But, says Zuckerman, if you were to talk to people who lost their life savings to corporate fraud, “you would find it hard to argue that, if the SEC has to take some time to separate the wheat from the chaff, then this program is not worthwhile.”
The SEC’s Nestor, while declining to comment directly on statements made about the commission, says a new program has been put in place to triage cases, which have increased “significantly” since the enactment of Dodd-Frank. (For claims submitted now, any awards earned will be paid after the final rules are issued.)
To those opposed to the proposed rules, an even bigger issue than a potential flood of tips is the provision that whistle-blowers may report fraud allegations directly to the SEC. To be eligible for protection under the antiretaliatory provisions in the Sarbanes-Oxley Act, they have had to first inform their employer through internal compliance programs.
The concern is that the option to go straight to the SEC could undermine the effectiveness of existing compliance and internal-audit processes. “It will harm companies,” says Rick Firestone, a partner at McDermott Will & Emery and a former associate director of the SEC’s enforcement division. “It’s ironic that the Dodd-Frank whistle-blower program sets up strong incentives to bypass the very internal reporting that the Sarbanes-Oxley program was set up to promote and protect.”
There also is the possibility that the opportunity for an employee to earn a big monetary award could exacerbate the effects of fraud in some cases. For example, someone might wait for a period of time before reporting a fraud in order to influence a larger recovery by the SEC.
Firestone, who defends corporate clients against whistle-blower claims, notes that most companies are grateful to receive information on possible fraud and take decisive action to root it out. That may be true, but it does not take into account that some violations are part of company culture and orchestrated at the top. If a CEO is behind an illegal scheme to stimulate short-term profits, the company’s compliance program is unlikely to be effective, Zuckerman points out, and an internal “investigation” could include tampering with evidence or witnesses.
For her part, Watkins said at the NYSSCPA meeting that a better strategy than paying whistle-blowers would be to incentivize corporate risk managers and internal auditors —who are not eligible for whistle-blowing awards under Dodd-Frank — by giving them stronger voices and meaningful guarantees that they will be listened to. She added that much fraud would be eliminated if companies were required to pay CEOs all in cash, so they would not be tempted to “cook the books” in order to win potentially lucrative stock options.
And despite the lure of a huge payday, it will continue to be the case, Watkins suggested, that many who could blow whistles will keep quiet for fear of losing their jobs or wrecking their companies. Further, they fear being stamped with a “troublemaker” label that will make finding a new corporate job extremely difficult, as most whistle-blowers have found out.
On that point, Zuckerman agrees with Watkins. “She has a good point,” he says. “High-level corporate people who are aware of fraud would probably earn more over their careers if they kept their jobs rather than blowing the whistle.”