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Drivers of Whistleblower Expansion & Compliance Strategies

Wed, 10/28/2015 - 11:48 -- admin25

by Michelle Brookshire and Russell Zimmerer

Several factors are driving an exponential increase in whistleblower complaints. These factors include expanded whistleblower protections in reaction to highly publicized scandals, payment of significant bounty awards, and a cultural backlash against corporations in light of corporate scandals. Given the increased focus on this area, it is important for companies to develop a reliable investigation system that welcomes internal complaints and promptly and fully addresses them.

In recent years, there has been an expansion of whistleblower rights. The Sarbanes-Oxley Act (SOX)—the most well-known statute protecting whistleblowers—protects employees who raise claims of securities fraud by publicly traded companies. Similarly, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which contains bounty and whistleblower protection provisions, covers publicly traded corporations and businesses in the financial industry.

Since the passage of Dodd-Frank in 2010, and the subsequent creation of the Office of the Whistleblower (OWB) within the U.S. Securities and Exchange Commission (SEC), the SEC has shown support for whistleblowers through monetary awards and enforcement actions. In its Annual Report to Congress on the Dodd-Frank Whistleblower Program, the SEC reported that both the number of whistleblower claims and the magnitude of the financial awards stemming from those claims “were record-breaking” in FY 2014. According to the Report, the SEC’s OWB received 3,620 whistleblower tips, an increase of more than 20 percent in two years. On September 22, 2014, the SEC authorized an award of more than $30 million to a whistleblower “who provided key original information that led to a successful enforcement action.” This is the SEC’s largest whistleblower award to date.

Another example of the SEC’s increased focus on whistleblower rights is a cease-and-desist order issued on April 1, 2015. The SEC declared illegal a company’s use of a confidentiality agreement that prohibited employees interviewed during an internal investigation from discussing, inside or outside the company, without legal approval, the substance of their interviews involving potentially illegal or unethical conduct by the company or its employees. The company was also penalized $130,000. Areas where a company’s use of a confidentiality agreement could draw an SEC attack include: release agreements, stand-alone confidentiality or non-disclosure agreements, internal policies regarding complaints of unethical or unlawful practices, and investigation protocols.

The Supreme Court has also taken a broad view of whistleblower protections. A recent example is Lawson v. FMR, LLC, 571 U.S. __, 134 S. Ct. 1158 (2014), in which the Court held SOX’s whistleblower protections apply to contractors of publicly traded companies. The practical effect of Lawson could expand coverage of SOX from about 6,000 publicly traded U.S. corporations to millions of business entities that enter into contractual relationships with those corporations.

The Second Circuit Court of Appeals also just extended Dodd-Frank’s anti-retaliation protections to employees who suffer retaliation for reporting alleged securities violations internally, even if they did not report them outside the company or to the SEC. See Berman v. Neo@Ogilvy LLC, No. 14-4626, 2015 WL 5254916 (2d Cir. Sept. 10, 2015).

Given the continued expansion of whistleblower protections, it is imperative for companies to take measures to foster a “speak up” culture wherein employees are encouraged to raise concerns in a non-retaliatory environment. Encouraging employees to raise concerns fosters the early resolution of potentially large problems. It also helps to reduce legal and public relations risks, improves employee engagement, and provides a concrete way for employees to contribute to organizational success.

Companies should work with counsel to address the following critical issues:

1.                  Review audit agreements containing confidentiality clauses to ensure they preserve the employee’s right to file claims and disclose information regarding the company’s business practices to an enforcement agency. These rights should apply to any government agency charged with enforcement of any law, not just employment laws.

2.                  Update and strengthen anti-retaliation policies and procedures.

3.                  Ensure that supervisors at every level are trained in the employer’s anti-retaliation policies. There needs to be a clear commitment from leadership to hear and resolve such claims and otherwise act aggressively to prevent retaliation.

4.                  Ensure a clear process to manage internal reports of retaliation. The reporting system should include multiple avenues for reporting; opportunities to report outside the chain of command; a hotline, including anonymous reporting; and the ability to elevate to higher levels.

5.                  Develop an investigation protocol, and use it.

6.                  Ensure that organizational commitment to ethics and compliance are properly addressed by the company’s Code of Conduct.

7.                  Secure confidential information and limit its dissemination to those who need to know.

 

Michelle Brookshire and Russell Zimmerer are associates of Littler Mendelson P.C. They can be reached at mbrookshire@littler.com and rzimmerer@littler.com, respectively.

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