laying the foundation: ethical issues in labor relations/media/files/people/...whistleblowing came...

Laying the Foundation: Ethical Issues in Labor Relations

November 10, 2014

THE PRACTICING LAW INSTITUTE: FINANCIAL SERVICES INDUSTRY REGULATORY COMPLIANCE & ETHICS FORUM 2014

Focus Topics:

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Whistleblower Laws 2 A look at the various regulators: Who’s who? 3 Compliance programs and the Whistleblower 4

The changing regulatory landscape for financial services firms 1

Responding to the Whistleblower complaint 5

Compliance programs and the Whistleblower 4 Responding to the Whistleblower complaint 5

Focus Topics:

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A look at the various regulators. Who’s who? 3

Whistleblower Laws 2


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This is the Year Of The Whistleblower. Employers who do not take steps to address any employee concerns before they reach “whistleblower” status—like strengthening internal reporting and compliance programs—do so at their peril. Federal law has long provided protections to employees who report regulatory violations by their employers. More than twenty federal statutes in areas such as food safety, aviation, and environmental law contain whistleblower provisions. But the new age of whistleblowing came into being in September 2011, when Bradley Birkenfeld received a staggering $104 million from the IRS for reporting a tax evasion scheme involving his employer UBS—even though he was convicted and jailed for participating in the very same scheme! Since then, whistleblowing has snowballed.

The Dodd-Frank financial reform law added additional whistleblower provisions and led financial regulators such as the Securities and Exchange Commission (“SEC”) to open special whistleblower offices. The SEC’s Office of the Whistleblower, established in 2011, was a bit slow off the mark and only granted its first award in August 2012 (for a nominal amount). But in October 2013, the SEC announced it had awarded more than $14 million to an individual. This large cash payout—which was called a “game changer” at the time—will lure employees in various other companies to be the next to win a whistleblower jackpot. The securities plaintiffs’ bar has also created their own “whistleblower” practice groups which are actively trolling to find the world’s next Bradley Birkenfeld.

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Presentation Notes

JPMorgan Chase to Pay $614 Million for Submitting False Claims for FHA-insured and VA-guaranteed Mortgage Loans This year, JPMorgan agreed to pay $614 million to settle whistleblower-initiated claims it violated the FCA by originating and underwriting non-compliant mortgage loans submitted for insurance coverage and guarantees by the Department of Housing and Urban Development's Federal Housing Administration (“FHA”) and the Department of Veteran Affairs (“VA”). As part of the settlement, JPMorgan admitted to approving thousands of FHA loans and hundreds of VA loans that were not eligible for insurance under agency requirements and that it failed to inform the agencies when it discovered that defective loans had been submitted to the agencies. The settlement requires the bank to implement new and improved controls on its underwriting system.

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SUNTRUST

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Presentation Notes

U.S. Dep't of Justice, Federal Government and State Attorneys General Reach Nearly $1 Billion Agreement with SunTrust to Address Mortgage Loan Origination as Well as Servicing and Foreclosure abuses This year, SunTrust Banks Inc. agreed to pay $968 million to settle various allegations relating to mortgage origination, servicing, and foreclosure practices with the DOJ, 49 state attorneys general, and the District of Columbia’s attorney general. Of the total recovery, $418 million was tied to allegations that the bank originated and underwrote loans in violation of the Fair Housing Act. The agreement requires changes in oversight related to the bank’s mortgage and foreclosure practices, an independent monitor and the potential for monitor-imposed fines up to $1 million for violations of the settlement’s terms.

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This year, U.S. Bank agreed to pay $200 million to settle allegations it violated the False Claims Act by knowingly originating and underwriting FHA-insured loans that did not meet the government's requirements. Specifically, the Department of Justice alleged that the bank, an FHA direct endorsement lender, failed to maintain a sufficient quality control program to identify deficiencies in many loans it certified for FHA insurance and did not report those deficiencies or take corrective action. As part of the settlement, the bank admitted that this conduct caused FHA to insure thousands of ineligible loans.

