Newly Adopted Dodd-Frank Whistleblower Rules: Practical Tips & Strategies to Address the New Landscape. July 19, 2011

Transcription

1 Newly Adopted Dodd-Frank Whistleblower Rules: Practical Tips & Strategies to Address the New Landscape July 19, 2011

2 Discussion Agenda Webinar Overview Review the Whistleblower Bounty Rules taking effect on August 12 th Tips and strategies for enhancing your existing compliance efforts Dealing with the SEC when an issue is reported Reacting to a worst case criminal scenario Questions and Answers 2

3 NEW Whistleblower Bounty Rules 3

4 New Whistleblower Bounty Rules Overview Whistleblower Bounty Rules The Dodd Frank Act requires the SEC to pay awards, subject to certain limitations and conditions, to eligible whistleblowers who voluntarily provide the SEC with original information about a possible violation of the federal securities laws that leads to the successful enforcement of an action brought by the SEC resulting in monetary sanctions exceeding $1 million Administration The whistleblower program will be administered by the SEC s Office of the Whistleblower Timing The new whistleblower bounty rules will become effective on August 12,

5 New Whistleblower Bounty Rules Who qualifies as a whistleblower? A whistleblower is a natural person who, alone or jointly with others, voluntarily provides original information (see slide 10) to the SEC relating to a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur A company or other entity cannot qualify as a whistleblower The violation must relate to a provision of the federal securities laws or a rule or regulation promulgated by the SEC Reporting a violation of a state or foreign law would not be sufficient 5

6 What kinds of persons are ineligible for awards? Certain persons will be ineligible to receive whistleblower awards because of Special client relationships with the individuals or entities involved in possible violations of the securities laws Pre-existing legal duties of such persons to report information to the SEC Generally, the following categories of potential would-be whistleblowers would be ineligible to receive awards: Members, officers, or employees of the SEC, the DOJ, an appropriate regulatory agency (as defined in the final rules), a self-regulatory organization, the PCAOB, or any law enforcement organization Any person who is a spouse, parent, child, or sibling of or resides in the same household as an employee of the SEC Foreign government officials New Whistleblower Bounty Rules 6

7 What kinds of persons are ineligible for awards? (cont.) Generally, the following categories of potential would-be whistleblowers would be ineligible to receive awards (cont.): Attorneys and non-attorneys who obtain information through a communication which is subject to the attorney-client privilege or in the course of representing a whistleblower or whistleblower s employer, unless disclosure is allowed under applicable state attorney conduct rules Certain personnel with compliance-related responsibilities New Whistleblower Bounty Rules Public accountants working on engagements required under the federal securities laws if the information relates to violations by the client or the client s directors, officers or other employees Persons who obtain information as a result of an audit of a company s financial statements if submission of such information to the SEC would be contrary to the reporting requirements of Section 10A of the Securities Exchange Act of 1934, as amended Persons who obtain information in a way that is determined by a domestic court to violate applicable federal or state criminal law Anyone who obtains information from persons subject to the above exclusions, subject to certain exceptions 7

8 What kinds of persons are ineligible for awards? (cont.) Reasonable Basis Exception New Whistleblower Bounty Rules The SEC provides an exception that allows public accountants and company personnel with compliance-related responsibilities (including officers and directors) to receive awards as whistleblowers in certain situations Such whistleblowers may be eligible for an award if they have a reasonable basis to believe any of the following: Disclosure is necessary to prevent the company from engaging in conduct likely to cause substantial injury to the financial interest or property of the entity or investors The company is engaging in conduct that will impede an investigation of the misconduct At least 120 days have passed since the information was provided to the company s audit committee, chief legal officer, chief compliance officer, or the whistleblower s supervisor, or since the whistleblower learned that the information had already been reported internally 8

9 What qualifies as a voluntary submission of information? A submission of information is voluntary if either New Whistleblower Bounty Rules The whistleblower provides the SEC with the information before the whistleblower or his or her representative receives (1) any request from the SEC, (2) a request in connection with an investigation, inspection or examination by the PCAOB or any self-regulatory organization, or (3) an investigative request by the U.S. Congress, any other authority of the federal government, a state attorney general or securities regulatory authority related to the same subject matter The same information is provided to one of the above-listed authorities prior to the whistleblower receiving a request from the SEC A submission of information is generally not voluntary if the whistleblower is required under a pre-existing legal or contractual duty owed to the SEC or one of the above-listed authorities to report such information to the SEC Note: Companies cannot simply disqualify all employees from award eligibility by generally requiring all employees to sign an agreement to report securities violations to the SEC 9

