Whistleblower corporate backlash has no place in compliance
When Countrywide Financial’s Michael Winston reported his employer for selling subprime mortgages in February 2013, he was hailed as a hero. The New York Times described him as the man who ‘conquered Countrywide’, while other accolades included ‘Wall Street’s greatest enemy’. Two years later and Winston is out of a job, some US$98,000 out of pocket, and fighting for his life after being diagnosed with laryngeal cancer.
The mortgage policies of Bank of America (BOA)–owned Countrywide Financial made a significant contribution to the 2008 global financial crisis. After blowing the whistle, Winston was fired from his job and then spent millions of dollars fighting Countrywide and BOA. A jury eventually granted him a multi-million dollar award for retaliation and termination, but this was subsequently overturned by an appellate judge, leaving Winston open to vengeful attacks from BOA.
As a result of the bank’s actions, a court eventually ordered Winston to pay nearly US$98,000 in court costs, meaning that he paid a larger individual penalty than virtually every wrongdoer behind the 2008 global financial crisis.
Alayne Fleischmann was fired from her job at JPMorgan Chase in February 2008 after stating her objections to a series of bad loans at the bank. The information that she subsequently provided to the Securities and Exchange Commission (SEC) resulted in a US$9 billion financial penalty for her employer.
In an interview with Rolling Stone, Fleischmann said, ‘Anyone thinking about becoming a whistleblower looks at what happened to whistleblowers before … The number one concern is that [corporate retaliation] incentivizes people to do nothing. The likely thing people will do in the future is just quit.’
In the same Rolling Stone article, Winston said, ‘What I worry about is that someone is going to see wrongdoing, and then see what’s happened to people like me, and decide it’s not worth it.’
SEC officials have become so concerned about a possible corporate backlash against whistleblowers that earlier this year they sent letters to a number of companies requesting years of nondisclosure agreements, employment contracts and other documents. The requests were part of a wider investigation into whether companies were muzzling those who were prepared to report misconduct. Perhaps not surprisingly, these were not well received by those companies targeted. However, the government agency enjoys the full backing of the law.
Reinvigorated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC launched a whistleblower programme in 2012 that enables it to financially reward those that report so long as the information provided leads to the collection of more than US$1 million in monetary sanctions.
The informant can receive between ten percent and 30 percent of the money collected, while the SEC maintains the informant’s anonymity. As a result, the number of tips since received by the SEC has been growing significantly year on year.
Other similar programmes include New York Attorney General Eric Schneiderman’s proposed Financial Frauds Whistleblower Act that would protect and reward those employees who report information about illegal activity in the banking, insurance and financial-services industries.
Before that, United States Attorney General Eric Holder sought the support of Congress to aid those prosecutors who attempt to build criminal cases against senior Wall Street executives. His suggestions included boosting rewards for Wall Street whistleblowers, as well as funding more FBI agents with forensic-accounting expertise.
Although, in theory, the Dodd-Frank regulations prevent companies from impeding an employee’s ability to report misconduct, there have been plenty of examples of organisations embracing evermore creative ways of doing just that. These have included banning the disclosure of confidentiality agreements, requiring employees to find witnesses before documenting abuse, and asking employees if they’ve ever previously blown the whistle.
Some agreements have even prohibited employees from accepting the financial incentive offered by the SEC whistleblower programme.
Sadly, those that report nonetheless continue to face retaliation. One recent case involved a whistleblower at a Veterans Affairs (VA) hospital in the United States, who reported concerns about how suicidal patients were being handled.
Therapist and decorated veteran Brandon Coleman claimed that he faced retaliation after telling his supervisor in Phoenix about his concerns following an incident where five suicidal veterans walked out of an emergency room without receiving any assistance. Coleman claimed that such practice was indicative of a wider problem. He was suspended from his duties six days later.
The case highlights the apparently flawed reporting culture that still exists in the VA organisation, even though VA Secretary Robert McDonald has been seeking to encourage respect for those who are brave enough to come forward.
In office since July 2014, McDonald has been trying to change the alleged culture of retaliation at VA and wants, in his words, to make ‘every employee a whistleblower’ and ensure that VA ‘celebrates them’.
McDonald’s predecessor Eric K Shinseki lost his job following revelations by a group of whistleblowers in Phoenix about the supposedly common practice of falsifying patient wait times in order to hide the length of time it took for a veteran to been seen by doctors. The claims caused public outrage, and a subsequent investigation highlighted systematic retaliation against whistleblowers.
Previous informants had raised concerns about accounting irregularities, nursing shortages, and the mishandling of healthcare funds.