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BANK OF AMERICA’S COUNTRYWIDE ORDERED TO PAY 1.3 BILLION

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Presentation Notes

In United States ex rel. O’Donnell v. Countrywide Home Loans, Inc., a whistleblower-initiated lawsuit brought by the federal government, Bank of America Corp.’s Countrywide unit was ordered to pay $1.3 billion and a former Countrywide executive $1 million for defective mortgage loans sold to Fannie Mae

“The whistleblower did everything feasible to correct the issue internally. When it became apparent that the company would not address the issue, the whistleblower came to the SEC in a final effort to correct the fraud and prevent investors from being harmed...”

"It’s the first award for a whistleblower with an audit or compliance function at a company."

"The award will be the largest made by the SEC’s whistleblower program to date and the fourth award to a whistleblower living in a foreign country, demonstrating the program’s international reach..”

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Ongoing Trend

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Changing Landscape: Whistleblowers As Regulators


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qui tam provisions allow private citizens to file false claims lawsuits on behalf of the government

2013 752 qui tam suits filed

$345M recovered by whistleblowers

$2.9B recovered 30 If the government prevails, the whistleblower (relator) receives up to %

Presenter

Presentation Notes

Most false claims actions are filed under the Act’s whistleblower, or qui tam, provisions, which allow private citizens to file lawsuits alleging false claims on behalf of the government. If the government prevails in the action, the whistleblower, known as a relator, receives up to 30 percent of the recovery. The number of qui tam suits filed in fiscal year 2013 soared to 752 –100 more than the record set the previous fiscal year. Recoveries in qui tam cases during fiscal year 2013 totaled $2.9 billion, with whistleblowers recovering $345 million.”


2012 Bank Settlements

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JPMorgan Chase $45,000,000 Countrywide Home Loans, Inc. $45,000,000 PNC Bank $38,000,000 First Tennessee Bank $16,000,000 SunTrust Mortgage $10,200,000 CitiMortgage $7,500,000

$161,700,000

Six banks settled an FCA lawsuit alleging they illegally charged veteran borrowers hidden fees on refinanced home loans backed by Veterans Administration:

Presenter

Presentation Notes

2012 Bank Settlements In 2012, six banks paid a total of $161.7 million -- -- JPMorgan Chase ($45 million), Countrywide Home Loans, Inc. ($45 million), PNC Bank ($38 million), First Tennessee Bank ($16 million), SunTrust Mortgage ($10.2 million), and CitiMortgage ($7.5 million) -- to settle an FCA lawsuit alleging the banks illegally charged veteran borrowers hidden fees on refinanced home loans backed by Veterans Administration.

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3,238 whistleblower tips, complaints or referrals

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Presentation Notes

2013 SEC Report to Congress “Fiscal Year 2013 was a historic one for the Securities and Exchange Commission’s Office of the Whistleblower (“OWB” or the “Office”). During the year, the Office paid whistleblowers a total of over $14 million in recognition of their contributions to the success of enforcement actions pursuant to which ongoing frauds were stopped in their tracks.” “In Fiscal Year 2013, 3,238 whistleblower [Tip, Complaint or Referrals (“TCRs”)] were received. By comparison, for Fiscal Year 2012, the Commission received 3,001 whistleblower TCRs.”


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…the Office paid

whistleblowers a total

of over $14 million in recognition of their

contributions …

3,238 whistleblower tips, complaints or referrals

Presenter

Presentation Notes

2013 SEC Report to Congress “Fiscal Year 2013 was a historic one for the Securities and Exchange Commission’s Office of the Whistleblower (“OWB” or the “Office”). During the year, the Office paid whistleblowers a total of over $14 million in recognition of their contributions to the success of enforcement actions pursuant to which ongoing frauds were stopped in their tracks.” “In Fiscal Year 2013, 3,238 whistleblower [Tip, Complaint or Referrals (“TCRs”)] were received. By comparison, for Fiscal Year 2012, the Commission received 3,001 whistleblower TCRs.”


