In the last ten years the U.S. Securities and Exchange Commission (“SEC”), has paid out over $1 billion in rewards to whistleblowers and levied over $6 billion in fines resulting from whistleblower tips. Some of these fines have been against UK companies and this is not surprising. The UK ranks as one of the top countries for foreign tips received by the SEC and thousands of companies in the UK are regulated by the SEC. Despite this, many UK employees and employers know very little about the SEC whistleblower rewards programme and the benefits and pitfalls it can present for clients. With U.S. and UK bolstering economic ties in the wake of Brexit, UK employment counsel need to have the SEC whistleblower programme on their radar if they want to advise clients effectively.
What Is The SEC?
The SEC is a U.S. government agency whose primary role is to make sure that companies with stock traded in the U.S. are obeying ‘securities laws.’ Securities laws are a collection of U.S. laws and regulations that require companies with stock traded in the U.S. to make honest and truthful disclosures to the market, keep accurate books and records, and abstain from all manner of fraud, bribery and corruption. The SEC is a civil regulator, meaning that it can levy substantial fines and compel production of documents, but cannot bring criminal charges.
What Companies In The UK Are Regulated By The SEC?
There is no shortage of companies in the UK that are regulated by the SEC. In fact, SEC regulates some of the largest corporations in the UK (and their subsidiaries) and most of the financial industry. This includes:
- All UK companies with stock traded on the NASDAQ and the NYSE, such as BP, Vodafone, Lloyds, National Grid, HSBC, Unilever, AON, over 100 others and their subsidiaries.
- All international companies with stock traded on the NASDAQ or NYSE who have operations in the UK, such as Apple, Amazon, Google (Alphabet), Microsoft, thousands of others and their subsidiaries.
- Most major financial institutions in the UK, such as NatWest, Barclays, JP Morgan, Citigroup and many others.
This expansive jurisdiction means that a large percentage of skilled workers in the UK are employed by companies that are regulated by the SEC. This makes those employees ideal participants for the SEC whistleblower rewards programme, and makes their employers prime targets for SEC investigations.
What Is The SEC Whistleblower Programme?
The SEC whistleblower rewards programme was introduced in the aftermath of the 2007 financial crisis with an aim to encourage people to report legal violations to government regulators. The programme allows individuals to report legal violations to the SEC anonymously, and if their tip leads to a fine of over $1 million, the whistleblower is entitled to 10-30% of that fine as a reward. The programme has paid out over $1 billion to whistleblowers already and the average payout is approximately $5 million.
Almost anyone is eligible to participate in the whistleblower rewards programme provided they are not a lawyer or government official. Even the limited restrictions on eligibility include exceptions designed to ensure maximum inclusion of whistleblowers in the programme.
What Are The Key Issues For UK Employees To Be Aware Of?
The biggest beneficiaries of the SEC whistleblower programme will be UK employees working for companies regulated by the SEC. If these employees witness legal violations they can report the violation anonymously to the SEC and potentially claim a multi-million-dollar reward if the company is fined for the misconduct.
Reporting to the SEC has several notable benefits:
- With an average award payment of ~$5 million, whistleblowers who participate in the programme can be handsomely rewarded.
- Reporting to the SEC can be done anonymously, meaning that the employee significantly lowers the risk that they will be subject to retaliation for reporting their concerns.
- Reporting to the SEC can be done at little or no cost. The SEC operates a web portal to accept tips and for whistleblowers who choose to employ counsel, most whistleblower lawyers in the U.S. work on contingency fee.
- The SEC allows people who were involved in the misconduct to report and claim whistleblower rewards. People who participated in the wrongdoing will have the size of their reward reduced, but are not disqualified from claiming an award unless they are criminally convicted as a result of their involvement.
Importantly, the whistleblower programme also caters to employees who choose to report internally at their organization. However, when an employee reports internally, the employee needs to report the same information to the SEC within 120 days if they want to claim credit for any disclosures the company makes to the SEC.
What Are The Key Issues for UK Employers To Be Aware Of?
