When it comes to whistleblower rules and protections, ignorance is not a defense the U.S. Securities and Exchange Commission will accept.
“Denial is not a strategy around this program,” the SEC’s Sean McKessy told FEI Daily in an exclusive interview. “Adjust your mindset if the thought was to pretend there is no whistleblower program, or pretend there is no ability for employees to report, or not educate your employees. Part of my job is to spread the word this program exists, and there is a mechanism for people to report wrongdoing when they see it."
“The fact that we have paid out over $15 million to over eight individuals, is clear testimony this program exists, it is real,” said McKessy, who is the Chief of the SEC's Office of the Whistleblower.
McKessy made is comments to FEI Daily following last week's settlement of a whistleblower "retaliation" case against a New York hedge fund Paradigm Capital Management.
“If you are determined to never encounter our office, then the best thing you can do is take a fresh look at your compliance program to try and create a culture that if your employees encounter wrongdoing, they feel comfortable reporting it internally so that they see it is stopped, and they won’t be punished for reporting it, even if they are wrong about the existence of an underlying violation.”
He continues, “The message for senior financial executives and senior officers is: If I don’t really want to have a whistleblower go to the SEC, what do I need to do so an employee comes to us, what do I have to do to create an environment where my employees believe that an internal report will result in a credible, transparent investigation.”
“Our program does not mandate that employees report internally,” notes the Office of Whistleblower Chief, ”but we do have significant incentives if employees report internally before they come to us. However, that depends on whether employees are aware of how to report internally.”
He added, “There is no one-size-fits-all, as to what a credible investigation should look like. Take a fresh look at your compliance program, tailor it to your industry, your company, as a starting point.”
One Challenge to the SEC’s Whistleblower Methods
When the Paradigm case was reported last week, Broc Romanek’s TheCorporateCounsel.net blog ran a post entitled The SEC’s First Whistleblower Retaliation Case, citing DLA Piper Attorney Nick Morgan, who questioned whether the SEC had overreached its authority in its retaliation against Paradigm by overstepping the Dodd-Frank Wall Street Reform Act.
We invited McKessy to comment on the statements in the DLA Piper attorney’s commentary as to whether the SEC’s rule on whistleblower retaliation could be subject to court challenge.
“Dodd Frank is a law that has to be enforced; in placing the whistleblower and anti-retaliation provisions in the Exchange Act of 1934, our statutory obligation is to enforce the Exchange Act. From a purely statutory perspective, given our jurisdictional mandate enforcing the anti-retaliation provisions falls within our authority to enforce,” said McKessy.
Additionally, he said, “Our rulemaking falls not only within our rights, but is our obligation to invoke our authority,” he added. “Our rules confirm we have the authority to do it.”
“It’s not for me to speculate whether people agree with that or whether some believe it to be an overreach of the statute,” McKessy added. “It certainly wouldn’t be the first time a regulator was challenged on the implementation of a statutory mandate if it were to happen.
As a key member of the SEC Enforcement Division’s team — and following on the report in last week’s WSJ CFO Journal by Emily Chasan, of SEC Enforcement Director Andrew Ceresney announcing that Financial Reporting, Audit Fraud are ‘Next Frontier’ —we asked McKessy for his thoughts on the financial reporting fraud landscape generally.
“If you look at our annual report to congress, we do break down the allegations by type, and consistently, financial reporting fraud has been in the top three in the kinds of tips we receive,” observed McKessy. “I don’t think that’s necessarily surprising,” he added. “Financial reporting fraud is squarely within the kind of conduct that we believe whistleblowers are in a great position to be aware of and report. Clearly, financial fraud and disclosure fraud is high priority, and high volume, in terms of tips we receive.”
“I am certainly aware of priorities of the division,” McKessy emphasized.
And detailing how his Office of the Whistleblower collaborates with other groups within the Division of Enforcement, painting a picture which, to me, seemed not unlike the Center for Disease Control working to inoculate against, or wipe out a new strain of disease, McKessy concluded his remarks to FEI Daily:
“We have set up new task forces to deal with particularized types of conduct and we in the Office of the Whistleblower are actively collaborating with those task forces to work together, such that if there is a messaging we can make to potential whistleblowers regarding those types of tips, and if there is messaging that David Woodcock and Margaret McGuire (Chair and Vice Chair, respectively, of the SEC's Financial Reporting and Audit Fraud Task Force) can work on to spread to people who may be exposed to financial fraud, we are working on that messaging as well.”
A webcast sponsored by the Anti-Fraud Collaboration will be held on July 1, 2014 from 2-3:30 pm EDT. Entitled “How to Improve Your Whistleblower Program and Address Impediments to Reporting”, the webcast is offered at no charge to the public, and offers up to 1.5 CPE.