The work-from-home phenomenon has triggered a fresh frustration for U.S. corporations: Americans are blowing the whistle on their employers like never before.
The proof is in the data, with the U.S. Securities and Exchange Commission receiving 6,900 tips alleging white-collar malfeasance in the fiscal year that ended Sept. 30, a 31 percent jump from the previous 12-month record. Officials at the agency, which pays whistleblowers for information that leads to successful investigations, say the surge really started gaining traction in March when COVID-19 forced millions to relocate to their sofas from office cubicles.
Paul is a partner in the Washington, D.C. office of Bracewell.� Paul’s career has intertwined with the SEC’s regulation of the municipal market from the very beginning, when as a young lawyer in the SEC’s Division of Enforcement he participated in preparing the SEC’s September 1977 and 1979 Staff Reports on New York City.� After practice as a securities, project finance, and bond lawyer in New York and Boston, �Paul returned to the SEC in 1994 to work for Chairman Levitt and serve as the first Director of the SEC’s Office of Municipal Securities. During that time, he participated in drafting the continuing disclosure amendments to Rule 15c2-12, oversaw SEC activity relating to Orange County California and advised the Commission on institution and settlement of over 100 enforcement actions in the municipal securities market.�Today, Paul defends states, local governments, and their officials, brokers, dealers, municipal securities dealers, municipal advisors, and their officers and employees, as well as individuals in investigations and enforcement proceedings by the SEC, Department of Justice, FINRA, and states Attorneys General.� Paul also serves as Counsel to a NRSRO, or Rating Agency, on regulatory and enforcement matters.� He advises clients on compliance with SEC and MSRB regulations, and corporate governance matters, conducts internal investigations, and serves as special disclosure counsel in securities transactions.Paul received the "Chairman's Award for Excellence" for his work in developing the amendments to Rule 15c2-12, while at the SEC, and received "The National Federation of Municipal Analysts�Industry Contribution Award" in 2001. Paul is listed in The Best Lawyers in America� in securities law, 2005 - 2010; in corporate governance and compliance law, 2006 -�2010;�and public finance law, 2005�- 2010.� Additionally, he is listed in Who's Who and What's What on Wall Street, Who's Who in America, Who's Who in American Law,The Lawdragon 500 Leading Lawyers in America 2005 edition, and Washington D.C. Super Lawyers 2007 for securities and corporate finance.Paul is frequently interviewed and quoted as an authority on securities regulation in international news media including The National, FTSE Global Markets, BBC News, The Business Times Singapore, and The Singapore American, as well as U.S. media, including The New York Times, The Wall Street Journal, Bloomberg News, the Associated Press, Reuters, and The Bond Buyer.
Jeff Curie is the President of Bitvore Corp., a provider of A.I.-based products that identify risk and opportunity for professionals in the municipal bond, banking and insurance industries.
Maikki Frisk is Mobey Forum's executive director.
The isolation that comes with being separated from a communal workplace has made many employees question how dedicated they are to their employers, according to lawyers for whistleblowers and academics. What’s more, people feel emboldened to speak out when managers and co-workers aren’t peering over their shoulders.
“You’re not being observed at the photocopy machine when you’re working from home,” said Jordan Thomas, a former SEC official who helped set up the agency’s whistleblower program a decade ago. “It’s never been easier to record a meeting when you can do it from your dining room table,” added Thomas, who now represents tipsters as an attorney at Labaton Sucharow in Washington.
Adam Waytz, a psychologist and professor at Northwestern University’s Kellogg School of Management, agrees.
“When you feel disconnected from work, you feel more comfortable speaking up,” said Waytz, who has studied the motivations of whistleblowers.
Massive award
Intended or not, the SEC itself has played a big role in encouraging informants to come forward by showing how lucrative whistleblowing can be. Since the pandemic hit the U.S., the agency has paid out some $330 million in awards, including an eye-popping $114 million to a single tipster in October. While the payments are tied to SEC investigations that almost certainly predate coronavirus, the amount of money going out the door is unprecedented in the decade since the regulator started its whistleblower program.
For corporations, the rise in tips risks triggering a consequence from work from home that will last long after employees return to the office. Even if few of the tips lead to SEC enforcement cases, companies could still be dealing with years of compliance distractions as the agency launches investigations, subpoenas documents and grills senior executives.
“Corporations and their lawyers are acutely aware of the fact that tips are flooding in and that whistleblower awards have ballooned,” said Joseph Grundfest, a former SEC commissioner who’s now a law professor at Stanford University. “You pay whistleblowers more than $100 million, you’re going to get more whistleblowers.”
The SEC gained authority to pay whistleblowers as part of the 2010 Dodd-Frank Act after lawmakers assailed the agency for missing signs of corporate wrongdoing that were later found to have laid the groundwork for the 2008 financial crisis. Another massive black eye was the regulator’s failure to catch Bernard Madoff’s Ponzi scheme despite repeated warnings from whistleblower Harry Markopolos.
Under the program, tipsters can receive financial awards if they voluntarily provide unique information that results in an enforcement action. Payouts can range from 10 percent to 30 percent of the money collected in cases where sanctions exceed $1 million. Awards are paid from a fund set up by Congress — not money owed to harmed investors.
Leveraging whistleblowers has become one of the SEC’s most potent tools for rooting out financial crime, despite the fact that most of the tips the SEC receives don’t lead to enforcement cases. Information has come from more than 100 countries, with whistleblowers providing evidence such as texts, emails and recorded calls.
Altered voices
The SEC never discloses the names of whistleblowers and what cases were brought with their help. Agency officials sometimes don’t even know the identity of tipsters. Thomas, the whistleblower attorney, has gone so far as to use voice-changing technology to disguise clients’ genders on conference calls with the SEC.
About $737 million has been paid to 133 individuals since the SEC issued its first payment in 2012, with most tipsters waiting months or even years after the agency wraps up its investigations to get their awards. Part of the reason payouts have quickened recently is that the SEC has streamlined its process so that enforcement lawyers who work with tipsters can actively vouch for how crucial their help was.
Discussing the dramatic jumps in tips since the start of the pandemic, then SEC Enforcement Director Stephanie Avakian said Dec. 3 that it’s too soon to assess the quality of the information the agency is receiving. She credited the huge awards that the SEC paid out last year as an important factor in encouraging whistle-blowing.
“Making more awards — certainly larger awards — all those things do go toward incentivizing whistle-blowers to come forward,” Avakian, who left the SEC last month, said at an event hosted by the American Conference Institute.
Overwhelmed regulators
Grundfest, the Stanford Law professor, just hopes the SEC doesn’t get overwhelmed.
“The problem is that they’re being flooded with tips and don’t have a robust mechanism for separating the wheat from the chaff,” he said.
In recent months, the SEC has received reports on possible financial-disclosure violations and the mismarking of assets. The coronavirus’ impact on businesses has also triggered allegations of wrongdoing, as companies have a responsibility under SEC rules to be truthful about how the pandemic is affecting their bottom lines.
“It’s very convenient for management to blame COVID for underperformance,” said Howard Schilit, author of “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports.” “It becomes an alibi for a company’s problems.”
— With assistance from Tom Schoenberg