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“The most common complaint categories reported by whistleblowers in the 2013 fiscal year were Corporate Disclosures and Financials (17.2%), Offering Fraud (17.1%), and Manipulation (16.2%). By comparison, in Fiscal Year 2012, the most common complaint categories reported by whistleblowers also were Corporate Disclosures and Financials (18.2%), Offering Fraud (15.5%), and Manipulation (15.2%).”

Presenter

Presentation Notes

“The most common complaint categories reported by whistleblowers in the 2013 fiscal year were Corporate Disclosures and Financials (17 2%), Offering Fraud (17 1%), and Manipulation (16 2%) By comparison, in Fiscal Year 2012, the most common complaint categories reported by whistleblowers also were Corporate Disclosures and Financials (18 2%), Offering Fraud (15 5%), and Manipulation (15 2%).”


2013 IRS Whistleblower Office Report to Congress

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2013 IRS Report to Congress “In FY 2011, the Whistleblower Office paid the first claims under section 7623(b). Since then, nine claims have been paid under the revised law.”



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Reasons Regulators Rely on Whistleblowers


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A lesson of the bank failures in 2007-08 was that even with accounting controls, many of the accounting financial transactions were too complex for those outside of the financial services community to sufficiently comprehend the risk. Sherron Watkins

Enron Corporation Cynthia Cooper

WorldCom

Many accounting scandals were first identified and disclosed internally by whistleblowers.

Presenter

Presentation Notes

Many accounting scandals were first identified and disclosed internally by whistleblowers. For example, Sherron Watkins of Enron raised accounting concerns and was dismissed just four months before the company’s bankruptcy. Similarly, Cynthia Cooper, VP of Internal Audit at WorldCom, unearthed $3.8 billion in misallocated expenses and phony accounting entries.

credibility

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• positive feelings about their jobs

• good job performance

• professional positions

• highly educated

• higher-level or supervisory positions

• senior tenure with the company

• part of a large group within the organization

• believe the company will be responsive

• view whistle-blowing as integral to their role

Whistleblowers gain credibility with certain common traits.

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• consistently the most successful method for detecting occupational fraud

• more effective than combined management review, internal and external audits

• 72% of tips warranted investigation: 44% of investigations resulted in corrective action

tips

Presenter

Presentation Notes

Reasons for Regulator Emphasis on Whistleblowing Data Shows Whistleblowing is Often Accurate. Tips are consistently the most successful method for detecting occupational fraud by a significant margin. Tips are more effective in detecting occupational fraud than the combined total of management review, internal audit, and external audit. The Overwhelming majority of hotline complaints do warrant investigation. According to the 2013 Corporate Governance and Compliance Hotline Benchmarking Report, in a study of reports to a whistleblower hotline provider for nearly half of the Fortune 500, 72% of all tips warranted investigation. This was an increase of five percentage points over 2011. Of the 72%, 44% resulted in a corrective action.

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employees • Employees were the source of almost half of all tips that led to successful fraud

detection. • Next are customers (21.6%), anonymous (14.6%) and vendors (9.6%).

Presenter

Presentation Notes

Insider’s Perspective Lends Value. Employees were the source of almost half of all tips that led to successful fraud detection. Next sources of tips that led to successful fraud detection are customers (21.6%), anonymous (14.6%) and vendors (9.6%).

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reporting • Corporations may lack effective internal reporting channels. • Lack of reporting systems and incentives

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retaliation

Compliance programs and the Whistleblower 4



Focus Topics:

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Whistleblower Laws – Sarbanes-Oxley

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No [public] company . . . may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee … to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investment is conducted by— (A) A Federal regulatory or law enforcement agency; (B) Any Member of Congress or any committee of Congress; or (C) A person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover or terminate misconduct

SOX 18 U.S.C. § 1514A

Protection extends to employees of contractors and subcontractors

Courts disagree about

whether reports of fraud need to be about shareholders

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Sarbanes-Oxley: Whistleblower Shield Expanded

Congress was “aiming to encourage whistle-blowing by contractor employees who suspect fraud involving the public companies with whom they work.”