10 What qualifies as a original information? Information is original if it satisfies all of the following: New Whistleblower Bounty Rules Provided for the first time to the SEC after July 21, 2010 (enactment date of the Dodd-Frank Act ) Derived from the whistleblower s independent knowledge or independent analysis Not already known to the SEC from any other source, unless the whistleblower is the original source of the information Not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is the source of the information Independent knowledge cannot be derived from publicly available sources and may be obtained through a whistleblower s own experiences, communications or observations (Note: A whistleblower is not required to have been involved in the possible violation at issue) Independent analysis may come from a whistleblower s own examination and evaluation of publicly available information, but such analysis must reveal information not generally known or available to the public 10

11 What will qualify as a successful enforcement action? Is the SEC already reviewing the conduct in question? New Whistleblower Bounty Rules No Yes The information provided by a whistleblower must have been sufficiently specific, credible, and timely to cause the SEC staff to commence an examination, open/reopen an investigation, or inquire about different conduct as part of a current examination or investigation and The SEC must bring a successful action based in whole or in part on the conduct that was the subject of the whistleblower s original information Higher Standard The information provided by a whistleblower will be considered to have led to a successful enforcement of a judicial or administrative action if the information provided by the whistleblower significantly contributed to the success of the action 11

12 New Whistleblower Bounty Rules How much could a whistleblower be eligible to receive? The final rules require a whistleblower (or whistleblowers in the aggregate) who qualifies for an award to be paid between 10 and 30 percent of the monetary sanctions collected by the SEC based upon the information provided by the whistleblower; provided, that such monetary sanctions exceed $1 million A whistleblower may also collect an award based on monetary sanctions that are collected from a related action (generally, a judicial or administrative action brought by the Attorney General of the United States, an appropriate regulatory authority, a selfregulatory organization, or a state Attorney General in a criminal case) if the whistleblower s original information led the SEC to obtain monetary sanctions exceeding $1 million The SEC will not make an award in a related action if an award has already been granted to the whistleblower by the Commodity Futures Trading Commission for the same action pursuant to its whistleblower award program established by the Dodd Frank Act In calculating whether the monetary sanctions meet the $1 million threshold, the SEC may aggregate multiple actions that arise from the same nucleus of operative facts 12

13 New Whistleblower Bounty Rules How much could a whistleblower be eligible to receive? (cont.) The SEC has discretion in determining the appropriate award amount within the percentage range and may consider the following factors: Factors that may increase an award amount: The significance of the information provided by a whistleblower to the success of the SEC s action or related action The degree of assistance provided by the whistleblower and any legal representative of the whistleblower in the SEC s action or related action The SEC s law enforcement interest in deterring violations of the securities laws by making awards to whistleblowers who provide information that leads to successful enforcement actions Factors that may decrease an award amount: The culpability of the whistleblower, including the whistleblower s role, education, experience, intent and the amount of financial benefit from the violations Whether the whistleblower unreasonably delayed reporting the securities violations Whether the whistleblower interfered with his or her company s internal compliance or reporting system, such as by delaying detection or providing false information Whether, and the extent to which, the whistleblower participated in the company s internal compliance system 13

14 Can a culpable whistleblower receive an award? Culpable whistleblowers are not automatically ineligible for an award Negative effects of culpability: The SEC will consider any culpability of the whistleblower in a securities violation as one of the factors in determining the amount of an award (see slide 13) In determining whether the required $1 million threshold has been satisfied for purposes of making an award to the culpable whistleblower, the SEC will not count any monetary sanctions that The whistleblower him- or herself is ordered to pay New Whistleblower Bounty Rules Are ordered against any entity whose liability is based substantially on conduct that the whistleblower directed, planned, or initiated The SEC will also not count these amounts towards the total monetary sanctions collected in the action for purposes of calculating any payments to the culpable whistleblower 14