Counsel for companies often focus on the negative implications of the whistleblower programme. But doing so ignores the opportunity it provides for ethical UK companies who want to report misconduct by their competitors. While this idea might seem fanciful, there is already a cottage industry of financial analysts and short sellers who investigate companies and report their misconduct to the SEC in order to claim whistleblower rewards.
If a UK company discovers that a competitor (who is regulated by the SEC) has potentially committed a legal violation, they would be foolish not to explore reporting to the SEC. Not only might this put an end to the conduct, it could also result in a lucrative whistleblower reward for the company. While the SEC won’t pay awards to a corporate entity, there is nothing stopping a company from nominating an employee or group of employees to report a competitor’s misconduct.
Counsel representing companies who are regulated by the SEC also need to ensure that their clients have robust compliance programmes to mitigate the increased risk of regulatory investigations. Luckily, most whistleblowers still report their concerns internally before reporting to the SEC. As a result, companies who can address internal complaints efficiently can often self-report to the SEC and reduce or avoid fines. In addition, companies in particularly high-risk industries may want to consider offering incentives to employees who report violations internally to increase their company’s ability to self-report and avoid fines.
A final point that counsel for employers should keep in mind is that a company regulated by the SEC cannot take steps to impede an employee whistleblowing to the SEC. As a result, if an employment dispute arises, it is critical that at no stage during the investigative process that the employee’s ability to report to the SEC is inhibited. This is particularly important if the dispute ends in a settlement, as releases, NDAs and settlement agreements cannot contain prohibitions against reporting to the SEC or the company will likely face a fine.
What Legal Violations Are Appropriate To Report To The SEC?
Not all legal violations are suitable for SEC enforcement. For example, the SEC has been reluctant to bring enforcement actions related to workplace issues such as discrimination and wage disputes which are better suited to the labour courts. The conduct that catches the attention of the SEC’s enforcement division typically involves some form of fraud. This can be internal fraud, such as the forgery of invoices or misclassification of expenses, or external fraud such as making misleading statements to the public or investors.
One class of allegation that counsel should be particularly sensitive to are Foreign Corrupt Practices Act (FCPA) violations. FCPA violations typically involve companies offering something of value to a foreign government official in exchange for a business advantage. FCPA violations are aggressively enforced by the SEC and the Department of Justice and attract some of the largest fines that either agency levies. One need only recall the $800 million that Rolls-Royce paid to settle FCPA charges to understand the seriousness of an FCPA violation.
How Do SEC Regulations Fit Into A Global Whistleblower Policy?
Global whistleblower policies are increasingly popular, but in order to be effective, they need to carefully drafted with the assistance of outside counsel. For UK companies that are regulated by the SEC, global whistleblower policies should highlight compliance with the two laws that protect SEC whistleblowers: Sarbanes-Oxley Act of 2002 (SOX) and Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (Dodd-Frank).
SOX mandates that almost every company regulated by the SEC must have an anonymous procedure which allows employees to report concerns about auditing, accounting and other compliance issues that could affect shareholders. In addition, SOX prohibits companies from discriminating against employees who report violations of securities laws or SEC regulations internally within the company. Dodd-Frank also prohibits retaliation against whistleblowers, but only protects employees who report their concerns externally to U.S. regulators such as the SEC.
In order to highlight compliance with these laws, global whistleblower policies should outline how employees can report violations anonymously and detail the controls that are in place to protect whistleblowers from retaliation. While specific reference to the SEC may not be necessary, policies should clearly reflect a culture that encourages employees to report concerns and display a commitment to protecting whistleblowers from retaliation, regardless of whether they choose to report violations internally to compliance, or externally to an agency such as the SEC.
Conclusion
Regardless of whether counsel is acting for an employer or an employee, whenever facts involve a company regulated by the SEC, counsel should ensure they have considered the implications of the SEC whistleblower programme. This can ensure their client doesn’t miss out on a golden opportunity to claim a reward or self-report a violation and avoid a hefty fine.
Article by John Peterson, Managing Attorney of FBR, a firm that specializes in representing SEC and FCPA whistleblowers. John has worked for almost a decade on financial crime and corruption cases around the globe. He regularly acts as an expert commentator in business and legal media on corporate crime and international corruption issues.
