Amid recession worries, SEC whistleblower program needed now more than ever
Before Enron became known for orchestrating one of the country’s largest accounting scandals, I alerted the company’s CEO, Ken Lay, to the irregularities I saw in financial reports. I was both optimistic and naïve that Lay could take action to save the company – my warnings were too late and my message too difficult to accept. Months later, after the company had collapsed under the weight of fraud and manipulation, I testified in front of Congress, only then to discover that Enron sought and received legal advice on the potential consequences of discharging employees who raise accounting concerns. I was shocked and dismayed to see that this advice to Enron was in a memo dated two days after I met with Lay.
Coming forward as a whistleblower was not easy, but I felt a sense of duty to report what I had discovered. Whistleblowers serve a valuable purpose in our society – one that keeps fraudsters at bay, exposes and prevents wrongdoing, and provides a check on abuse of power. My story is about just one example of fraud. In response to public outcry following this and similar high-profile instances of fraud, the U.S. Securities and Exchange Commission (SEC) established the agency’s own whistleblower program with help from U.S. Senator Chuck Grassley (R-Iowa), a long-time proponent of the False Claims Act (FCA). This federal law dating back to President Abraham Lincoln has recovered nearly $70 billion in stolen government funds since its inception, while also deterring fraudsters from stealing potentially trillions more.
In the 12 years since the SEC whistleblower program was established, its impact can be clearly seen in the numbers. The SEC Office of the Whistleblower has received nearly 60,000 tips, placed monetary sanctions exceeding $5 billion on fraudsters, paid whistleblowers over $1 billion for their courageous efforts, and helped return more than $1 billion to investors in recovered funds. Despite this incredible level of success, the fraud lobby is once again attempting to undermine and weaken the program, making disingenuous arguments about its efficacy and fairness.
Amid record-high inflation and fears of an economic recession on the horizon, the SEC whistleblower program is just as important as it’s been since its inception, which came on the heels of the financial crisis of 2007-2008, the Great Recession, and the infamous Bernie Madoff Ponzi scheme. While fraud can certainly take place in any economic climate, there is a correlation between fraud occurrences and the state of the economy. During the last recession, the Association of Certified Fraud Examiners (ACFE) found that instances of fraud increased, citing “increased financial pressure” as the most prevalent reason fraudsters committed their crimes. The pressure to demonstrate profitability to investors can lead to unsavory actions. The research also found that during a recession, layoffs may have disproportionately impacted employees who oversaw their organizations’ internal control system, leaving fraud unchecked.
Uncovering fraud in the financial sector is complex. The SEC is immensely short-staffed and does not have the capacity to uncover it all on their own, nor the mechanisms to quickly hire new personnel the same way a private corporation or law firm might when faced with a similar uptick in workload. To ensure that fraud does not go undetected amid the SEC’s staffing constraints, private firms that specialize in SEC whistleblower cases provide a much-needed service in quickly building a case that may otherwise fall through the cracks.
The fact that these private firms exist is good news for the SEC when it comes to attracting talent. For many, a career in the public sector is cost prohibitive, an unfortunate but all too real reality. However, the occurrence of private firms that specialize in SEC whistleblower cases has undoubtedly attracted smart, hard-working professionals to the SEC, who will gain valuable experience in this field to perhaps leave government work for a more lucrative and fulfilling career. The SEC can finally take advantage of this talent pipeline, the same way the DOJ benefits from its courtroom experience which attracts legal talent to the DOJ.
Like the False Claims Act, the SEC whistleblower program relies on everyday citizens to report fraud when it occurs. In fact, according to the ACFE, tips are by far the most common way fraud is detected, as it provides valuable information and insight that may otherwise never be unearthed, giving the SEC the tools needed to root out financial schemes from festering further. The very existence of the SEC whistleblower program has prompted many companies, who would prefer to stay out of the SEC’s crosshairs, to put in place internal measures to detect fraud occurring within their walls.
There is no doubt that the SEC whistleblower program is working as intended – holding those who attempt to defraud investors accountable, while awarding those who voluntarily sound the alarm when a crime is being committed. The reward structure of the program must incentivize the whistleblower to come forward in the first place, as these cases often take years to progress through the appropriate channels, and rewards are not guaranteed. The current whistleblower rewards available to those reporting under the SEC whistleblower program also helps to attract legal talent to the cause of the whistleblower, preventing them from being ground in the dust by those with more power, and ultimately improves the odds that justice will ultimately win the day.
The False Claims Act’s whistleblower reward structure, on which the SEC’s whistleblower program is based, is credited with more than two-thirds of all False Claims Act recoveries. Congress anticipated large awards when it passed the 1986 Amendments as it was focused on large frauds. The awards, large and small, have caused the Act to work as Congress intended. While cases of fraudsters who attempt to disguise themselves as whistleblowers have occurred, they are rare, and the law is clear that anyone who is found guilty of hoodwinking the government this way is ineligible for an award, and likely will face criminal charges due to their actions. The reward structure ultimately benefits affected investors and the public in rooting out fraud.
The SEC’s whistleblower program also allows the whistleblower to remain anonymous, a critical provision written in the law to prevent retribution against the whistleblower. I can attest with firsthand knowledge the retribution I faced when I came forward. No one’s good name should be sullied for doing the right thing. The SEC’s anonymous provision protects future whistleblowers from experiencing the same retaliation I faced. Any attempts to “reform” the whistleblower program, specifically the anonymity provision, may well lead would-be whistleblowers to remain silent, ultimately serving as a catalyst for the demise of the program as we know it.
History proves that fraud increases as the country experiences a downturn in the economy. Can we actually afford, literally, to do less to prevent fraud? The SEC’s whistleblower program is the agency’s most effective tool at rooting out fraud, but attempts to weaken the law will undermine future justice from being served to those who attempt to defraud.
Sherron Watkins was an Enron executive when she alerted then-CEO Kenneth Lay of accounting irregularities within the company, and whose efforts led her to be named one of Time Magazine’s 2002 “Persons of the Year.” She is currently the Senior Fellow for Ethics and Policy for Whistleblower Network News.