by Michael Connor

A provision in the financial reform legislation now before Congress could lead to an increase in multi-million dollar awards to whistleblowers, prompting more government enforcement actions and increasing pressure on companies to report misconduct early.

Whistle-Blower_iS_000007907470The legislation would require the Securities and Exchange Commission (SEC) to award whistleblowers up to 30 percent of the fines collected by the government for providing “original information” regarding violations of securities laws.

While the new measure would apply to all fraud, it could have a particular impact on anti-bribery cases involving the U.S. Foreign Corrupt Practices Act (FCPA), where prosecutions and settlements have risen to record levels in recent years.  Based on some recent cases, payouts to whistleblowers could be substantial.

Siemens Corp., for example, agreed in December 2008 to pay $800 million to the U.S. government as part of a larger international settlement of FCPA charges.   And in a case that was initially prompted by evidence from a whistle-blowing employee, Daimler AG agreed in March of this year to pay $180 million to settle charges that it had made improper payments to officials in at least 22 countries to obtain government contracts for Daimler vehicles.

While the Senate and House bills differ somewhat – the Senate version includes a 10 percent minimum award, for example – it seems likely that some compromise version will be incorporated and approved by Congress.

False Claims Act

Monetary awards to encourage whistleblowing are not new.  The U.S. False Claims Act allows citizens with evidence of fraud against the federal government to file qui tam lawsuits, on behalf of the government, in order to recover the stolen funds.  In the 1980s, most qui tam suits were against defense contractors; in recent years they’ve largely involved health care fraud or instances of illegal marketing of drugs by pharmaceutical companies.

Pfizer Corp.’s record 2009 $2.3 billion settlement of charges related to the marketing of several drugs led to a payout of about $51 million to one former company salesman who provided evidence to investigators.

And only last week, drug maker AstraZeneca agreed to pay $520 million to settle charges brought by the federal government based on evidence provided by whistleblower James Wetta, a former AstraZeneca sales representative.  For Wetta, it’s something of a repeat performance – he assisted a government probe of his former employer, Eli Lilly, and was one of several sales reps who shared in a 2009 $100 million payout to several whistle-blowers.

On average, successful qui tam whistleblowers collect $46.7 million, according to a recent study published by professors at the University of Chicago and the University of Toronto, who conclude that “a strong monetary incentive to blow the whistle does motivate people with information to come forward.”

However, the study notes, whistleblowers aren’t always successful in their suits and many say they pay a price. “In 82 percent of cases with named employees, the individual alleges that they were fired, quit under duress, or had significantly altered responsibilities as a result of bringing the fraud to light. Many of them are quoted saying, ‘If I had to do it over again, I wouldn’t.’”

A “Race” to Disclose?

The expansion of monetary awards for whistleblowers in the finance reform bill “is likely to greatly increase the number of FCPA matters under government investigation,” notes an analysis by attorneys at the law firm of Morgan Lewis, who think it may also have an impact on how management reacts when fraud is first identified.

Companies that discover potential fraud have customarily been given “credit” by the SEC and federal prosecutors for voluntarily disclosing problems. The Morgan Lewis analysis suggests the new legislation will “change the calculus in deciding whether to self-report a violation, as the risk of disclosure by a current or former employee will be greatly heightened.”

Attorneys at the firm of Latham & Watkins agree, suggesting in a white paper that a new “cooperation regime” by the SEC “increases the odds that senior management or the board will first learn of misconduct at the company not through a hotline or internal audit report, but in a telephone call from SEC Enforcement.”

Mike Koehler, a law professor at Butler University and an expert in the FCPA, says the changes have “the very real potential of putting the company and the whistleblower in a competitive ‘race’ to see who can disclose first, recognizing that both ‘race participants’ have incentives to do so.” Koehler thinks this will very likely lead to more FCPA “issues” being disclosed “at premature stages without a clear basis for even concluding or suspecting that the statute has been violated.”

Koehler says that while he is generally in favor of “whistleblower-like” provisions in laws, he does not favor the proposed new monetary awards because of how they might apply to the FCPA.  Often, he says, a company will settle with the government because it “is simply easier, more cost effective, and more predictable for a company to settle an FCPA enforcement action – often through a non-prosecution or deferred prosecution agreement –  than challenge the government’s interpretation of facts and law in an adversary proceeding.”

“Settled FCPA enforcement actions do not necessarily represent the triumph of the government’s legal position,” Koehler says. “Given these dynamics, it would seem silly to reward a whistleblower when it is debatable whether the conduct at issue even violated the law. “

Nonetheless, with new and hefty financial incentives for whistleblowers likely to become law, experts say it’s important for businesses to reassure those who might be inclined to reach out first to federal prosecutors rather than the company itself. Recommendations include making sure that employees understand that retaliation for reporting legitimate concerns of potential misconduct will not be tolerated.

“From the highest levels of the company, regularly emphasize to all employees the company’s desire to address potential wrongdoing and to make it easy for potential whistleblowers to report concerns to the relevant company personnel,” recommends the Latham & Watkins firm.