SEC whistleblower program stricter than IRS bounty which paid $104 million to felon, former official says

September 12, 2012

By Stuart Gittleman

NEW YORK, Sept. 12 (Thomson Reuters Accelus) – Rewards like the $104 million the Internal Revenue Service said Tuesday it would pay a convicted felon would not occur under a similar Securities and Exchange Commission program, a former official who helped develop the program told Compliance Complete.

The former official, Jordan Thomas, leads the whistleblower practice at the law firm Labaton Sucharow.

The IRS said it would pay Bradley Birkenfeld, a former UBS private banker, for providing information that led to a deferred prosecution agreement with the bank and $780 million in fines, penalties, interest and restitution to settle charges of helping wealthy U.S. taxpayers hide billions of dollars in secret accounts.

Birkenfeld pleaded guilty to withholding related information from federal investigators and spent some 30 months in federal prison. That did not bar him from benefiting from the IRS whistleblower program, but it would disqualify him from the SEC program, which was implemented in August 2011, Thomas said.

Thomas noted differences between the programs for rewarding individuals, even if they participated in the wrongdoing, who provide information that leads to the recovery of unpaid taxes and penalties, in the case of IRS tips, or fines and the disgorgement of ill-gotten gains, in the case of SEC whistleblowers.

The SEC program allows for bounties of 10 percent to 30 percent of the amount recovered; the IRS range is 15 percent to 30 percent. The SEC program applies to recoveries that stem from the whistleblower’s information, not just from the entity or individual named in the initial complaint, Thomas said.

The SEC program, however, only applies if the recovery ordered is $1 million or more. The information must have been provided voluntarily, and individuals are excluded from participation in the program if they were convicted of violating related U.S. laws, Thomas added.

“It would depend on where the individual was convicted. Overseas would have no impact, but in the U.S. it would zero [the whistleblower] out,” Thomas said.

The SEC recently announced its first award under the whistleblower program, for a full 30 percent of the recovery, and Thomas said the program’s first year proves that it was developed and implemented well.

The SEC has for years solicited tips, complaints, and potential enforcement and criminal referrals from the public and from registrants’ employees and industry insiders, and the SEC received about 30,000 reports during the year between the passage of the Dodd-Frank Act and the start of the SEC program. There were only about 3,000 – 10 percent – more complaints in the program’s first year, Thomas said.

“Fears that the SEC would be overwhelmed by garbage reports” were rampant when Dodd-Frank’s whistleblower provisions were being debated in Congress and when the program was being considered by the SEC, but the worries were overblown, Thomas said.

“There was no tsunami, just a relatively small plus-up, but of much higher quality,” Thomas noted.

Thomas said his assessment of the quality and credibility of the tips received under the program is also reflected in comments by SEC Chairman Mary Schapiro; Sean McKessy, director of the SEC Office of the Whistleblower; and Thomas Sporkin, former director of the SEC Office of Market Intelligence.

Fears that employees would sidestep the program’s incentives to report internally – a potentially higher award for doing so and a potentially smaller one for not doing so – were also overblown, Thomas said. A recent survey of employees of S&P 500 companies found that only 1 percent of employees who were aware of problems first reported them externally and effectively counters this argument, he noted.

The real fear is that employees who raise internal alarms of potential violations may be retaliated against, Thomas said, adding that some of his clients have reported facing this “unfortunate corporate response.”

The better corporate response would be to “establish and maintain a culture of integrity, and not only focus on the latest compliance trends,” Thomas said.

“Start from the premise of what is the right thing to do regardless of short-term advantage,” Thomas said. He noted that 30 percent of respondents to a recent survey said bonus considerations were putting pressure on their integrity.

“Reconcile your company’s compliance manual with its compensation practices. A long-term outlook is critical,” Thomas said.

“Establishing a sense of community and engagement can lead to a decrease in misconduct, and an increase in reporting it if it should occur,” Thomas said.

The key components of an effective internal reporting system are communication, transparency and accountability, said Thomas, who has been retained to advise on establishing such reporting systems.

Another effective practice is to publicly recognize employees who report violations, to show that “just bringing in money is not the end of the game,” Thomas added, saying he recommends that companies have a “zero tolerance policy that treats integrity like other business components of the organization.”

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. <a href=” ions/regulatory-intelligence/compliance- complete/” target=_new”>Compliance Complete</a> provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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