The New SEC Whistleblower Rules: How to Prepare Your Company Webcast. Amy Goodman Jason Schwartz John Sturc F. Joseph Warin June 8, 2011

Transcription

1 The New SEC Whistleblower Rules: How to Prepare Your Company Webcast Amy Goodman Jason Schwartz John Sturc F. Joseph Warin June 8, 2011

2 Overview SEC Rules: Sea Change in Compliance New Whistleblower Regime: Statutory Framework and Overview of SEC Rules Impact Culture of compliance Internal reporting procedures HR / employment procedures Internal investigation practices 2

3 SEC Rules: Sea Change in Compliance 3

4 <Presentation Title/Client Name> Rules in Context Rules are intended to supplement SEC s ongoing efforts to encourage individuals and companies to self-report and self-remediate securities law violations SEC s individual cooperation initiative Non-prosecution and deferred prosecution agreements SEC v. Pequot Capital Management, Inc. et al. (July 2010): SEC awarded $1 million to ex-wife for information regarding alleged insider trading. Award was largest provided under SEC s pre-dodd-frank authority in insider trading cases. The Commission s new whistleblower program... is part of a broader initiative undertaken by the Division in the last two years to further strengthen our enforcement program by expanding our arsenal of investigative tools. Robert Khuzami Director SEC Division of Enforcement May 25,

5 False Claims Act Experience Experience with qui tam lawsuits under FCA suggests that whistleblower claims may become an important source of SEC investigations and enforcement actions 89.7% of employees who would eventually file a qui tam case initially reported their concerns internally, either to supervisors or compliance departments (Impact of Qui Tam Laws on Internal Compliance: A Report to the Securities and Exchange Commission, National Whistleblowers Center 4 (Dec. 17, 2010)) Healthcare Industry 2010 recoveries in the healthcare sector exceeded $2.5 billion AstraZeneca: $520 million settlement with AstraZeneca Pharmaceuticals resulted in the largest amount ever paid by a company in a civil only settlement of off-label marketing claims (Attorney General Eric Holder, April 27, 2010) $45 million award to whistleblowers 5

6 False Claims Act Experience Government Intervention in Qui Tam Cases Data shows that government intervention is key <Presentation Title/Client Name> $17.6 billion $595.8 million U.S. Intervened U.S. Declined Settlements and judgments in qui tam cases in which government intervened account for nearly 97% of all recoveries since October 1, 1987 In 2010, settlements and judgments in qui tam cases in which government intervened account for 95% of recoveries (Fraud Statistics, Overview (Oct. 1, 1987 to Sept. 30, 2010), DOJ, Civil Division, Sept. 30, 2010) 6

7 Rules Apply Broadly SEC s whistleblower rules apply broadly to all possible securities law violations Whistleblower bounty program applies to securities law violations by public companies, their subsidiaries and affiliates, registered broker-dealers, investment advisers, investment companies, rating agencies, hedge funds, and other entities 7

8 New Whistleblower Regime: Statutory Framework and Overview of SEC Rules 8

9 Statutory Framework Dodd-Frank Act signed into law on July 21, 2010 Added whistleblower provisions requested by SEC to Securities Exchange Act of 1934 Under Dodd-Frank Act: if original information voluntarily provided by one or more whistleblowers leads to successful SEC enforcement action that results in sanctions exceeding $1 million, the whistleblower is entitled to between 10% and 30% of collected monetary sanctions SEC has discretion to determine amount of whistleblower award (within 10% to 30% range) but must consider: significance of information to success of action degree of assistance provided by whistleblower and any counsel interest of SEC in deterring violations by making awards other factors established by SEC 9

10 Expanded Protections Against Whistleblower Retaliation Dodd-Frank Act Expanded protections for whistleblowers New causes of action SEC whistleblowers private right of action (15 U.S.C. 78u-6(h)(1)(B)(i)) Statute of limitations of 6 years from date of violation or 3 years after employee should reasonably have known of violation, but in any event no longer than 10 years after date of violation (15 U.S.C. 78u-6(h)(1)(B)(iii)) Provides for double back-pay (plus reinstatement, attorneys fees, litigation costs, and expert witness fees) (15 U.S.C. 78u-6(h)(1)(C)) Similar cause of action for CFTC whistleblowers (7 U.S.C. 26(h)(1)(B)(i)) Expansion of SOX whistleblower protection Statute of limitations extended from 90 to 180 days (18 U.S.C. 1514A(b)(2)(D)) Clarifies jury trial right (18 U.S.C. 1514A(b)(2)(E)) Prohibits pre-dispute arbitration agreements (18 U.S.C. 1514A(e)) Expands coverage to subsidiaries, affiliates, and statistical rating organizations (18 U.S.C. 1514A(a)) 10

