Whistleblowing in the Corporate World Series: Part VI

Transcription

1 Whistleblowing in the Corporate World Series: Part VI Whistleblowing and the Corporate Insider

2 Presenters Lawrence A. Hamermesh is the Ruby R. Vale Professor of Corporate and Business Law at Widener's Delaware campus and Director of the Widener Institute of Delaware Corporate and Business Law. Professor Hamermesh received a B.A. from Haverford College in 1973, and a J.D. from Yale Law School in Following graduation from law school, Professor Hamermesh worked as an associate attorney with Morris, Nichols, Arsht & Tunnell in Wilmington, Delaware, from , and was a partner at Morris, Nichols, Arsht & Tunnell from 1985 to 1994, when he joined the Widener faculty. In 2010 and 2011, while on a leave of absence, Professor Hamermesh served as senior special counsel in the Office of Chief Counsel of the Division of Corporation Finance at the Securities and Exchange Commission in Washington, DC. Since 1995 he has been a member of the Corporation Law Council of the Corporation Law Section of the Delaware State Bar Association, which is responsible for the annual review and modernization of the Delaware General Corporation Law, and was Chair of the Council from lahamermesh@widener.edu t: From 2001 to 2007 Professor Hamermesh was an elected member of the Corporate Laws Committee of the American Bar Association Business Law Section, which supervises the drafting and revision of the Model Business Corporation Act. In 2011 he was named Associate Reporter for that committee. In , Professor Hamermesh served as the Reporter for the American Bar Association Task Force on Corporate Responsibility. Professor Hamermesh was elected in 1999 as a member of the American Law Institute. Professor Hamermesh is also a member of the Board of Directors of ACLU Delaware, Inc.. He was President of that organization from , and served on the national board of directors of the ACLU from 2004 to

3 Presenters t: f: Jordan A. Thomas is a partner at Labaton Sucharow LLP and chairs its Whistleblower Representation Practice. Labaton Sucharow is one of the country s premier private securities litigation firms and the first law firm in the country to establish a practice exclusively focused on protecting and advocating for SEC whistleblowers. Prior to entering private practice, Jordan spent more than 15 years in federal law enforcement, as both a Trial Attorney at the Department of Justice and an Assistant Director in the Enforcement Division of the Securities and Exchange Commission. While at the SEC, Jordan played a leadership role in the development of its Whistleblower Program. He is also the Editor of SECwhistlebloweradvocate.com, a website dedicated to helping responsible organizations establish a culture of integrity and courageous whistleblowers to report possible securities violations without personal or professional regrets. 3

4 CORPORATE CHALLENGE 4

5 Recent Survey Findings I KPMG, Integrity Survey, % of employees personally observed/had firsthand knowledge of wrongdoing during previous 12 months 47% didn t believe they would be protected from retaliation if they reported misconduct 61% didn t believe they would be satisfied with outcome if they reported misconduct 60%, in the banking/finance industry, reported that the wrongdoing they observed could cause a significant loss of public trust if discovered. Littler Mendelson, Whistleblower Survey, November % report concern about whistleblower claims 73% reported this as an emerging risk area 67% predicted that whistleblower claims increasing 65% reported being only moderately prepared Ethics Resource Center, National Business Ethics Survey, January % witnessed misconduct at work 42% reported that their employer had a weak ethical culture 22% of employees who reported misconduct perceived retaliation 5

6 Recent Survey Findings II Labaton Sucharow, US/UK Financial Industry Survey, July % believed competitors had engaged in illegal or unethical conduct 26% had observed or had first-hand knowledge of misconduct in workplace 94% would report wrongdoing given the protections and incentives of the SEC Whistleblower Program 44% were aware of the SEC Whistleblower Program Labaton Sucharow, Ethics & Action Survey, September % had observed or had firsthand knowledge of misconduct in workplace 84% had a positive perception of whistleblowers that report illegal or unethical conduct 83% would report wrongdoing given the protections and incentives of the SEC Whistleblower Program 28% were aware of the SEC Whistleblower Program 6

7 WHERE DO SECURITIES LAW COMPLIANCE PROBLEMS ARISE? 7

8 Common Securities Violations Market Manipulation Offering Fraud Financial Fraud Insider Trading Trading and Pricing Foreign Corrupt Practices Act Municipal Securities Fraud 8

9 Market Manipulation Market manipulation is the interference with the free and fair operation of the market by engaging in transactions and other practices that create or maintain an artificial price for a security. Examples include: Churning Placing of both buy and sell orders for the same security at about the same price in order to create the appearance of increased trading activity, thereby increasing its price Pooling An agreement among a group of people delegating authority to a single manager to trade in a specific stock, for a specific period of time, and then to share in the resulting profits or losses Pump and Dump Spreading false information to increase the price of a security, then selling shares at the increased price 9

