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Whistleblower CrosscurrentsThe Limitations of Whistleblower Laws

SCCE’s 10th Annual Higher Education Compliance ConferenceAustin, TexasJune 5, 2012

Charles L. Howard, PartnerShipman & Goodwin LLP

© Charles L. Howard 2012

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Agenda – 4 Key Questions

1. What are the main features of whistleblower laws?

2. What are the problems with the way whistleblower laws work?

3. What are the limitations of other reporting channels?

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Agenda – 4 Key Questions

4. What else can be done?

• Guidance before reporting

• Ways to surface issues without having to become a whistleblower

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“People who come forward to expose corruption risk their jobs, their personal relationships, and even their lives. Rather than being celebrated for their honesty and integrity, too often they end up alone and embittered. The sad truth is that in too many cases whistleblowers have gotten badly screwed. . . .

The Whistleblower’s Plight

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. . . In the past few years, I’ve come to know several of them well, and this includes people who have received large rewards for exposing frauds that robbed the government of hundreds of millions of dollars, and the truth is that many of them are sorry they ever got involved. The money they eventually received wasn’t worth what they had to go through simply to do the right thing.”

Harry Markopolos, No One Would Listen, p. 64 (2010)

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The Organization’s Plight

• Who is really a whistleblower?

• Defensive claims of whistleblowing or retaliation

• Liability for retaliation over which there is little control

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Whistleblower Laws in the U.S.

• Over 250 in various jurisdictions– Federal and state– Civil and criminal

• Well known and recent– False Claims Act (“FCA”)– SOX– Dodd-Frank Act

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Common Provisions

• Financial incentives (some)– FCA

– Dodd-Frank Act

• Ban on retaliation (almost all)

• Cause of action for retaliation (many)

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False Claims Act

• Civil War era legislation

• Government recoveries are greater than $25 billion in last 20 years

• Applies to false claims submitted to federal government

• “Original” information

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False Claims Act (cont.)

• Permits private parties to assert claims:– Filed in camera

– Sealed for at least 60 days to give government opportunity to intervene and proceed with care

• If government intervenes, it controls case and can dismiss or settle it (only 15-20% are accepted)

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False Claims Act (cont.)

• If government declines to intervene, plaintiff may proceed with case

• Recovery for qui tam plaintiff:– 15 -25% of proceeds if government

controls

– 25-30% if government does not accept

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Dodd-Frank Wall Street and Consumer Protection Act (“Dodd-Frank Act”)

• SEC bounty for whistleblowers of 10%-30% of SEC’s recovery, but only ifcertain conditions met:– Information “voluntarily” provided

– “Original” information

– Recovery is > $1 million

– Subject to factors within SEC discretion

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Dodd-Frank Wall Street and Consumer Protection Act (“Dodd-Frank Act”)

• Anonymous complaints possible but only if represented by a lawyer

• Limited confidentiality provisions

• Ability to bring direct action in court for discrimination or retaliation (contrast with SOX)

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Limitations - Bounties

• Timing– Decision to become whistleblower

(beginning) vs. recovery (end)

– Recovery can take years N. Engl. J. Med. (5/13/2010) – study of successful FCA relators– average recovery took 4.9 years (longest was 9 years)

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Limitations – Bounties (cont.)• Uncertainty of recovery

– Dependent on government action/discretion

• Acceptance

• Settlement or litigation

• Recovery over $1 million

• Discretionary award

– Meeting eligibility standards • “Original” information

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Limitations – Bounties (cont.)• Not responsive to primary motivation

– One study – 90% tried to report internally first

– N. Engl. J. Med. study• 18 of 22 insiders tried to report inside first

• 22 of 26 “felt that what they did was important for ethical or other psychological or spiritual reasons.”

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Limitations – Ban on Retaliation• The Data

– EEOC – 37,334 claims (FY 2011)- more than age, race, sex or national origin

– 2011 National Business Ethics Survey®• Lower reports of observed misconduct than

previously

• 35% still do not report misconduct (less than in past), BUT

• Increased retaliation against whistleblowers:

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22% of those who reported misconduct experienced some

form of retaliation (up from 12% in 2007)

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Limitations – Ban on Retaliation

• Case Studies

–Anne Mitchell

–Bobby Maxwell

–N. Engl. J. Med. 5/13/10

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The Prosecution of Anne MitchellFebruary, 2010

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“It occurred to Anne Mitchell as she was writing the letter that she might lose her job, which is why she chose not to sign it. But it was beyond her conception that she would be indicted and threatened with 10 years in prison for doing what she knew a nurse must: inform state regulators that a doctor at her rural hospital was practicing bad medicine.”

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“The state and national nurses associations have called the prosecution an outrage…. Mrs. Mitchell would seem to be protected by Texas whistle-blower laws.”

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“The nurses, who are highly regarded even by the administrator who dismissed them, said the case had stained their reputations and drained their savings. With felony charges pending, neither has been able to find work.”

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“It has derailed our careers, and we’re probably not going to be able to get them back on track again,” said Mrs. Galle, 54, a grandmother who is depicted around town as the soft-spoken Thelma to Mrs. Mitchell’s straight-shooting Louise.”