15 Can a whistleblower submit reports anonymously? New Whistleblower Bounty Rules A whistleblower may submit information to the SEC anonymously only under certain specified conditions Any whistleblower may choose to be represented by counsel, but an anonymous whistleblower must retain an attorney who will, among other things, certify to the SEC that he or she has verified the whistleblower s identity A whistleblower will be required to reveal his or her identity to the SEC before the SEC will pay such person any award Can the SEC communicate directly with the whistleblower about a possible violation? If the whistleblower is a director, officer, member, agent or employee of a company that is represented by counsel, the SEC may communicate directly with the whistleblower about a possible securities law violation without seeking consent of the company s counsel and without regard to any confidentiality agreements to which the whistleblower may be a party 15

16 What do the rules provide regarding retaliation protection for whistleblowers? Anti-retaliation protection New Whistleblower Bounty Rules Is not limited to whistleblowers who are ultimately determined to be eligible for an award Applies to all whistleblowers who had a reasonable belief that the information provided relates to a possible securities law violation that has occurred, is ongoing, or is about to occur To incentivize the submission of high-quality tips and to discourage the abuse of the antiretaliation provisions, the reasonable belief standard requires both The whistleblower to hold a subjectively genuine belief that the information demonstrates a possible violation (subjective component) Such belief to be one that a similarly situated employee might reasonably possess (objective component) 16

17 New Whistleblower Bounty Rules What do the rules provide regarding the use of internal compliance programs? A whistleblower is not required to report information through a company s internal compliance process in order to be eligible for an award However, several provisions in the final rules are designed to encourage the use of internal compliance processes: If a whistleblower reports information through a company s compliance procedure and the company then reports the same and additional information to the SEC within 120 days, the whistleblower would be deemed to have reported such information to the SEC on the date when he or she originally reported the violation internally, and the whistleblower would be given credit for both the original and additional information self-reported by the company to the SEC The SEC has the discretion to increase the award amount if a whistleblower voluntarily reports to and cooperates with internal compliance systems, and to decrease the award amount if a whistleblower delays reporting or interferes with internal compliance systems (see slide 13) In appropriate cases, upon receiving a whistleblower complaint, the SEC staff will contact a company, describe the nature of the allegations, and give the company an opportunity to investigate the matter and report back. In determining whether to allow a company time to internally investigate a matter, the SEC may consider factors such as the nature of the alleged conduct, the level at which the conduct allegedly occurred, the company s corporate governance culture and its internal compliance programs 17

18 Practical Tips & Strategies for Companies and Management Teams 18

19 Practical Tips & Strategies #1 Secure Insurance Coverage for Regulatory Investigations Falls under the policy s definition of claim Formal investigations Directors and Officers Company The coverage trigger Informal investigations Directors and Officers Company Evolving market / new products 19

20 #2 Regularly Audit and Assess Your Compliance Program Effective compliance programs include: Internal complaint mechanisms (i.e. confidential hotline) Ability to track, monitor, and report on complaints Various communications channels for promoting complaint mechanisms both internal and external Annual education and training for all employees An independent body (i.e. Chief Compliance Officer) A third-party assessment Practical Tips & Strategies 20

21 Practical Tips & Strategies #3 Maintain Document Retention Policies Not just a paper policy Know your communications systems Do not provide additional fodder for government investigations Subpoenas can create additional avenues for indiscriminate rummaging 21

22 Practical Tips & Strategies #4 Develop Protocols for Investigating Issues Procedures for response Educate your employees on how to respond when approached unexpectedly Separation of duties the role of Chief Compliance Officer Perception of retaliation 22

23 Practical Tips & Strategies #5 Set Tone at the Top Role of senior management Create a culture where ethical business conduct is paramount Be consistent Enable your Chief Compliance Officer to conduct internal investigations and report issues directly to the Board Apply disciplinary action if employees engage in wrongdoing or condone unethical behavior 23

24 Dealing with the SEC 24

25 Dealing with the SEC When the SEC Comes Knocking Have a plan in place ahead of time to: Have outside counsel on board; Communicate to employees and others; and Gather and preserve information No retaliation! Exhibit cooperation and demonstrate an independent review Get the facts 25

26 Worst Case Scenarios 26

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28 Dealing with Criminal Investigations Government Investigations Generally focus upon: Documents s and records Statements Past and present 28

