Could SEC's first whistleblower award to a company outsider persuade competitors to drop a dime on an arch rival?
If it wasn’t already clear how deadly serious the SEC is about increasing its enforcement actions, the $700,000 award to an outside whistleblower who provided analysis that led to one such action ‒ which the commission announced on January 15 ‒ should drive the point home.
Some observers call it a game changer, but in fact the federal government has been using reports from company outsiders to launch investigations against companies under the False Claims Act (FCA) for years. This is the first time it’s been done under the Dodd-Frank Act, whose whistleblower provisions were modeled on the FCA.
True to form, the SEC hasn’t divulged the identities of either the company or the whistleblower, who was simply ‘referred to as an ‘industry expert’, [who] reviewed publicly available data and was able to provide invaluable analysis and information to the SEC.’
Ed Ellis, co-chair of Littler Mendelson’s whistleblowing and corporate ethics practice, speculates that ‘somebody compiled a bunch of publicly available information – certainly the financials are available on the SEC’s website – and maybe some other public statements by the target company, or maybe some information that was available from industry publications or something like that, where he/she was able to determine that the publicly filed numbers didn’t make any sense based on other things going on in the industry.’
Once the SEC gets a tip, Ellis points out, it can subpoena documents from the company, so it’s no longer limited to information available to the whistleblower. For someone on the outside to provide something credible, he or she would have to have a fairly sophisticated understanding of public financial filings and likely ‘know something about the industry to know what kinds of numbers don’t add up,’ he explains.
For Greg Keating, partner at Choate Hall Stewart, that begs the question of the precedent this award might set. ‘What if a competitor wants to gain an advantage?’ he asks. ‘Maybe it has a couple of pieces of information it heard through the grapevine that it thinks could at least get the SEC’s crosshairs trained on its arch rival, so why not make a report? I definitely think there are some unintended consequences depending on how far this is taken.’
Indeed, Ellis cites an example reported by Bloomberg News and other news outlets a few years ago involving a pharmacy owner in the Florida Keys whose business servicing AIDS patients was run into the ground in the 1990s when a national healthcare chain opened an AIDS clinic in Key West and gained market share by offering local doctors padded insurance reimbursements. Motivated to investigate how the healthcare chain was making money, the pharmacy owner and two partners discovered the chain was overbilling Medicare. Suing on behalf of taxpayers, the pharmacist’s firm has recouped more than $3 billion for the US government and earned roughly $600 million in awards for itself.
But the kind of predatory filings Keating worries might be made by a competitor are frowned upon by the SEC, which usually isn’t inclined to investigate unless there is actual evidence of fraud, says David Scher, partner at the Employment Law Group, which represents whistleblowers in fraud cases.
However unlikely the threat of a competitor turning whistleblower, the SEC wants employers to know it is looking in every direction for potential sources to help root out fraud. Those sources include in-house counsel, compliance officers, foreign nationals living abroad and industry experts, Keating says. As a best practice, companies ‘need to have a lot of periscopes up and take a hard look at their existing protocols around compliance and ethics and identifying issues that are being raised internally,’ he says.
The biggest deficiency Keating sees in companies is a passive wait-and-see approach. ‘Unfortunately, a lot of employers don’t implement and place the necessary emphasis on honing and investing in training and compliance protocols that are reviewed and tweaked regularly, putting meaningful metrics in place so you can make compliance and ethics a part of the culture until they get hit [with an SEC charge] and then they go and do all this,’ he says. He believes making the investment in such things now will pay dividends in the long run.
Ellis urges companies to listen to people who report concerns internally and put in place a surveillance program that covers internal financials and ‘take it seriously: don’t get caught thinking nobody’s looking at you.’ He warns about relying too much on the internal audit function, which ‘can’t watch every single transaction the company goes through. What a company should be doing is trying to listen to people who identify questionable transactions and look [into] them without relying on internal audit to pick it up.’