“Whistleblower protection includes employees of a public company’s private contractors and subcontractors.”

Presenter

Presentation Notes

In Lawson v. FMR LLC, the United States Supreme Court ruled to allow Sarbanes-Oxley retaliation lawsuits by employees of contractors for public companies. Supreme Court Justice Ruth Bader Ginsberg explained in the Court’s majority opinion that Congress was “aiming to encourage whistle-blowing by contractor employees who suspect fraud involving the public companies with whom they work.” The case has significant implication for mutual fund companies, which have few employees and generally use privately held companies as contractors to conduct day-to-day activities.

Whistleblower Laws – Dodd-Frank

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No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower— . . . in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), including section 10A(m) of such Act (15 U.S.C. 78f(m)), section 1513(e) of title 18, United States Code, and any other law, rule, or regulation subject to the jurisdiction of the Commission

Dodd-Frank 15 U.S.C. § 78U-6

Boundaries of Act disputed by courts

May not require disclosure to SEC for whistleblower protections to apply

May not apply to overseas employees of US publicly traded companies, but SEC states it is still applicable to whistleblowers

Courts Are Still Defining The Boundaries Of Dodd-Frank Act

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Asadi v. G.E. Energy, LLC, 720 F.3d 620 (5th Cir. 2013) The employee must actually report to the SEC

Kramer v. Trans-Lux Corp., Case No. 11-CV-1424, (D. Conn. Sept. 25, 2013); employees need not report direct to the SEC

Wagner v. Bank of Am. Corp., No. 12-cv-00381, 2013 WL 3786643, at *4 (D. Colo. July 19, 2013) Must report to the SEC to be considered a “whistleblower.”

Banko v. Apple Inc.,No. 13-cv-2977, 2013 WL 7394596, at *6 (N.D. Cal. Sept. 27, 2013) Under Dodd-Frank, employee must report to SEC to be a “whistleblower.”

“… This award of more than $30 million shows the international breadth of our whistleblower program as we effectively utilize valuable tips from anyone, anywhere to bring wrongdoers to justice. …”

Liu v. Siemens, A.G., 763 F.3d 175 (2nd Cir. Aug. 14, 2014), Dodd Frank does not apply extra-territory to oversees employees of US publicly traded companies

Whistleblower Laws - Enforcement

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Record-breaking $30 million award against company

SEC to take action against companies that try to stop whistleblowers from coming forward

Retaliation cases are a priority

Whistleblower office will alert enforcement staff of evidence of retaliation

Whistleblower Laws – False Claims Act

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(1) IN GENERAL.

Any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor, or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, or agent on behalf of the employee, contractor, or agent or associated others in furtherance of other efforts to stop 1 or more violations of this subchapter.

(2) RELIEF.

Relief under paragraph (1) shall include reinstatement with the same seniority status that employee, contractor, or agent would have had but for the discrimination, 2 times the amount of back pay, interest on the back pay, and compensation for any special damages sustained as a result of the discrimination . . .

False Claims Act 31 U.S.C. §§ 3729-3733

Primary tool in combating fraud against federal government

Whistleblowers are entitled to receive between 15 to 30 percent of amount awarded to the government

As of 2014, thirty states and the District of Columbia have created false-claims statutes, modeled on the federal False Claims Act

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2014 Whistleblower Financial Services Suits

in False Claims Act settlements in the first half of 2014.

Presenter

Presentation Notes

In the first six months of 2014, The U.S. Department of Justice secured more than $2 billion from False Claims Act settlements. The vast majority of funds ($1.2 billion) were recovered against financial services providers as a result of three whistleblower lawsuits against JPMorgan Chase & Co., SunTrust Banks Inc. and U.S. Bank in connection with fraud in their mortgage origination and underwriting practices.