10 Offering Fraud Offering fraud involves making material misrepresentations and/or omissions to potential investors in connection with an offering of securities. Examples include: Unregistered Offering The securities being sold are not registered with the SEC as required under the Securities Act Ponzi Scheme Investors are paid returns from their own money or from the money invested by subsequent investors, rather than from any actual profit earned Affinity Fraud Targets members of an identifiable group, such as religious or ethnic communities, in order to induce those members to invest in a fraudulent investment opportunity 10

11 Financial Fraud Financial fraud occurs when a public company files materially false or misleading financial statements with the SEC. Examples include: Misleading disclosures Misclassifications Improper recording of transactions Overstatements Understatements 11

12 Insider Trading Insider trading is the buying or selling of a corporate security while in possession of material information about that corporation that is not known to the public. Two theories of insider trading: Classical Theory Involves corporate insiders who have access to material, nonpublic information based on their positions inside a corporation Misappropriation Theory Involves third parties who acquire material, nonpublic information about a corporation based on some relationship of trust with the source of the information 12

13 Trading and Pricing Trading and pricing violations involve any number of trading techniques that are illegal under the securities laws. Examples include: Market Timing/Late Trading When a mutual fund permits select customers to purchase shares in the fund after trading has closed for the day Wash Trades Involve the buying and selling the same security for the purpose of generating activity and increasing the price Marking the Close Buying or selling a security near the close of the day s trading in order to affect the closing price Front Running Buying or selling a security while knowing that another investor is about trade, or an analyst will make a recommendation, that will influence the price of the security 13

14 Foreign Corrupt Practices Act (FCPA) The FCPA prohibits the offer, payment, or promise to pay money or anything of value i.e., a bribe to any foreign official in an effort to win or retain business from that foreign official s government. Affirmative Defenses: The payments are legal under the written laws of the country in which the payments are made; or The payment is a reasonable expenditure directly related to the conducting of business with a foreign government. 14

15 Municipal Securities Fraud Municipal securities fraud occurs when materially false or misleading statements are made to investors in connection with the purchase or sale of debt securities issued by state and local governments in the United States. 15

16 FIDUCIARY DUTIES AND RIGHTS OF DIRECTORS RELATING TO WHISTLEBLOWING 16

17 Fiduciary Duties of Directors (quoting the ABA Corporate Director s Guidebook, 6 th ed.) The duty of care, including Responsibility for overseeing management s activities in assuring the corporation s compliance with legal requirements Becoming satisfied that the corporation s procedures for identifying matters requiring disclosure... are reasonably designed to produce accurate and complete public disclosures in an appropriate and timely manner Duty to inform fellow directors and management about information known to the director that is relevant to corporate decisions Confidentiality: A director must keep confidential all matters involving the corporation that have not been disclosed to the public. 17

18 The Duty of Loyalty In general, the duty of directors to not use their position for personal profit or gain or for any other personal or noncorporate advantage. Defensible only through establishing entire fairness to the corporation Duty of loyalty includes the obligation to act in good faith, including the duty to avoid: Failing to act when there is a known duty to act; and Acting with the intent to violate, or with intentional disregard of, an applicable law. 18

19 Corollary Director Duties Especially Relevant to Whistleblowing Issues The duty of care also includes: Duty to inquire into potential problems or issues when alerted by circumstances or events suggesting that board attention is appropriate The duty of loyalty (specifically, the subsumed duty to act in good faith) is also breached by: Failing to respond to red flags 19

20 Director Rights Relating to Whistleblowing Directors have the right: To inspect corporate books and records To request additional information reasonably necessary to exercise informed oversight and make careful decisions Of access to key executives and other employees of the corporation and to the corporation s legal counsel... to obtain information relevant to the performance of their duties To retain their own legal counsel, when determined to be appropriate To request than any issue of concern be put on the board (or appropriate committee) agenda 20

21 HOW DO DIRECTORS FIDUCIARY DUTIES AND RIGHTS RELATE TO WHISTLEBLOWING? 21

22 The Director s Role in Relation to Whistleblowing Directors pre-eminent role: facilitating appropriate reporting of and responses to compliance problems: Establishing and monitoring the effectiveness of internal reporting systems Directors should periodically satisfy themselves that an appropriate process is in place to detect violations... And to encourage... the timely reporting of significant legal or other compliance matters to the board or an appropriate board committee. Directors may be whistleblowers in some circumstances: E.g., a majority of the board persistently refuses to take action to address a material violation of law 22

23 FIDUCIARY DUTIES OF OFFICERS RELATING TO WHISTLEBLOWING 23

24 Fiduciary Duties of Corporate Officers Generally, similar to the fiduciary duties of directors Special application to officers (duty to report up ): (As expressed in Model Business Corporation Act 8.42(b)): Duty to inform his or her superior officer, or another appropriate person within the corporation, or the board of directors, or a committee thereof, of any actual or probable material violation of law involving the corporation... that the officer believes has occurred or is likely to occur. In addition: duty of obedience (reinforced by cognitive biases supporting loyalty to superior officers) 24