29 Only Thing You Have Total Control Over Present Statements Where the rubber hits the road for criminal investigators / prosecutors Acts considered obstructive are law enforcement and cost escalators Agents look at all evidence with a jaundiced eye Facts vs. personal knowledge Explaining stupid things in s Explaining conduct troublesome in retrospect Protecting friends and associates Dealing with Criminal Investigations Attorneys can help you best if they know the actual facts! 29

30 Questions? 30

31 Biographies & Contact Information 31

32 Presenters Megan N. Gates Boston (617) J.D., Boston College Member in the firm's Corporate Section and Co-Chair of the firm's Securities Practice Group Concentrates practice on providing counsel to biotechnology and life sciences companies in public and private equity and debt financings, in merger and acquisition transactions, and with respect to compliance obligations under the Securities Exchange Act of 1934 Frequently advises clients with respect to corporate governance matters, including compliance with the Sarbanes-Oxley Act of 2002 Extensive experience with tender offers, exchange offers, and goingprivate transactions, including preparation of offering documents and related materials Frequently speaks at conferences on securities offerings, corporate governance, and compliance matters and is Co-Chair of the Boston Bar Association s Securities Law Subcommittee In 2010, recognized by Women s Business Boston as one of the Top 10 Corporate Lawyers in the region Before joining the firm, served as Associate General Counsel for Thermo Electron Corporation, responsible for securities offerings and compliance for the corporation and its 23 publicly traded subsidiaries 32

33 Presenters Pamela B. Greene Boston (617) J.D., Boston University Member in the firm s Corporate Section Concentrates on counseling the firm s public company clients with respect to securities compliance under both the Securities Act of 1933 and the Securities Exchange Act of 1934; corporate governance matters, including compliance with the Sarbanes-Oxley Act of 2002; and executive compensation-related issues Advises and represents public and private companies, as well as individuals, on all aspects of equity compensation matters Works with clients management teams, boards, and compensation committees to develop and design appropriate executive compensation programs, and to resolve legal issues confronting employers when implementing and revising such programs Has advised venture capital fund clients and participated in the organization of venture capital funds Handles corporate and securities law matters for a range of businesses, including entrepreneurial companies and private equity investors Represents both corporations and investors in private placements, public offerings, mergers and acquisitions, and general corporate law matters 33

34 Presenters Paul E. Pelletier Washington, D.C. (202) J.D., New England School of Law Member in the firm's Litigation Section, including the White Collar Defense, Health Care Enforcement Defense, Foreign Corrupt Practices Act and Corporate Compliance and Investigations Practice Groups Specializes in representing public and private companies of all sizes and high-profile individuals in state and federal investigations Represents clients across various industries, including pharmaceutical, biotechnology, medical device, and financial services Twice recognized by the attorney general with the DOJ's highest honor: Attorney General s Award for Fraud Prevention in 2006 and Attorney General s Award for Distinguished Service in 1996 Previously served in the Department of Justice as a federal prosecutor for more than 25 years, where he was lead counsel in more than 20 jury trials targeting money laundering; sophisticated financial, corporate, and securities fraud; and health care fraud Also previously served as chief of the Economic Crime Section at the U.S. Attorney s Office for the Southern District of Florida, where he supervised and prosecuted a number of significant securities, health care, and bankruptcy fraud cases 34

35 Presenters Adam L. Sisitsky Boston (617) J.D., New England School of Law Member in the firm s Litigation Section and Securities Litigation Practice Concentrates on securities-related issues and has significant federal and state court trial experience Represents corporations, officers, directors, accountants, and other individuals in SEC investigations and enforcement proceedings, as well as in civil litigation Has published numerous articles on securities-related topics, and recently co-authored the Securities Litigation chapter in the definitive Massachusetts Continuing Legal Education compilation, Business Torts of Massachusetts Recognized by Benchmark: Litigation 2009 as one of just seven Future Stars in business litigation throughout Massachusetts, and by the Greater Boston Chamber of Commerce as one of Boston s Future Leaders for 2009 Previously practiced as a Special Assistant District Attorney in Middlesex County District Attorney s Office where he prosecuted and tried numerous criminal cases 35