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2 SEC Enforcement Trends, the Dodd-Frank Whistleblower Law, Employment Law Issues, and Best Practices to Safeguard Your Company April 16, 2013 Presented By: Lauren Camilli, CSC Robert Lewis, Baker & McKenzie Marc Litt, Baker & McKenzie

3 Agenda SEC Enforcement Trends The Dodd-Frank Whistleblower Law Employment Law Issues Arising From Whistleblower Protections Best Practices to Safeguard Your Company 3

4 SEC ENFORCEMENT TRENDS 4

5 Current SEC Enforcement Trends Attitude since Madoff: never again More aggressive enforcement against both corporations and senior management Protecting investors Extraterritorial enforcement of U.S. laws insider trading investment advisers China-based U.S. listed companies 5

6 Increased Enforcement: Drivers & Responses DRIVERS 1. Madoff 2. Financial Crisis: public/congress/media outrage RESPONSES 1. Reorganization/specialization 2. Adoption of criminal law enforcement practices cooperation immunity DPAs, NPAs 3. Diversification of partners 4. Incentivizing whistleblowers 6

7 Former SEC Bounty Program Bounty program established after the October 1987 stock market crash Limited to insider trading Maximum bounty of 10% Between 1989 and 2010: 42 tips 5 claimants awarded bounties for providing information leading to penalties in 7 cases Total amount awarded: $159,537 7

8 Whistleblower Program Comparison Agency Minimum Recovery Maximum Recovery SEC 10% 30% CFTC 10% 30% IRS 15% 30% DOJ/False Claims Act (intervention) DOJ/False Claims Act (no intervention) DOJ Financial Institution Fraud (FIAFEA)* 15% 30% 25% 30% $850,000 $1.6 million * Range calculated based on statutory incentives of 20-30% on the first $1 million of recovery, 10-20% on the next $4 million, and 5-10% on the next $5 million. 8

9 THE DODD-FRANK WHISTLEBLOWER LAW 9

10 Dodd-Frank Whistleblower Overview Section 922 of the Dodd-Frank Act greatly increases incentives for whistleblowers to report violations of all securities laws to the SEC These incentives significantly increase the risk that public companies will be the target of SEC investigations, and justify fresh scrutiny of compliance programs 10

11 Enhanced Whistleblower Incentives Increased Eligibility and Size of Awards Expansion of violations eligible for awards whistleblower bounties now available for all securities law violations, including violations of the Foreign Corrupt Practices Act any judicial or administrative action brought by the [SEC] under the securities laws the resulting monetary sanctions must, in the aggregate, exceed $1,000,000 Bounties increased from a maximum of 10% to a minimum of 10%, and a maximum of 30% 11

12 Broadened Definition of Whistleblower Rule 21F-2(a) An 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 natural persons, not companies, are entitled to obtain a whistleblower award. Final rules narrow exclusions and create exceptions to encourage maximum reporting. 12

13 Narrowed Definition of Whistleblower for Purposes of Anti-Retaliation Protections Rule 21F-2(b)(1) For purposes of anti-retaliation protections, an individual is a whistleblower if: (s)he possesses a reasonable belief that the information relates to a possible securities law violation (s)he reports that information in the manner described Reasonable belief : both subjectively genuine and objectively reasonable (i.e., one that a similarly situated employee might reasonably possess) 13

14 Voluntary Submission Rule 21F-4(a) Not voluntary if made in response to a request from: (i) the SEC, (ii) the PCAOB, (iii) any self-regulatory organization, (iv) Congress, (v) any other authority of the federal government or (vi) a state Attorney General or securities regulatory authority Note: Foreign authorities and other state and local authorities not listed in final rule A request to an employer is not considered to be directed to employees who possess the documents or other information that is within the scope of the request. Only a request that is directed to the individual involved (or to his or her representative) will preclude that individual from subsequently making a voluntary submission Rejected comments urging that a submission may not be voluntary if made after being contacted for information in the course of an internal investigation 14

15 Original Information and Independent Knowledge Rule 21F-4(b) Original information must be derived from the whistleblower s independent knowledge or analysis Is not already known to SEC from another source (unless the whistleblower is the original source) Is not exclusively derived from allegations in judicial or administrative proceeding Independent knowledge is factual information that is not obtained from publicly available sources Can be derived from information from third parties Cannot be derived from FOIA requests or court filings However, independent analysis can be based upon the whistleblower s evaluation of publicly available sources 15

