proceeding. Its investigators may use the whistleblower’s information, and provide information, subject to confidentiality requirements, to other government or regulatory entities. Whistleblowers’ employment, on the other hand, may be protected. The Commission sued an employer that caused an employee-whistleblower to resign. An employer was fined for pressing a whistleblower hard to protect its interests, which ended in the employee’s resignation. Employers may ask employees to sign confidentiality agreements to ward off whistleblowing, arguably in violation of Rule 21F-17.
The Dodd-Frank Act has called for creating an office of the Investor Advocate, appointing an ombudsman to resolve problems that retail investors may have with the Commission or self-regulatory organizations, and establishing safeguards to maintain the confidentiality of communications with investors.
There are objections to protecting whistleblowers.
Arguably (i) efficient market forces might encourage violations and breach of integrity rules. Expected profit may be larger for some people than the harm done to those who will be injured. (ii) Deterrence undermines democratic values if it focuses on harm to particular plaintiffs, rather than outrage concerning the wrong. (iii) The Supreme Court has shifted the rationale of punitive damages from moral retribution to results. (iv) Protecting whistleblowers is contrary to the values and beliefs imbedded in American culture: (v) Punishing and preventing bad corporate behavior is a difficult task, depending on moral condemnation and economic pain. Where institutional conduct is egregious, the effective punishment is to simulate incarceration, such as bankruptcy limits a company’s freedom and taints its reputation.
An international perspective may support a non-result argument. However, individual freedom may support jury-awarded punitive damages. Punitive damages in international law may enable each society to maintain its values in the global arena. Paul J. Zwier has argued that jurors should determine punitive damages, considering community values. The National Association of Corporate Directors noted that rewards for whistleblowers may injure companies’ internal compliance programs, because they might provide employees incentive to approach the Commission rather than report their findings through the employers’ programs.
The Bechtel v. Admin. Review Br. case is instructive. Although the legal issues in that case do not pertain to this topic, the facts demonstrate the possible problems that arise in this context. That case dealt with the issue of reinstating employees whose employment was terminated for refusal to obey a suspected illegal order or support an illegal action. In an action for equitable relief brought in connection with a failed employment relationship, the plaintiffs asserted that the defendant, Competitive Technologies, Inc. (CTI), terminated their employment in retaliation for conduct protected by Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002 (Sarbanes-Oxley Act), 18 U.S.C. § 1514A.
The plaintiffs, joined by the intervening plaintiff United States Secretary of Labor, sought an injunction enforcing a preliminary order of the Secretary which required CTI to reinstate the plaintiffs to their previous positions. The issues presented were: (1) whether the court has subject matter jurisdiction to enforce a preliminary order of reinstatement under the Sarbanes-Oxley Act; and (2) whether enforcement requires the plaintiffs to prove the material elements required for a preliminary injunction. The court concluded that it had subject matter jurisdiction to enforce the Secretary’s preliminary order and, further, the plaintiffs are entitled to this relief regardless of whether they have also met the standard for awarding injunctive relief. The application was therefore granted.
On three separate occasions before their job terminations, Bechtel and Jacques raised concerns with several members of CTI’s management concerning CTI’s financial reporting and whether certain oral agreements entered into by the CEO John Nano with consultants were material and should be disclosed on the SEC reports and to the shareholders. The plaintiffs were told that any oral agreements were not material. The materiality of these oral agreements was later . . . verified by their inclusion in the SEC 10-K report in July 2004. Following a disclosure meeting, the plaintiffs refused to sign off on the report because their concerns that the oral agreements had not been addressed. The CEO held a meeting with the plaintiffs and assured them that their concerns would be addressed by the next disclosure meeting and they finally signed off on the report. After the meeting the CEO’s attitude towards the plaintiffs changed. He criticized and attempted to embarrass them at staff meetings and in front of co-workers. His hostility continued until their employment was terminated on June 30, 2003.
After the termination of their employment, the plaintiffs filed the complaint with the Secretary of Labor pursuant to the Sarbanes-Oxley Act, alleging that CTI terminated their employment because of issues they raised at quarterly disclosure committee meetings. After CTI had responded to the allegations, the Secretary issued a preliminary order finding that CTI violated the Sarbanes-Oxley Act and ordered CTI to “reinstate Bechtel and Jacques to the same positions and pay them the salaries and all other benefits commensurate with the position of vice president. CTI objected to the Secretary’s preliminary finding and, pursuant to C.F.R. § 1980.107, requested a hearing before an administrative law judge. With this request, all the provisions of the preliminary order were stayed, except for the portion requiring preliminary reinstatement. The portion of the preliminary order requiring reinstatement would be effective immediately upon the defendant’s receipt of the findings and preliminary order, regardless of any objections to the order.
Although the rule required CTI to immediately reinstate Bechtel and Jacques, CTI did not do so. Instead, CTI filed a motion to stay the reinstatement order. Using a tool that was employed traditionally for companies in financial trouble, the New York regulator planned to utilize independent outside monitors as part of settlements with accused institutions. The regulator admitted that it lacks the skills of professional monitors. In the past, monitors were not as frequent visitors to the institutions as they are today. Further, the current monitors focus not only on past violations but also on how to prevent future violations, and on high-risk international relationships. The resort to expert monitors has been strengthened with the discovery of “holes” in compliance programs of defendant institutions. However, financial institutions spokespersons expressed doubts about the new use of outside monitors. After all these monitors would like to please those who hired them. Unfortunately, outside monitors may have conflicts of interest and may conflict with the regulators. The monitors might be accused of providing a shield for the banks they monitor.
A similar conflict arose by an outside monitor of banks who was past head of a banking regulator. The argument involved disclosure to the bank regulators of information that the private monitor had. Finally, the monitor “settled by paying $15 million to the Department of Financial Services,” and “acknowledged that it did not follow the regulator’s requirements for consultants.” It agreed to a voluntary six-month abstention from new consulting engagements that would require the use of confidential reports. The liable bank settled for $340 million. The violation consisted of “hiding $250 billion of [prohibited] transactions for Iranian customers.”
Recently a number of courts have not followed a proposed expansion of the whistleblower protective rights, but this cannot form the basis of a long-term prediction.
A whistleblower may face conflicted commitments and loyalties. As a good citizen, he or she is committed to following the law. Yet he or she is also committed to the workplace and to its leaders’ directives and success. The institutions and their leaders’ actions and directions may conflict with the whistleblower’s interpretation of the law. Unfortunately, such conflicts may not be unique. People may interpret the law and loyalty to others differently. When these loyalties clash, and when whistleblowers follow what they consider to be their commitment to society rather than to their workplace, the whistle-blowers may pay a very high price by losing their job, being viewed as “traitors” to their workplace and its leaders. and finding it hard to get another position.