11 SEC Rules Notwithstanding strong objections by the corporate community, the SEC rules do not require employees to report possible violations of law through internal compliance processes as a prerequisite to eligibility for an award Rather, the rules include modifications to incentivize whistleblowers to report internally In determining award amount, SEC will consider whether whistleblower reported internally Rules provide 120-day look back period Whistleblowers who report a possible violation internally will be eligible to receive an award if company simultaneously or later reports information to SEC that leads to successful enforcement action [The new rule] significantly underestimates the negative impact on internal compliance programs. Kathleen Casey SEC Commissioner May 25,

12 SEC Rules Under SEC rules, award is available to: whistleblower who voluntarily provides SEC with original information that leads to successful enforcement action (or related action) by SEC that results in monetary sanctions of more than $1 million arising out of same core facts Rules become effective 60 days after publication in Federal Register 12

13 SEC Rules Whistleblower. An individual who, alone or jointly with others, provides SEC with information that relates to possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur Voluntary submission of information. Information provided before request, inquiry, or demand directed to whistleblower (or representative) by SEC or other specified regulatory bodies Original information. Must be based on whistleblower s independent knowledge or independent analysis, and must not be already known to SEC from any other source. Original information includes only that information that is provided to SEC for the first time after July 21,

14 SEC Rules Leads to successful enforcement action. Award may be made if SEC brings successful judicial or administrative action in either of the following circumstances: First, when information was sufficiently specific, credible, and timely to cause staff to: commence an examination open an investigation reopen an investigation inquire concerning different conduct as part of a current examination or investigation Second, when examination or investigation already underway, and whistleblower s submission significantly contributed to success of action 14

15 SEC Rules Payment of award. Rules permit aggregation of multiple cases that arise out of same nucleus of operative facts, as well as related actions brought by other government agencies Factors increasing amount of award: significance of information provided to success of action degree of assistance provided programmatic interest of SEC in deterring securities law violations whether whistleblower participated in internal compliance systems and reported any possible violation internally, or assisted in any internal investigation Factors decreasing amount of award: personal culpability of whistleblower any unreasonable delay in reporting whether whistleblower interfered with internal compliance and reporting systems 15

16 SEC Rules Exclusions: Individuals Always excluded Individuals convicted of criminal violation that relates to SEC (or related) action Individuals who knowingly and willfully make false or fraudulent statement, or use false document, with intent to mislead SEC or other authority Members, officers, or employees of foreign government Individuals associated with SEC or other law enforcement organization Generally excluded Officers, directors, trustees, or partners Compliance or internal audit personnel Individuals retained to conduct inquiry or investigation into possible law violations Certain individuals associated with public accounting firm Exceptions Reasonable basis to believe disclosure necessary to prevent company from engaging in conduct likely to cause substantial injury to financial interest or property of entity or investors Reasonable basis to believe company engaging in conduct that will impede investigation of alleged misconduct At least 120 days have elapsed since whistleblower provided information internally 16

17 SEC Rules Exclusions: Information Always excluded Information obtained in violation of federal or state criminal law Information acquired with intent to evade rules Information obtained from excluded person (and no exception applies) Generally excluded Attorney-client privileged information Information obtained in legal representation of client Note: Both general exclusions apply whether information possessed by non-attorneys or attorneys, including in-house attorneys Exception Where disclosure permitted under SEC or State conduct rules Under SEC rules, to prevent issuer from committing material violation that is likely to cause substantial injury to financial interest or property of issuer or investors Under State rules, crime-fraud exception 17

18 SEC Rules Staff Communications with Whistleblowers Rules authorize SEC staff to communicate directly with whistleblowers who are directors, officers, members, agents, or employees of a company that has counsel, without first seeking consent of company s counsel SEC s adopting release emphasize[s] that nothing about this rule authorizes the staff to depart from the Commission s existing procedures and practices when dealing with potential attorney-client privileged information 18

19 SEC Rules Anti-Retaliation Protections For purposes of anti-retaliation protections provided by Section 922 of Dodd-Frank Act, an individual is a whistleblower if that individual possesses a reasonable belief that the information he or she is providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur Purports to bar enforcement of confidentiality agreements SEC s adopting release states: Because the anti-retaliation provisions are codified within the Exchange Act, SEC has enforcement authority for violations by employers who retaliate against employees for making reports in accordance with Section 21F Creates significant potential for overlap and even conflict with jurisdiction already vested with Department of Labor 19