16 Exceptions to Independent Knowledge and Independent Analysis Rule 21F-4(b)(i)-(vi) The following are not eligible to receive bounties: Persons who obtained information through attorneyclient privilege or as part of legal representation Persons whose principal duties involve legal, compliance, investigative or audit responsibilities (with exceptions discussed on next slide) Persons who obtained the information by a means or in a manner that violates federal or state criminal law Persons who obtained the information from any of the above persons 16

17 Exceptions to the Exception Rule 21F-4(b) In the following limited circumstances, legal, compliance, audit, and other personnel may be considered whistleblowers eligible for bounties: Disclosure may prevent substantial injury to the financial interest or property of the company or its investors Reasonable basis to believe that the company is engaging in conduct that will impede an investigation of the misconduct If 120 days have elapsed after the whistleblower provided the information to the appropriate company representative (audit committee, chief legal or compliance officer, person s supervisor) 17

18 Other Persons Not Eligible for Bounties Rule 21F-8(c) Member, officer or employee of SEC, DOJ, PCAOB, a selfregulatory organization, an appropriate regulatory agency or any law enforcement organization Member, officer or employee of foreign government or foreign financial regulatory authority Person convicted of a criminal violation related to the SEC action or a related action Person who obtained information through an audit of company s financial statements Person who makes false representations in SEC or related action Persons who received the information from any of the above persons 18

19 Anti-Retaliation Provisions in SOX Section 806 prohibits retaliation, i.e., taking adverse action against employee who... provides information or assists in investigation regarding conduct employee reasonably believes violates SOX or any SEC rule or regulation, or any federal law relating to fraud against shareholders 19

20 Anti-Retaliation Provisions in SOX When employee provides information to or assists in investigation conducted by (1) a federal regulatory or law enforcement agency, (2) any member of Congress or committee of Congress or (3) a person with supervisory authority over employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct); or 20

21 Anti-Retaliation Provisions in SOX files, causes to be filed, testifies, participates in, or otherwise assists in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of SOX or of any SEC rule or regulation or any provision of federal law relating to fraud against shareholders 21

22 Anti-Retaliation Provisions in SOX File civil complaint with the U.S. DOL within 180 days of becoming aware of the retaliatory action and, if the DOL does not issue a final decision within 180 days of filing the complaint, the employee can bring a de novo action in federal district court. Remedies include reinstatement, back pay with interest and compensation for any special damages sustained as a result of the retaliation, including litigation costs, expert witness fees, and reasonable attorney fees. 22

23 Anti-Retaliation Provisions in SOX SOX also provides criminal sanctions in Section 1107 Crime to knowingly, with an intent to retaliate, to take any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense. Penalties include fine and/or imprisonment of not more than ten years. 23

24 Anti-Retaliation Provisions in Dodd-Frank Section 922 of Dodd Frank Prohibits retaliation against employees who provide information to the SEC or CFTC, assist in any investigation or legal action of either SEC or CFTC related to such information, or engage in any other protected activity under SOX. 24

25 Anti-Retaliation Provisions in Dodd-Frank File lawsuit in federal district court within 6 years after the date when the violation occurs or within 3 years after the date facts material to the right of action are known or reasonably should have been known by the employee, but not more than ten years after the date of the violation. No DOL exhaustion requirement (unlike SOX) Substantially longer statute of limitations than SOX 25

26 Anti-Retaliation Provisions in Dodd-Frank The plaintiff is entitled to a jury trial. Remedies include reinstatement, double back pay, attorney s fees and other costs. For employee whistleblowers who report violations of federal commodities laws, remedies include back pay, and special damages, including attorney s fees and costs. 26

27 RESULTS TO DATE 27

28 Results to Date FY ,001 tips 50 States, DC, Puerto Rico 49 countries First award: about $50,000 (30%) on August Notices of Covered Action (exceed $1 m threshold) FY 2011 (partial year) 334 tips 28

