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SEC Whistleblower Complaints Swell to a Flood: How to Find the High Ground of Sound Compliance

The volume of whistleblower complaints received by the SEC recently has left some to wonder about the current state of securities laws compliance. With the move by most businesses to a remote working environment, the SEC Enforcement Division has received over 4,000 whistleblower tips since mid-March, a 35% increase over the same time period last year. This has resulted in the Enforcement Division opening hundreds of new investigations[1]. At the same time, the number and value of whistleblower awards by the SEC have reached all-time highs,[2] with the single largest whistleblower award in history awarded Thursday.[3]

It is unclear whether the increased reporting rate is reflective of newly developed compliances issues during the pandemic, or long-standing ones that employees are now reporting with more personal time and physical distance from day-to-day operations.

The costs of remaining in or coming into compliance pale in comparison to the costs associated with a substantiated SEC whistleblower complaint leading to an enforcement action. Aside from the associated civil penalties, which can be considerable, the cost of conducting internal investigations and responding to external investigations can be extensive. The SEC announcing an enforcement action can also damage investor confidence, resulting in a lower stock price and costing a company far more than any penalties. Often, an enforcement action is also followed by shareholder litigation — even when alleged errors may be those of unknowing omission, rather than an active intent to violate securities laws. 

While a robust compliance and internal control program is always important, there has never been a better time to revisit your own processes and examine places for improvement. Here are a few areas on which to focus:

  • Ensure employees know whom to contact within your company to report concerns or violations. Employees who feel leadership takes compliance seriously, investigates allegations of wrongdoing, and protects whistleblowers from reprisal can be the best first line of defense against any sort of securities enforcement action.

  • Communicate to your employees how any whistleblower reporting to you remains confidential, and ensure your systems for maintaining confidentiality and preventing reprisal are robust. Allegations of reprisal by whistleblowers expose companies to further liability and penalty, beyond any securities law violations.

  • As part of educating employees on how to report issues, make sure internal compliance policies are up to date and comply fully with Sarbanes-Oxley and other applicable laws and regulations. 

  • Ensure the audit committee on your board is properly resourced and meeting regularly. Independent, internal investigations and prompt self-reporting, where appropriate, to regulators are viewed positively in any regulatory investigation or enforcement action.

  • If you receive an internal whistleblower report, treat it seriously. Regulators do not expect a board to have detailed working knowledge of all day-to-day operations, but they do expect that when a board becomes aware of a problem, it will take decisive action to correct it.


Endnotes

[1]  https://www.wsj.com/articles/tips-to-sec-surge-as-working-from-home-emboldens-whistleblowers-11591003800

[2] https://www.natlawreview.com/article/sec-whistleblower-awards-skyrocket-2020

[3] https://www.law360.com/articles/1280015/sec-pays-50m-whistleblower-award....

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume X, Number 161

TRENDING LEGAL ANALYSIS


About this Author

Adam Sisitsky, Mintz Leving Law Firm, Boston, Corporate and Litigation Law Attorney
Member

Adam is an experienced trial attorney and litigator whose practice encompasses a wide range of matters focusing on business and securities litigation, internal investigations, and government enforcement actions. Adam represents corporations, officers, directors, accountants, and other individuals in SEC investigations and enforcement proceedings, as well as in civil litigation. He routinely counsels public and private companies and others in matters involving compliance issues, including matters arising under the Foreign Corrupt Practices Act (FCPA).

...
617-348-1689
Michael S. Arnold, Mintz Levin Law Firm, Labor Law Attorney
Member / Chair, Employment, Labor & Benefits Practice

Michael Arnold is Chair of the firm's Employment, Labor & Benefits Practice.  He is an employment lawyer who deftly handles a wide array of matters. His capabilities include counseling on everyday HR life cycle issues, defending management and senior executives in connection with employment-related proceedings, and assisting companies navigate the complex employment issues that arise in transactions.  Michael’s clients appreciate his strong emphasis on providing not just legal advice, but also practical advice, that aligns with organizational and HR strategies while reducing exposure. He also prides himself on being user-friendly, responsive, and strategic.

When Michael is not with a client, he’s out there leading the Firm’s Employment, Labor and Benefits Section.  He is still quite active blogging for Mintz’s award-winning Employment Matters Blog, where he currently serves as an Editor and where he’s twice been named a top author by JD Supra (2016 and 2017). His peers seem to like him too as they have recognized him consistently; first he was included on the New York Super Lawyers Rising Star List in 2012 and then included among the New York Super Lawyers List from 2013 through the present.

More specifically, here is what Michael is practicing on a day to day basis:

  • Counseling on issues related to the HR life cycle (recruiting, staffing, performance, including evaluations and PIPs; engagement, retention, separation, including reduction in force; post-separation, including employee mobility issues), and compliance with discrimination, wage and hour, family and medical leave, workers’ compensation and disability, and other employment laws and regulations.
  • Investigating and reporting on employee complaints, including sexual harassment and discrimination complaints, and assisting management resolve other employee relations issues.
  • Conducting anti-discrimination/harassment and other HR and legal issue-based training seminars regarding legal requirements, best practices, and risk mitigation.
  • Auditing and assisting in the development and implementation of employment policies, procedures, and practices.
  • Representing management and senior executives in connection with a variety of complex employment litigation matters, including pre-trial, trial and appellate work; administrative discrimination charges and other agency proceedings (including EEOC, NYSDHR, NYCCHR, DOL, WCB); and arbitrations and mediations relating to wage and hour, discrimination, restrictive covenants, contract, and other employment-related disputes, including collective and class actions.
  • Drafting and negotiating employment-related agreements and policies, including offer letters, employment and consulting agreements, restrictive covenant agreements, separation agreements, and employee-related regulatory disclosures.
  • Representing clients in connection with corporate transactions and bankruptcy proceedings, including conducting employment-related due diligence and negotiating employment-related warrants and representations and related employment transaction documents.
212-692-6866
Megan N. Gates, Mintz Levin, Securities & Capital Markets Mergers & Acquisitions EB-5 Financing
Member

Megan is a prominent corporate and securities attorney who deftly steers public companies through capital-raising transactions, SEC reporting obligations, and mergers and acquisitions. She applies knowledge she gained during an earlier in-house role with a laboratory and analytical instrument maker to ably advise life sciences and other clients on corporate governance and SEC compliance matters.

Megan is a member of the Firm's Policy Committee and Co-chair of the Securities & Capital Markets Practice Group. She concentrates her practice on providing counsel to public companies...

617-348-4443