Another United States Government department that has been accused of acts of retaliation is the Federal Bureau of Investigation (FBI). One recent case involved a surveillance team member who came forward as a whistleblower and claimed that some FBI decisions were made based on nepotism rather than merit.
FBI memos confirmed that three jobs in elite surveillance teams had been given to the younger relatives of high-ranking supervisors, including two fast-track promotions to full special agent status. However, the FBI denied the allegation of nepotism, maintaining that each candidate goes through a rigorous selection process.
The FBI dismissed the whistleblower’s complaints and in turn gave him a poor personal review. The whistleblower then approached the Justice Department’s Inspector General and the Senate Committee on the Judiciary because he feared the practices were hampering the FBI’s war on terror.
Senate Judiciary Committee Chairman Chuck Grassley said he was concerned by the treatment of the whistleblower when he tried to report internally. ‘Whenever an employee comes forward like this with concerns about waste and mismanagement, the Bureau should be grateful that it has someone willing to step up and point out problems … But too often, the whistleblower gets punished for doing the right thing.’
Company officer solution
In its efforts to tackle such a backlash against whistleblowers, the SEC recently began reviewing the front-row seats occupied by corporate officers. And one recent case gave it the perfect opportunity to push the onus of responsibility firmly onto the C-suites.
The SEC awarded between US$475,000 and US$575,000 to a former company officer who proactively reported a violation after recognising that the internal compliance system was failing to meet expectations. The SEC said that the officer qualified for the money because he or she reported the information after other compliance professionals within the company had processed it but failed to draw any attention to it.
Officers, directors, trustees or partners are rarely eligible to receive whistleblower awards. However, this particular officer benefitted from the fact that the SEC will permit company officers to report the fraud and collect payment if the original reporter or compliance supervisor fails to act on the information for 120 days. The SEC confirmed that this was the first time an officer had received a whistleblower award under these circumstances.
Director of the SEC’s Enforcement Division Andrew Ceresney said, ‘Corporate officers have front-row seats overseeing the activities of their companies, and this particular officer should be commended for stepping up to report a securities law violation when it became apparent that the company’s internal compliance system was not functioning well enough to address it.’
Meanwhile, Chief of the SEC’s Office of the Whistleblower Sean McKessy said, ‘Receiving information and cooperation from company insiders is particularly useful in the early detection of securities fraud, and we will continue to leverage whistleblower information to help combat securities law violations and better protect investors and the marketplace.
‘Meanwhile, companies must have rigorous internal compliance programs that adequately address and remedy potential violations voiced by their employees as well as by their officers, directors, or other individuals.’
It can only be hoped that such high praise and financial incentives will motivate other C-suites to closely monitor their whistleblowing programmes to ensure that they remain fit for purpose.
How to implement a robust whistleblowing programme
In order to adequately address and remedy potential violations, companies need to have a fair whistleblowing programme that provides protection and anonymity for those who report. The programme also needs to be supported by a company culture that ensures that complaints will be taken seriously and investigated where appropriate.
If employees feel comfortable reporting through the available channels, and are confident that their information will be taken seriously and not result in retaliation, then they are much more likely to pursue internal avenues before approaching external regulators. This will give companies the chance to address the issue and mitigate any resulting financial penalty or reputational damage.
When was the last time you gave consideration as to whether your whistleblowing programme was working properly and fit for purpose? Do you know how your colleagues really feel about the prospect of suffering negative consequences for speaking up? Simply having non-retaliation clauses in whistleblower documentation is not enough to ensure that companies are providing adequate protection for staff and relevant third parties who make bona fide reports. There are several facets to implementing a robust whistleblowing programme.
Management training for supervisors needs to encompass what it means when non-retaliation is guaranteed in a workplace, as very often it is direct-line managers who are approached with concerns first. How they react can determine whether a complainant faces retaliation. Supervisors should be informed that if they take retaliatory action against a complainant they will face disciplinary action.
Furthermore, whistleblowing needs to be properly promoted and encouraged. A few old posters scattered the offices does not represent an adequate whistleblowing communications campaign. There needs to be continued emphasis, especially from senior management and in a variety of communication avenues, that whistleblowing is valued by the company. Examples should be made of instances where whistleblowing has led to a better workplace, whether by increasing safety measures, identifying improper conduct which has led to financial loss and potential legal risk, or otherwise.
Conducting employee surveys can be eye opening. These surveys could cover how comfortable employees feel about whistleblowing, their level of confidence in not facing retaliation, and even whether they know about all of the avenues available for making complaints.
Engaging an external professional-services firm to conduct a whistleblower programme review is also a good way of ensuring that you receive an objective assessment of your programme by an organisation with access to relevant benchmarking data. This could help you to identify gaps in your reporting practices.