20 Impact 20

21 Impact SEC forecasts it will get hundreds, if not thousands, of whistleblower tips per year Expects about half of them to lead to formal money claims We expect there are going to be tons of these whistleblowing complaints. Some are going to be excellent, and some are going to be out there. David Rosenfeld, Associate Director of SEC s New York Regional Office Because some recent fines imposed by SEC have been in the hundreds of millions of dollars, incentive to file a claim is great Plaintiffs firms are already openly soliciting whistleblower clients ( Sometimes the whistleblower is from within the corporation, sometimes it s from a competitor, sometimes it s from a counterparty, sometimes it s even from a jilted spouse. Thomas Sporkin, Chief of SEC s Office of Market Intelligence, February 4,

22 Addressing the New Rules: Four Areas to Consider Culture of compliance Internal reporting procedures HR / employment procedures Internal investigation practices 22

23 Culture of Compliance 23

24 <Presentation Title/Client Name> Encourage compliance at all levels Tone at the top set by senior management and board of directors Commitment to compliance empowers employees to prevent wrongdoing and encourages employees to speak to supervisors or use other internal reporting systems when they first become aware of any possible misconduct 24

25 Codes of conduct and training Consider reviewing codes of conduct to see if any changes are appropriate, especially with respect to encouraging communications Check whether codes of conduct disseminated to all employees and made available online and in multiple languages Employees should receive training on the code when they are first hired and periodically thereafter Consider requiring employees to sign annual certification stating that they have read code of conduct and received training 25

26 Require employees to report violations Employees should be required to promptly report internally all violations of code of conduct and be regularly reminded of this requirement As part of annual certification, companies should consider having employees acknowledge that they are not aware of any potential violations that have not already been reported to company 26

27 Internal Reporting Procedures 27

28 Make internal reporting easy and accessible Consider providing several methods of reporting, such as tollfree hotlines, office of ombudsman, anonymous system, and websites that accept anonymous allegations Consider making reporting methods available 24 hours a day and in multiple languages for companies operating internationally or with foreign employees Consider benchmarking internal reporting systems against those of companies in industry 28

29 Communicate importance of internal reporting Consider highlighting importance of compliance and internal reporting at all levels of organization and continually communicate this message Consider creative ways to raise employee awareness of importance of reporting compliance issues: Employee newsletters and electronic communications to highlight examples of internal reporting and positive steps that have resulted Recognition of employees who show exceptional commitment to compliance, including reporting possible violations to company 29

30 HR / Employment Procedures 30

31 HR / Employment Procedures Screen prospective new hires to identify and properly vet any red flags, consistent with applicable federal and state laws Incorporate adherence to code of conduct, including use of internal reporting procedures, into employee evaluations. For example, companies should consider: Using an employee s commitment to fostering a culture of ethics and accountability among the criteria used to evaluate performance employees who take additional compliance training programs, demonstrate leadership in compliance areas, and actively and candidly participate in investigations should be recognized Including the reporting of potential misconduct as a positive performance criterion 31

32 HR / Employment Procedures Evaluate training programs provided to managers and supervisors on how to react and respond to employee reports of possible violations and add or revise new training programs if necessary Respond promptly to troubled working relationships Review procedures in place for dealing with known whistleblowers to make sure they comport with the anti-retaliation provisions and consider whether they should be revised. Managers and supervisors should receive training. There may be instances where disciplinary action against a whistleblower is appropriate and warranted; however, to reduce the likelihood of a successful retaliation claim, companies should document their investigation of a whistleblower and create a clear record of any adverse employment action Identity of whistleblowers, when not anonymous, should be shared only on need-to-know basis Counsel should be consulted before taking action against whistleblower to make sure company properly addresses any potential legal issues 32

33 HR / Employment Procedures Obtain confirmation from departing employees that they have disclosed to the company any misconduct of which they are aware so that it can be addressed and remedied Separation agreements should include acknowledgments of employee rights to file charges, provide truthful information, and otherwise assist governmental authorities so they are not misinterpreted as impeding these rights, while at the same time waiving individual relief to the maximum extent permitted Whistleblower retaliation claims under SOX (as amended by Dodd- Frank Act) and CFTC provisions of Dodd-Frank Act cannot be included within pre-dispute arbitration agreements 33

