CONGRESS CONSIDERS BROADER PROTECTIONS FOR CORPORATE WHISTLEBLOWERS

Ashley Herzog,

The U.S. Supreme Court limited the scope of protection under existing law to employees who report wrongdoing directly to the Securities and Exchange Commission (SEC) or the Commodities Futures Trading Commission (CFTC).

The U.S. Congress is considering bipartisan legislation to protect whistleblowers from retaliation when they report wrongdoing to corporate officials.

The Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2008 have provisions intended to prevent businesses from firing or demoting employees who report fraud, insider trading of stock, or other criminal activities to authorities. The U.S. Supreme Court limited the scope of protection under existing law, however, to employees who report wrongdoing directly to the Securities and Exchange Commission (SEC) or the Commodities Futures Trading Commission (CFTC), in its 2018 opinion in Digital Realty Trust, Inc. v Paul Somers.

‘Holding Corporate America Accountable’

The Whistleblower Programs Improvement Act (WPIA) would broaden the scope of the law by extending whistleblower protections to individuals who report wrongdoing internally before or instead of reporting it directly to government agencies.

The WPIA was introduced in the Senate by Finance Committee Chairman Chuck Grassley (R-IA) and Sens. Tammy Baldwin (D-WI), Joni Ernst (R-IA), and Dick Durbin (D-IL) on September 23. Sens. Susan Collins (R-ME) and Margaret Hassan (D-NH) joined as cosponsors on December 3 and 9, respectively. A similar bill, H.R. 2515, was passed by an overwhelming majority of the U.S. House of Representatives on July 9.

“There’s no reason why those who want to report wrongdoing internally should face potential retaliation from the exact people they are reporting to,” Grassley stated in a September 24 press release. “Internal disclosures can be the fastest and most effective way for a company to remedy problems, prevent fraud and protect investors.”

“If we strengthen and empower whistleblowers, we can do a better job of holding corporate America accountable,” Baldwin stated.

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‘There Is Retaliation’

The number of whistleblower tips has “increased dramatically” in recent years, states the SEC’s Office of the Whistleblower 2019 Annual Report, published on November 15. In fiscal year 2019, the SEC awarded $60 million to eight individuals who provided information that led to successful SEC enforcement actions.

Retaliation against whistleblowers is a serious problem, says Richard Bowen, a professor at the University of Dallas and a Citigroup whistleblower who testified against the banking industry after the subprime mortgage crisis of 2010.

“It’s a horrible problem, absolutely,” Bowen said. “Whistleblowers are widely discriminated against, and there is retaliation. There is no doubt that any potential whistleblower is going to blow up their career. If you report on your own company for violations, there’s an unwritten expectation that you’ll leave voluntarily. If you don’t, you’ll most likely be forced out.”

Corporate Hotlines

Large public corporations have established procedures for employees to report perceived wrongdoing, says Dennis McCuistion, a clinical professor of corporate governance at the University of Texas at Dallas and executive director of the Institute for Excellence in Corporate Governance.

“Most public corporate boards that I’m on or know of have done a good job,” McCuistion said. “They’ve established hotlines for whistleblower complaints.”

Such tip lines usually go directly to the chairman of the board of directors’ audit committee, says McCuistion, but most of the calls received do not relate to financial irregularities.

“Ninety-nine percent of the complaints on hotlines are related to personnel issues that could or should be handled by human resources departments,” McCuistion said.

However, “after the incident is reported, board members are unlikely to know what happens,” McCuistion said.

“The fact that whistleblowers are retaliated against rather than applauded is appalling,” McCuistion said.

 ‘Lip Service’ to Ethics

The corporate culture determines whether an employee who reports ethics violations internally will be penalized, Bowen said.

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“Some companies accept feedback, and that’s how you know if you have an ethical culture,” Bowen said. “The companies who do have an ethical culture listen to employees and act on what they’re telling them. Many companies are happy to have an opportunity to have a dialogue with an employee. An ethical company will listen, and even agree with the employee and fix it. You don’t read about that in the headlines, but that’s how an ethical corporation works.”

When companies punish whistleblowing, industries lose valuable people, Bowen says.

“Some corporations merely pay lip service to a ‘Code of Ethics,’” Bowen said. “But if an employee reports something uncomfortable for the company, they are penalized. And it’s very hard to find another job in that industry, because you’re viewed as disloyal. The whistleblower becomes a foreign organism.”

Advantages for Corporations

There are some aspects of the WPIA that are positive for corporations, Bowen said.

“Without fear of retaliation, more employees may be willing to approach the problem internally, instead of reporting violations directly to the SEC,” Bowen said. “The advantage of this bill for corporations is that employees will go to them first, before the SEC.”

As a former whistleblower, Bowen says he “absolutely” approves of the new bill.

“I am very hopeful this latest bill will make it through,” Bowen said. “Grassley is a strong whistleblower advocate, and he’s building a coalition of lawmakers.

“This new legislation is definitely needed because whistleblowers have been deceived into believing since Sarbanes-Oxley and now Dodd-Frank into believing they have more protections than they do,” Bowen said.

Ashley Herzog (aebristow85@gmail.com) writes from Avon Lake, Ohio.

Internet Info

“Whistleblower Program, 2019 Annual Report to Congress,” U.S. Securities and Exchange Commission, November 15, 2019: https://www.heartland.org/publications-resources/publications/whistleblower-program-2019-annual-report