Last week the US Supreme Court issued its decision in Digital Realty Trust v. Somers (Somers). It was a closely watched case in the compliance community. Yesterday, I reviewed the Court’s decision. Today, I want to consider the impact of the Court’s decision on a variety of actors; including the Securities and Exchange Commission (SEC) itself, Chief Compliance Officers (CCOs) and compliance practitioners, compliance programs and corporate America. I explored some of these issues with Roy Snell, in the FCPA Compliance Report – Episode 372.
While we both agreed the Supreme Court came to the correct legal decision, there are several areas which this decision may well lead to negative impacts. The first is the message that it sends to potential whistleblowers; if you do not report to the SEC you will not receive any legal protections against discrimination or retaliation. One cannot over-emphasize the strength of this message. There may be companies out there who say they will not terminate you for standing up, raising your hand about concerns and internally reporting but even if they do, you do not have any legal protection against termination or even simple discrimination. Remember Digital Realty Trust, Inc. (DLR) allegedly fired Paul Somers for raising concerns about suspected securities-laws violations.
An approach by companies such DLR certainly cannot sow trust among its employees. Trust is one of the most important factors that a corporate culture can engender. For if there is no trust employees will not come forward to report issues. For every CCO or compliance practitioner, this will negatively impact attempts to create a best practices compliance program. A key part of any best practices compliance program is an internal reporting mechanism (Hallmark 8 of an Effective Compliance Program). CCO and compliance practitioners continually work encourage reporting to not only comply with the Ten Hallmarks and US Sentencing Guidelines on internal reporting but also to create more effective compliance and a better culture in their organizations. Now much of that work may be for naught.
Another reason articulated by Snell is that often an employee’s concern about possible illegal conduct may be simply a misunderstanding of the legal requirements. He stated, “what the compliance department does is quite often sit the employee down shown the regulation and help them understand” their interpretation is not correct. A CCO can provide to them documents, the internal process and what the organization is doing on the issue which concerns them. He concluded by noting “I am sure tens of thousands of times a year, employees are saying ‘oh I see I didn’t understand the law or I didn’t understand what we’re doing. Thank you for straightening that out.’”
Henry Cutter, writing in the Wall Street Journal (WSJ) Risk and Compliance Journal, quoted Thomas A. Zaccaro, vice chairman of the white-collar and investigations group at Paul Hastings LLP and a former chief trial attorney at the SEC’s Los Angeles office, for the following “I think for businesses, for companies, it’s a matter of ‘be careful what you wish for’. I think the consequence of the decision is whistleblowers are now made more likely to report to the SEC, and I think most companies would prefer that employees would report internally.”
Cut off from its best sources of information, that from its own employees, companies now will have less ability to detect and then remediate any problems before they become legal violations or keep legal violations from expanding. In addition to not being informed of issues closer to the ground, businesses where their employees have whistleblown to the SEC are now automatically behind the 8-Ball with the SEC as they cannot self-disclose. Even if they have the information from another source and do self-disclose they cannot receive credit for it because the SEC already knew about it.
Moreover, as noted by Greg Keating who heads the whistleblower defense practice at Choate Hall & Stewart LLP, “Companies want to do whatever they can to spot problems internally. They now may increasingly have to tackle problems while simultaneously dealing with SEC investigations. What employers want is, ‘come to us and let us nip the problem in the bud.’ If such a problem is not reported internally but an employee whistleblows to the SEC, the problem could well fester and get much worse.”
Next if an employee goes to the SEC but not the company, they may be bullet proof from termination or discipline. Snell said, “If an individual goes to the government reports an issue, doesn’t report it to their organization and that individuals start showing up two hours late or starts becoming unproductive for some other reason or has a legitimate issue and their supervisor is unaware of the fact that they cannot retaliate because they don’t know the individuals part it anything and they take what is deemed by any HR professional in the country appropriate disciplinary action on something completely unrelated.”
Finally, is the impact the decision will have on the SEC itself. Now there is no incentive to report internally because you are not eligible for any financial incentive nor will you receive any protections from discrimination or retaliation. It is possible the SEC will be literally inundated with potential securities-laws violations. This will cause the problem of such whistleblower reports taking years for resolution to increase, thereby allowing the potentially illegal conduct to continue and perhaps get worse. If an employee reports a problem internally, it can be more quickly acted on by the compliance function. Snell noted, “Now contrast that with the idea that a problem isn’t reported internally that it’s reported to the SEC and the problem lands in a pile of now an ever-increasing size of allegations. It may take them a year to get that case. It may take them the year to come to a conclusion that is that they would now want to engage the company with the issue.” He believes this narrowed definition of whistleblower “defeats some of the absolutely critical elements of a compliance program.”
What are some of the things a CCO or compliance practitioner can do now to ameliorate the effects of the Somers decision? You can re-emphasize your commitment not only to compliance and ethics BUT that there will be no retaliation or discrimination tolerated for employees who report internally. It would probably be a good idea to have your Chief Executive Officer (CEO) put out a video message to this effect and follow up with training for middle level managers. Some companies, notably Weatherford, have reported success with internal rewards and bonuses for whistleblowers.
The Somers decision was correct from the legal perspective. However, the negative effects may long weigh on CCOs, compliance functions and companies. As Sean McKessy, the first chief of the SEC’s Whistleblower Office, told Henry Cutter, “Corporate America has now litigated itself into a box. I do expect that our business is going to pick up because of the way the Supreme Court decision came down.”
Sometimes getting something you think you want is much worse for you than not getting it.
The Somers decision has the ability to negatively impact corporate compliance programs, CCOs and the SEC.Click to tweet
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© Thomas R. Fox, 2018