29 Where Are The Tips Coming From? State Number of Tips Country No. of Tips California 435 United Kingdom 74 New York 246 Canada 46 Florida 202 India 33 Texas 159 China 27 Washington 102 Australia 21 New Jersey 102 South Africa 10 Illinois 99 Israel 10 Pennsylvania 90 Ireland 9 Arizona 67 Germany 8 North Carolina 67 Venezuela 6 Source: SEC Annual Report on the Dodd-Frank Whistleblower Program, FY

30 What Are The Tips About? Allegation Type FY 2011 FY 2012 Corporate Disclosure & Financials 15.3% 18.2% Offering Fraud 15.6% 15.5% Manipulation 16.2% 15.2% Insider Trading 7.5% 6.3% Trading & Pricing 5.6% 4.8% Foreign Corrupt Practices Act 3.9% 3.8% Unregistered Offerings 5.4% 3.3% Market Event 3.3% 2.8% Municipal Securities & Public Pension 2.7% 2.1% Other 23.7% 23.4% Blank 1.5% 4.4% Source: SEC Annual Reports on the Dodd-Frank Whistleblower Program, FY 2011 & FY

31 EMPLOYMENT LAW ISSUES RAISED BY WHISTLEBLOWER PROTECTIONS 31

32 WHAT DOES THIS MEAN WITH RESPECT TO BEST PRACTICES? 32

33 Once claim filed, no opportunity to remedy or fix things after the fact. Need to ensure ahead of time that your company s employee discipline, HR/management decision-making, and documentation practices are such that claim could be successfully defended 33

34 Means that you had better be sure that your discipline documentation practices and protocols are complete and timely. A. Have them audited. B. Educate your managers. C. Ensure that documentation is contemporaneous with decisions and is done for as much as possible. 34

35 Documentation, Documentation, Documentation A. FACTS B. ACCURATE C. CONSISTENT WITH TREATMENT OF OTHERS D. TIMELY E. SUPPORTED BY DOCUMENTATION 35

36 OSHA INVOLVEMENT IN SOX CLAIMS CAN LEAD TO OSHA AND DOL REVIEW OF REGULAR OSHA AND DOL COMPLIANCE ISSUES. THIS MEANS THAT YOU SHOULD BE SURE THAT YOU ARE CURRENTLY IN OSHA AND DOL COMPLIANCE. 36

37 PROTECTING YOUR COMPANY FROM WHISTLEBLOWER RISKS A. Record-keeping (including accident logs). B. Training. C. Employee illness & injury prevention plans. D. Ergonomics if you are in a covered industry. E. Also, means that impact of prior OSHA or DOL citations can pre-prejudice SOX claims (and vice versa). F. Wage and overtime records. 37

38 Controversy Regarding Role of Internal Compliance Programs No issue received more focus during rule making process than the role of internal compliance programs Competing SEC and Corporate Interests SEC interest in encouraging reporting to SEC Corporate interest in not undermining compliance program; commentators argued for mandatory internal reporting before SEC reporting Final rules do NOT require internal reporting to be eligible for bounties 38

39 SEC s Incentives to Encourage Internal Reporting Consider how much a whistleblower has participated in or interfered with the internal compliance process Gives credit to a whistleblower whose company passes the information along to the SEC, even if the whistleblower does not Lengthens the period of time in which a whistleblower can wait before coming to the SEC after reporting internally: Up to 120 days Credit for the original date they reported to their company 39

40 How Companies Should Respond Puts a Premium on: Prevention and Due Diligence Internal Recognition of Compliance Issues Training Prompt and Thorough Investigations Compliant with local data privacy and labor laws Nipping Violations in the Bud Solid Disciplinary and Performance Records Proper Document Retention 40

41 How Companies Should Respond Puts a Premium On: Emphasis on Open Doors and Culture of Compliance Petting the Watchdogs rather than Muzzling Them Being Conscious of Possible Lack of In House Counsel Attorney-Client and Work Product Privileges Internationally Being Sensitive to Settlement and Release Language or Appearances of Hush Money or Obstruction PLANNING AHEAD for when the whistle blows 41

42 The Essential Elements of Corporate Compliance Leadership Risk Assessment Standards and Controls Training and Communication Monitoring, Auditing and Response 42

43 Thank You!

44 Lauren Camilli Director, Global Compliance Programs CSC (703) Contact Information Robert Lewis Partner Baker & McKenzie, LLP (212) Marc Litt Partner Baker & McKenzie, LLP (212)

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