34 Recent Anti-Retaliation Cases Involving Whistleblowers Sylvester v. Parexel International (ARB May 25, 2011): Allegation of securities fraud not a necessary component of protected activity under SOX Section 806 Critical of Platone v. FLYi, Inc. (ARB Sept. 29, 2006) Tides v. Boeing Corporation (9th Cir. May 5, 2011): Providing information to media is not protected activity under SOX, and Boeing was within its rights to terminate the employee compliance officers Egan v. TradingScreen, Inc. (S.D.N.Y. May 4, 2011): Holding that (1) any SOX-protected complaints fall within scope of Dodd-Frank Act s whistleblower provisions, whether or not employee reports to SEC; and (2) reporting of misconduct to employer and participation in law firm investigation may be sufficient to jointly provide information to SEC if law firm subsequently reports to SEC, triggering section 922 s anti-retaliation provisions Johnson v. Siemens Building Technologies, Inc. (ARB March 31, 2011): ARB determined that non-public subsidiary of publicly held company could be held liable for whistleblower retaliation under Section 806 of SOX 34

35 Internal Investigation Practices 35

36 Internal Investigation Practices Consider review of current investigation procedures and create plan in advance to respond to allegations of possible violations Scope and nature of investigation will depend on type of allegations made Decide which employees or departments will be involved in different types of investigations and develop basic protocols that will be used in whistleblower investigations In some cases, may be important that the investigation be conducted by someone with independent perspective, so as to give internal and external confidence to results Public companies should review types of whistleblower complaints that they require to be promptly reported to Audit Committee and determine whether any changes to these procedures are appropriate 36

37 Internal Investigation Practices Investigate expeditiously, yet thoroughly Investigators will face pressure to find answers quickly But results must be accurate see, e.g., Renault case in which company acknowledged that its assertions of misconduct by executives were mistaken Consider apprising whistleblower of status and outcome of investigation consistent with needs for confidentiality. A whistleblower left wholly in the dark may assert to SEC that company s internal investigation is inadequate. Interviewers should remember to remind employees not to reveal existence of investigation or substance of interview to anyone 37

38 Internal Investigation Practices Consider having an attorney conduct or participate in interviews. All information obtained through a communication that is subject to attorney-client privilege is not considered original information, and thus generally is not eligible for an award. Provide Upjohn warnings before all employee interviews to protect privilege United States ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Inc. (S.D.N.Y. Apr. 5, 2011): Lawyer s participation as plaintiff in qui tam lawsuit against former corporate client violated conflicts and confidentiality rules, requiring dismissal of action Consider supplementing policies regarding privileged and confidential information. Rules appear to permit attorneys and others in possession of information protected by company s attorney-client privilege or work product doctrine to disclose that information to SEC under some circumstances. Whistleblowers may disclose confidential and proprietary business information to government without corporate authorization Companies should seek to preserve confidential status of their information 38

39 Internal Investigation Practices Due to resource constraints, SEC may ask companies to self-investigate whistleblower complaints made to SEC If SEC calls, attempt to learn as much as possible about alleged violation Consider self-reporting calculus Government asserts that it will give credit for self-reporting Be aware that whistleblower may have already made his or her complaint to government 39

40 Internal Investigation Practices Be mindful of public disclosure obligations regarding internal investigations in connection with periodic reports and other public filings Broker-dealers and investment advisers also must consider SRO reports and amendments to public filings Consider remedial measures: Consider changes to personnel, policies, and disclosures as indicated by the results of the investigation 40

41 Internal Investigation Practices Expect surprises Whistleblower may be monitoring company s own investigative efforts and confidentially reporting to SEC There may be additional whistleblowers with new allegations 41

42 Today s Presenters: F. Joseph Warin 1050 Connecticut Avenue, N.W. Washington, DC T: F: fwarin@gibsondunn.com Jason C. Schwartz 1050 Connecticut Avenue, N.W. Washington, DC T: F: jschwartz@gibsondunn.com Amy L. Goodman 1050 Connecticut Avenue, N.W. Washington, DC T: F: agoodman@gibsondunn.com John H. Sturc 1050 Connecticut Avenue, N.W. Washington, DC T: F: jsturc@gibsondunn.com 42

43 Whistleblower Team Gibson Dunn has formed a multidisciplinary Whistleblower Team to offer experienced, comprehensive counsel on the full range of issues that arise under the SEC rules. The attorneys comprising Gibson Dunn s Whistleblower Team are drawn from several of the firm s practice areas, including Labor and Employment, Securities Enforcement, Corporate Governance and Securities Regulation, White Collar Defense and Investigations, and Litigation. The Whistleblower Team is experienced in: Counseling companies, executives, and boards of directors on developing effective and comprehensive compliance programs, as well as governance structures and policies. Addressing SEC disclosure issues, and evaluating possible claims under federal and state securities laws. Conducting time-sensitive internal investigations. Representing firms and individuals facing securities enforcement and other related regulatory investigations. Defending against allegations of accounting irregularities, retaliation, or discrimination leading to wrongful termination lawsuits brought by a whistleblower. 43