25 Whistleblowing and Corporate Officers Again generally, whistleblowing by senior corporate officers will be rare Likely circumstances (factors suggesting that the internal reporting is ineffective) Widespread misconduct within the corporation, implicating senior leadership Exigent circumstances (imminent corporate harm) Inadequate/untimely responses to internal reporting In short, whistleblowing is most likely where there is a substantial breakdown in corporate governance 25

26 Is Whistleblowing Consistent with the Officer s Fiduciary Duties? Tension between: Duty of confidentiality; Duty of loyalty (effect of potential for bounty/award?) AND Duty of care (to protect corporation from harm) Duty to promote legal compliance Resolution is contextual E.g., resolution of loyalty issues: Negative corporate opportunity doctrine: initial presentation through internal reporting system serves entire fairness by affording the corporation the opportunity to avoid or minimize bounty/award also, to limit disclosure outside the corporation 26

27 Federal Preemption General Rule: Under the law of federal preemption, a law or regulation enacted by the federal government preempts conflicting state law. Application: Any conflicting state law or regulation that subject an otherwise qualifying officer, director or other corporate insider to potential liability or disciplinary action would be preempted by the whistleblower provisions in Dodd-Frank and invalid. 27

28 RIGHTS UNDER THE SEC WHISTLEBLOWER PROGRAM 28

29 Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act enacted July 2010 Act required the SEC to establish a whistleblower program which offers: Anonymous reporting Robust employment protections Significant monetary awards The implementing rules for the program became effective in August

30 Anonymous Reporting Overview Confidential nature of SEC investigations Statutory representation requirement Practical reality 30

31 Employment Protections Overview Section 922 PROHIBITION AGAINST RETALIATION (A) IN GENERAL No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower because of any lawful act done by the whistleblower (i) (ii) In providing information to the Commission in accordance with this section In making disclosures that are required or protected under Sarbanes-Oxley Act of 2002, and any other law, rule, or regulation subject to the jurisdiction of the Commission. 31

32 Monetary Awards Overview Subject to the eligibility requirements, the Commission will pay an award or awards, 10-30% of the monetary sanctions collected, to one or more whistleblowers who: Voluntarily provide the SEC With original information That leads to the successful enforcement by the Commission in a federal court or administrative action In which the SEC obtains monetary sanctions totaling more than $1 million The SEC will also pay an award based upon amounts collected in certain related actions. 32

33 Whistleblowers Ineligible for an Award Individuals criminally convicted for related misconduct Members, officers and employees of the SEC and other enumerated organizations Family members and those that reside with an SEC member or employee Members, officers and employees of a foreign government Individuals that knowingly or willfully provide false information to the SEC 33

34 Whistleblowers with Qualified Eligibility for an Award Attorneys Accountants Officers, directors, trustees, and partners Employees or contractors whose duties involve compliance or internal audits Individuals retained to conduct an internal investigation involving possible violations Individuals who obtain information about violations from an ineligible individual 34

35 COMMON QUESTIONS 35

36 Who is eligible to be an SEC whistleblower? 36

37 Eligible SEC Whistleblowers Any individual who, alone or jointly with others, provides information to the SEC relating to a possible violation of the securities laws that has occurred, is ongoing, or is about to occur. Only individuals, not companies, are eligible for the whistleblower protections and incentives in Dodd-Frank. 37

38 Reach of the SEC Whistleblower Program With few exclusions or qualifications, a whistleblower can be any individual or group of individuals regardless of citizenship. Eligible securities violations may occur anywhere in the world Potential international violators can be individuals or organizations (public or private) Jurisdictional nexus: investors, investments, operations, employees or clients in the United States International information sharing 38

39 What is the statute of limitations for bringing an SEC enforcement action? 39

40 Catch all statute of limitations for actions brought by federal agencies in federal court 28 U.S.C. 2462: SEC has five years to bring an enforcement action seeking civil penalties from the date that the claim first accrued Accrual/tolling Rules Discovery rule (applies only to fraud claims): claim does not accrue until the fraud is discovered, or could have been discovered with reasonable diligence Fraudulent concealment/equitable tolling (also applies to nonfraud claims): Temporarily suspends the statute of limitations clock, even though a claim has already accrued, if the defendant took affirmative steps to conceal the wrongful conduct SEC or private plaintiff must plead facts establishing that the defendant took affirmative steps to conceal the wrongful conduct 40

41 What steps can my organization take to deter and detect securities violations? 41

42 5 Tips For Every Responsible Organization 1. Invest in compliance 2. Have a game plan 3. Self-report 4. Communicate more 5. Establish a culture of integrity 42

43 What should every potential officer or director whistleblower know? 43

44 5 Insider Tips For Potential SEC Whistleblowers 1. Know the odds 2. Attempt to identify violations 3. Legally collect evidence 4. Be prepared 5. Timing matters 44

45 Where can potential whistleblowers and other interested parties learn more about the securities laws and the SEC enforcement process? 45

46 Additional Resources 46

47 Whistleblowing in the Corporate World Series: Part VI Whistleblowing and the Corporate Insider Jordan A. Thomas Labaton Sucharow LLP 140 Broadway New York, NY (212)