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“They sounded internal alarms but felt they were not being heeded by administrators.”

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Anne Mitchell: The Aftermath

• Acquittal (4 days of trial)• Collateral Damage:

– Civil Rights lawsuit ($750k settlement)

– Criminal charges and guilty verdicts against doctor, sheriff, prosecutor, and hospital administrator

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Bobby MaxwellSeptember, 2010

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“Nearly seven years after a government auditor charged that an oil company had cheated the government out of millions of dollars in royalties, a federal judge has ordered the company to pay nearly $23 million in penalties—including $5.7 million to the auditor who uncovered the problem.

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“But Mr. Maxwell’s bosses at the minerals service were not persuaded by his claims, and he was let go by the agency after bringing the accusations….”

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“This whole thing has been much more difficult than I ever imagined,” Mr. Maxwell said. “I was fired, I was ostracized, I was threatened. I think I was on the right side of history, but I also paid a tremendous price for it.”

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“Mr. Maxwell said that even if he collected his portion of the award, ‘the majority of it is going to the attorneys, not to me.’”

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The New EnglandJournal of Medicine

Special ReportMay 13, 2010

“Whistleblowers’ Experiences inFraud Litigation Against

Pharmaceutical Companies”

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“All relators in our sample received a share of the financial recovery. The amounts received ranged from $100,000 to $42 million, with a median of $3 million (net values, in 2009 dollars).”

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“But a majority perceived their net recovery to be small relative to the time they spent on the case and the disruption and damage to their careers.”

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“After settlement, none of the 4 outsiders changed jobs, but only 2 of the 22 insiders remained employed in the pharmaceutical industry.”

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“The prevailing sentiment was that the payoff had not been worth the personal cost.”

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“22 of 26 relators still felt that what they did was important for ethical and other psychological or spiritual reasons.”

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“…whereas retaliation is clearly prohibited by the FCA, our report suggests that the protections are not fully effective, particularly for insiders. Often retaliation was more subtle than overt harassment.”

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The Problem:• Internal reporting channels may be

blocked

• Lack of checks and balances

• Uncertainty where to go or what will

happen

• Not sure of information

• FEAR OF RETALIATION

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Limitations: Ban on Retaliation

• Feudal relationship

• Types of retaliation

– Direct

– “Under the radar”

– Peer

– “Ripple”

Reasons Why Inadequate

Sum: Personal cost not worth potential financial reward.

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Limitations: Civil Remedy for retaliation

1. The law can protect you.

2. Money damages can make you whole.

Two questionable assumptions:

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Limitations: Civil Remedy for retaliation

• Human nature when someone breaks ranks

• Adversarial legal system

• Time to resolution

• Procedural constraints

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Limitations: Other channels

Peter Earle

Wall Street Journal

April 25, 2012

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“A slip up during a Federal securities investigation leads to the exposure of a key witness.”

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“Federal securities regulators… inadvertently revealed the identity of a whistleblower during a probe of a firm that ran a stock trading platform”

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“SEC officials said there is always a risk a whistleblower’s identity might be disclosed during an investigation, but its practice has been to avoid unnecessarily revealing an informant’s identity….”

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“The person shown the notebook…said in an interview that he previously suspected Mr. Earle was an SEC informant. [His] desk was near Mr. Earle’s…and he said he recognized Mr. Earle’s handwriting in the notebook.”

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“Mr. Earle said he made other internal complaints about trading, and was fired on April 3, 2009…. Pipeline’s efforts at all junctures have been to malign me. That’s one of the reasons I went to the SEC in the first place.”

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“Mr. Earle said he has been the target of ire from current and former Pipeline employees…. He…ran into a Pipeline executive while walking…in early December, a little over a month after the SEC fined Pipeline $1 million and two of its executives $100,000 each….”

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“Mr. Earle said he asked [Pipeline executive] Reid Curley, how he was doing. ‘Just trying to clean up your wreckage,’ he said Mr. Curley responded.

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Limitations: Other channels

HR and Compliance

• “Police”

• Duty to act – management responsibilities

• Limited confidentiality – like SEC

• Limited use where uncertainty, fear of loss of control, or fear of retaliation.

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Limitations: Other channels

Hotlines

• Cultural aversion by many

• Rarely used for fraud and abuse

• Often outsourced

• Still a reporting channel

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Two Big Unasked Questions

1. How to provide timely guidance to someone deciding whether to report?

2. How to surface concerns about misconduct without forcing someone to become a whistleblower?

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What Else is Needed

1. Independence of existing channels

• Checks and balances are important

• Non-management responsibilities

2. Able to provide information, guidance, or counseling to an employee before making a report.

Four key elements:

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What Else is Needed

3. Confidentiality – Able to have an off-the-record conversation

4. Strategies for how to surface issues with or without revealing identity of someone.

Four key elements (cont.):

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One Answer –The Organizational Ombudsman

An independent, neutral person with whom someone may speak confidentially (off the record) and informally about work-related concerns.

• Independent

• Neutral

• Informal

• Confidential

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Advantages ofOrganizational Ombudsman

• Double duty – workplace conflict and misconduct

• Knowledgeable resource – Organizational culture

• Supplements but does not replace formal channels

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Thank You