Recent Laws Encourage Whistleblowing

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IRS & THE TAX RELIEF HEALTHCARE ACT OF 2006

Law/Whistleblower Provisions a. Section 406 of the Tax Relief Healthcare Act of 2006 made

significant changes to the IRS Informant Awards program. b. Section 406 called for the creation of an IRS Whistleblower

Office responsible for reviewing tips.

Whistleblower Rewards a. Previously, whistleblowers were limited to the IRS Informant

Awards program. The program was discretionary with a defined award percentage (15% of collected taxes and penalties) and an award cap ($10 million).

b. Under IRS Whistleblower Program, awards are not discretionary and provide a higher award percentage (15 to 30 percent of the collected proceeds), and have no cap on the award amount where the amount in dispute exceeds $2 million.

c. If a whistleblower does not meet the $2 million threshold for the IRS Whistleblower program, the IRS is authorized to pay for information relating to violations of the internal revenue law that result in recovery of tax.




Focus Topics:

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Whistleblower Laws 2 A look at the various regulators. Who’s who? 3

Who’s Who: The Various Regulators

FINANCIAL SERVICES

Economic services provided by organizations that manage money. These services include:

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Credit Unions

Banks

Credit Card Companies

Insurance Companies

Accountancy Companies

Consumer Finance Companies

Stock Brokerages

Investment Funds

Some Government Sponsored Enterprises

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Independent Regulators

Federal Regulators

Private Sector Regulators

State Regulators

Justice System Regulators

Who’s Who: The Various Regulators



Focus Topics:

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Compliance Programs and the Whistleblower 4

Compliance Programs & The Whistleblower

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Marshall L. Miller, DOJ Criminal Division Principal Deputy Assistant Attorney General

“On the flip side, compliance programs that have widespread prophylactic and training mechanisms – as well as procedures designed to uncover wrongdoing and expose individuals responsible for criminal behavior – are the most effective.” “A corporation’s ability to use compliance to uncover misconduct and, just as importantly, identify wrongdoers is central to the Justice Department’s evaluation of a compliance program.”

“The scandals and financial disasters of the twenty-first century have one thing in common: The independent members of the boards of directors of Enron, WorldCom, and Lehman Brothers Holdings, Inc., among others, were completely surprised by the impending scandal. The primary reason that the board was clueless was because it relied solely on information supplied by top management and incorrectly assumed that the independent or internal auditors would detect illegal activity or major risk exposure.”


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!?!?

Board Insulation


Audits are only part of the solution for detecting occupational fraud.

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Internal audits

External audits

14%

3%

Why audits are not enough: Fraud is hidden

Audits use sampling

Auditors are not police investigators

Insiders have the ability to override controls

Audits are limited in scope

Audits are non-adversarial

Auditing is distinct from a fraud examination

COMPLIANCE PROGRAMS & THE WHISTLEBLOWER

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FRAUD IS A COMPANY’S “MOONWALKING BEAR”


Key Elements of Compliance Program: Code of conduct & compliance policies

High-level management oversight

Training & education

Effective communication of compliance standards

Internal monitoring, auditing and reporting systems

Enforcement and discipline mechanisms

System to respond to offenses

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Where do whistleblowers fit in?

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Internal whistleblowing offers organizations an enormous opportunity to tackle compliance problems before regulators become involved.

Only 8% of employees report wrongdoing externally without first reporting it internally

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reporting When employees reported externally, it was because they needed support and wanted to help stop misconduct or limit its harm.


