Straight to the SEC: Trouble for the Future?


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by Edward Kang and Michael Chiumento, Clerk

In a startling settlement that has businesses nationwide scratching their heads and trembling in fear, the SEC’s recent $14 million award to a whistleblowing employee has been found to have been given to someone who did not first report to the company’s own human resources department with the problem.  While whistleblower protection statues do not require that employees first go through human resources with potential issues, it has long been understood that the first step in the process of reporting a potentially illegal activity was to try to work within the company, only going outside if necessary.  Traditionally, and under Dodd-Frank, potential whistleblowers also see their rewards rise if they report internally first.  Reports state that it only took the SEC about six months form the time of the original “tip” to enforce the penalties upon the accused company.  It would seem that the SEC actually rewarded the whistleblower here for going straight to the SEC and bypassing the longer internal process, which may have failed to yield similar results.

This troubling development raises some serious questions as employers begin to wonder whether this process is valid and helpful, or just a waste of time.  Internal investigative procedures are normally in place in order to sift through the claims made by employees regularly to ensure that one is valid before passing it on to the SEC if necessary.  The thought then becomes that if employees see that they can gain such large sums in reward money, they may be more inclined to go straight to the SEC with many more claims.  But considering how many claims that are made internally to companies end up being invalid, there is a worry that unfiltered claims will make their way to the SEC more often.

Human resource department are in place specifically to address issues such as these that arise and often understand the dynamic of the company better than outside sources.  As a result, there is the belief in the corporate world that HR department should be allowed time to collect evidence and interview employees before the SEC takes over an investigation for the benefit of the process as a whole.  The fact that the SEC was willing to reward the largest sum in the history of Dodd-Frank to a whistleblower that bypassed reporting internally first, raises the question about the future of whistleblowers in general.  Clearly in this case, the whistleblower was not penalized in any way for going straight to the SEC, which influences future whistleblowers in an unsettling way.  Experts continue to stress in the modern day under still new whistleblower protections and incentives set by Dodd-Frank, for companies to improve and educate the internal complaint reporting systems in place.  All employees at any level should be made knowledgeable of how to report any internal issues or complaints so that they feel it to be a quick and simple process to keep issues in house when possible.



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