February 3, 2016

Newly Released Government Accountability Project White Paper Responds To Security And Exchange Commission Rulings Penalizing Whistleblowers For Delay In Disclosing Corporate Fraud

By Jessica T. Moore

Seemingly unexplained and arbitrary SEC rulings reducing whistleblower awards due to reporting “delays” have troubled those who work to expose fraud against investors.  See The Hill, SEC whistleblowers be warned, don’t delay in reporting fraud.  Now, an in-depth study from the Government Accountability Project details why such delays may occur.  The goals of the paper, Why Whistleblowers Wait: Recommendations to Improve the Dodd Frank Law’s SEC Whistleblower Awards Program, released February 1, 2016, are twofold: (1) to “seek to make a record of what whistleblowers experience – the choices they must make and the consequences – from discovery through resolution, and its impact on delays,” and (2) to recommend SEC standards for sufficient notice of SEC expectations that will not punish the sometimes unavoidable delays in providing “responsible, safe disclosures.”

Among other findings, the GAP report confirms what whistleblowers and those who represent them have long known: that delays in reporting are not deliberate and calculated.  Rather, common and primary reasons for hesitating in reporting fraud, even internally at the company, are:

  • Fear of retaliation
  • Fear that reporting would be futile
  • Desire to confirm the suspected misconduct
  • Need to understand more completely the nature and scope of the wrongdoing
  • Consideration and weighing of the risks of reprisal against disclosing it

The GAP explains that its paper is based on its “experience working with over 8,000 whistleblowers since 1977, empirical studies, academic research, and a just-completed survey responded to by 1,366 whistleblowers, support organizations and whistleblower lawyers.”

Most whistleblowers, says GAP, do not immediately run to the SEC to disclose, but first attempt to report and fix the problem internally.  The primary motivation is “loyalty to the company and professional pride in its positive role in society” and the belief that the company would correct the action.  The very act of first reporting internally, of course, causes delay in reporting to the SEC.  As many, if not most whistleblowers experience, the delay often is further exacerbated by the company’s subsequent unresponsiveness or stonewalling.

Frequently, only after frustration has built over corporate inaction and the continuation of the problems will someone decide to take further action.  Inevitably, additional time is required for the potential whistleblower to educate herself about the SEC or other whistleblower programs, conduct further due diligence of the fraud, protect herself professionally and legally, and otherwise investigate and build a case.

The SEC has rationalized award penalties for delay, stating that “it would undermine our objective of leveraging whistleblower tips to help detect fraud early and thereby prevent investor harm if whistleblowers could unreasonably delay reporting and receive greater awards due to the continued accrual of wrongful profits.”  U.S. SEC Award Order, Nov. 4, 2015, 3.  In response, the GAP white paper cites extensive evidence showing what those in the whistleblower community have long known: whistleblowers are not motivated by money, but rather the “compulsion to do the right thing” and the need to “bring to light something that was ethically compromised.”

The GAP paper makes a number of recommendations to the SEC in considering the effect of delay, including a presumption of timeliness absent a finding of “deliberate delay,” and credit to the whistleblower for case-complexity, fear of retaliation, and employer response to internal reporting (including company tactics).  Perspectives like the GAP’s should assist the Commission to understand the true experience of whistleblowers and to reconsider policies that counter its own goals of receiving quality submissions and protecting persons brave enough to disclose the harmful schemes.

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