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hotlines

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Presentation Notes

Among the organizations victimized by fraud only 54% had a hotline and less than 11% provided rewards for whistleblowers


How can companies take advantage of whistleblowing? Establish Tone at the Top Put Clear Procedures In Place Anonymous hotline, investigated by independent counsel, reporting directly to

independent directors

Ensure Timely Response Implement Internal Controls Failure to follow internal controls will work as a “red flag” to help employees spot

and report potential wrongdoing

Establish Anti-Retaliation Policy Many people do not report misconduct due to fear of retaliation

Positive Recognition and Incentives for Successful Whistleblowing 52


Compliance vs. Supervision

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Compliance Maintains compliance program and advises business units and senior management on program operation

Senior Management Ultimate supervisory responsibility for the company’s compliance obligations

Legal Risks Avoid exposing Compliance to legal risks associated with being deemed a “supervisor”:

Control theory Affect theory Blended theory


The changing regulatory landscape for financial services firms 1 Focus Topics:

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Responding to the Whistleblower Complaint

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3 4

5

The Complaint

Elevate

Investigate

Respond

Assess


56 1 The Complaint Positive reaction to receipt of complaint Resist the brush off Be sure to report back

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Dear Jane:

Thank you for raising your concerns about certain underwriting practices by Binford Bank. This is a serious concern and Binford will investigate this issue and, if necessary, take any appropriate corrective measures.

Binford will be conducting an internal investigation. In the next few weeks, we will ask you to meet the company so that we can understand your concerns. We will be conducting other interviews and reviewing important documents. Once the investigation is complete, we will let you know what we discovered and whether any changes to our policies are necessary.

Binford truly appreciates your commitment to the company and your willingness to speak up when you think a problem exists. If you have any questions or concerns as this investigation proceeds, please call me directly at (248) 555-5599.

Sincerely,

Jeff Feeger Binford Bank

Happily Accept The Whistleblower Complaint

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Resist “Brushing Off” The Whistleblower Complaint

Dear Jane:

We have received your allegations and Binford Bank is committed to complying with all applicable laws and regulations. Please be advised that some of the issues you raised concern Binford’s Confidential and Proprietary Information and any disclosures that violate company policies may lead to disciplinary action, including termination.

Binford will investigate this matter and take any appropriate action it deems necessary.

Sincerely,

Jeff Feeger Binford Bank

How did it feel to have the company tell you to go fly a kite?


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2 Elevate

Quickly elevate complaints through reporting chain for preliminary evaluation

Refer complaints to a compliance officer and/or a legal department for guidance of how to respond

Notify human resources of the complaint to ensure compliance with relevant employment laws

If employee makes complaint while subject to discipline or termination segregate complaint and disciplinary response 1


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3 Investigate

Legal department and/or compliance officer assess whether claim is credible

Conduct internal investigation Collect and review documents Employee interviews

Consider privilege issues and the use of outside counsel UpJohn warnings

Communicate to the whistleblower that the matter is being investigated

2 1


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4 Respond Determine whether the complaint is credible

Determine whether the complaint

implicates violations of the organization’s policy and/or the law

Take immediate action to cease the implicated conduct (e.g. halting certain transactions)

Contact outside counsel for assistance with a broader investigation, document preservation, and response guidance

3 2

1


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5 Assess Review and assess the strength

of current internal controls

Implement or update controls to prevent future fraud

4 3

2 1

What are you going to say when the regulator comes knocking?

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“We conducted a through investigation and determined that is was not meritorious.”

“We found an issue, but we corrected it promptly.”

Contact Information

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Savaria B. Harris Partner [email protected] 1251 Avenue of the Americas, New York, New York, 10020-1104, United States T: +1 212 335 4553 F: +1 212 335 4501

Savaria Harris an experienced litigator with trials in state and federal courts as well as with government and internal investigations in the white collar context. Her practice centers on providing clients with an integrated approach to addressing fraud, whistleblower and government actions under the False Claims Act and its local equivalents. She is experienced in risk assessments, internal investigations, ethics and compliance training, as well as litigation and trial representation. In addition to her practice, Savaria is an adjunct professor of Workplace Ethics at Georgetown University, a member of the Advisory Council for the Association of Certified Fraud Examiners and a member of the NYU Program on Corporate Compliance and Enforcement.

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