SEC Whistleblowers and Voluntary Disclosures
With the new SEC whistleblower rules, companies now face a difficult decision of whether and when to disclose to the SEC and DOJ potential FCPA violations. The issue is not new but the dynamic will certainly be different.
For example, when it is clear that whistleblower intends to report allegations to the SEC, the company needs to consider whether to make a pre-emptive report to the SEC concerning the complaint even if the issue has not been investigated or where the company believes the compliant is without merit. A pre-emptive disclosure may cause the SEC to decline to open an investigation when it considers the whistleblowers complaint.
In some cases, the whistleblower complaint may raise criminal liability issues and the company may decide to self-report to the Justice Department. Such a disclosure may mitigate against any future penalties. Under the Sentencing Guidelines, a company must have, “(A) prior to an imminent threat of disclosure or government investigation; and (B) within a reasonably prompt time after becoming aware of the offense, reported the offense to appropriate governmental authorities, fully cooperated in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct.”
Once a company receives a complaint, the company should do everything in its power to respond and deal with the substance of the complaint in a responsible fashion. By doing so, the company will reduce the possibility that the whistleblower will report the complaint to the SEC. If successful, the company can control the scope and length of the investigation, address the problem and even self-report the misconduct to receive some cooperation credit.
There are several steps the company can take to reassure the whistleblower that it intends to make a good faith effort to address the complaint.
1. If the company knows the whistleblower’s identity, the company should meet with the whistleblower and outline the steps it intends to take to respond to the complaint. While conducting an internal investigation, the company should keep the whistleblower apprised of the status of the investigation. The company should avoid sharing substantive information about the internal investigation, except for a summary of its efforts.
2. If the company decides to self-disclose to the SEC and/or the Justice Department, the company should inform the whistleblower about its action.
3. The company should implement any remedial measures which are needed as quickly as possible. Such actions may reassure the whistleblower and help the company to earn future cooperation credit.
4. If the company determines that there has been no violation or misconduct, the company should inform the whistleblower of its findings, without disclosing any details about the nature of its investigation.
5. In those cases where the whistleblower reports his or her complaint to the SEC, it is critical for the company to aggressively investigate the substantive issues and establish ongoing contact with the SEC. Meanwhile, the SEC’s whistleblower office prioritizes the complaints it receives based on the seriousness of the allegation, the quality of the information, the level of persons involved in the alleged wrongdoing (e.g., CFO), and whether harm to investors is ongoing.
The number of complaints under the new program is estimated to exceed 30,000 tips and complaints annually. The SEC cannot investigate every tip and complaint, especially given its resource limitations. In some cases, the SEC may ask companies to conduct an internal investigation and report back to the SEC. This will give companies an important opportunity to negotiate the scope of the internal investigation, and seek to resolve the issues favorably while minimizing the disruption to the company and potential harm from an SEC investigation.