Image of Shkreli Trial Reveals the Challenges Faced by Compliance Whistleblowers

Shkreli Trial Reveals the Challenges Faced by Compliance Whistleblowers

 

In September 2015, Martin Shkreli became infamous after his company purchased the rights to an AIDS drug (Daraprim) and increased its price from $13.50 per pill to $750 per pill. This price gouging quickly earned Shkreli the title as “the most hated man in America.” Only a few months later, however, Shkreli got a dose of his own medicine.

In December 2015, the FBI arrested Shkreli and charged him with securities fraud. According to the SEC’s complaint, Shkreli misappropriated investor funds and lied to investors in his two hedge funds, MSMB Capital Management LP and MSMB Healthcare LP (MSMB).   After those investors sued Shkreli, he founded and took public a pharmaceutical company named Retrophin, Inc.  From September 2013 through March 2014, Shkreli induced Retrophin to issue stock and make cash payments to the disgruntled MSMB investors.  Shkreli characterized these payments as “consulting services” from Retrophin.

Compliance Officer Raised Concerns About Shkreli

At Shkreli’s trial, the former chief operating officer of MSMB, Jackson Su, testified that he raised concerns internally about Shkreli’s misconduct on several occasions. Despite Su’s complaints, the hedge fund refused to take corrective action. Seeing no other option, Su filed a complaint about Shkreli with the SEC in May 2012.

Su continued working at the hedge fund until December 2012 and continued to witness Shkreli’s misconduct. According to Su’s testimony, the last straw came when he saw Shkreli take $10,000 from MSMB for Retrophin.  Su testified that he “got really tired of all the things I saw going on in the company” and told MSMB’s President, “I’m not going back to work, all these things don’t add up.”

Whistleblower Laws Protect Compliance and Ethics Personnel from Retaliation

Su’s experience is but one example of the significant challenges that compliance and ethics personnel face when their internal disclosures about fraud or other wrongdoing fall on deaf ears.

When Sherron Watkins raised concerns about accounting irregularities at Enron and when Cynthia Cooper raised concerns about accounting fraud at WorldCom, they were unable to persuade senior management to halt the fraud.  As Cooper said, “Nobody wants to believe that the CFO is perpetrating a multi-billion-dollar fraud.”

In the wake of Enron and other massive accounting fraud that harmed investors, Congress enacted robust protections for corporate whistleblowers.   In particular, whistleblower-protection provision of the Sarbanes-Oxley Act of 2002 (“SOX”) was enacted to combat a “corporate code of silence,” a code that “discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the Federal Bureau of Investigation and the SEC, but even internally.” S. Rep. No. 107-146, at 4–5 (2002).  Congress wanted to empower whistleblowers to serve as an effective early warning system and help prevent corporate scandals.

Section 806 of SOX protects whistleblowers working at publicly-traded companies or at contractors and subcontractors of publicly-traded companies when raising concerns about securities fraud, shareholder fraud, bank fraud, a violation of any SEC rule or regulation, mail fraud, or wire fraud. If a whistleblower suffers retaliation after lawful whistleblowing, SOX allows the whistleblower to recover:

  • lost wages and benefits;
  • reinstatement; and
  • special damages, which includes emotional distress, impairment of reputation, personal humiliation, and other non-economic harm resulting from retaliation.

There is no cap on special damages under SOX. Recently, some SOX whistleblowers have obtained significant jury verdicts:

Compliance Personnel Can be Eligible to Obtain an SEC Whistleblower Award

The SEC Whistleblower Program issues awards to “eligible” whistleblowers who provide original information about violations of federal securities laws that lead to enforcement action with total monetary sanctions in excess of $1 million. Under the program, whistleblowers may receive an award of between 10-30 percent of the total monetary sanctions collected. To date, the SEC has paid more than $154 million to whistleblowers.

Many key compliance personnel, including internal auditors, external auditors, officers, and directors may incorrectly assume that they are ineligible for SEC whistleblower awards. The program’s rules include exceptions (found in Section 21F-4 of the Securities Exchange Act) that allow these individuals to report violations and become eligible for an award in certain circumstances. Specifically, key compliance personnel may report to the SEC and receive awards under the program if:

  • they reasonably believe the disclosure is necessary to prevent conduct that is likely to cause “substantial injury” to the financial interest or property of the entity or investors;
  • they reasonably believe the entity is engaging in “conduct that will impede an investigation of the misconduct”; or
  • at least 120 days have passed either since they properly disclosed the information internally, or since they obtained the information under circumstances indicating that the entity’s officers already knew of the information.

The analysis is complex, however, and eligibility may vary depending on the whistleblower’s position at the company. For example, the 120-day exception (third bullet listed above) does not apply to external auditors who obtain the information during the audit of an issuer. Instead, external auditors can immediately report to the SEC after they inform a superior in their accounting firm about improper or illegal client activity and the accounting firm fails to promptly report the securities law violation to the SEC. Moreover, the first two exceptions (first and second bullet listed above) will only apply to external auditors when the violation is “material.”

If a whistleblower is uncertain about their eligibility, they should consult with an experienced SEC whistleblower attorney to determine the appropriate steps. A skillful analysis may be the difference between a large SEC award and no award at all.

Tips for SEC Whistleblowers

For more information about the SEC Whistleblower Program, download our free ebook SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award.  And based on our experience representing Compliance Officers, auditors, and accountants under various whistleblower protection laws, we offer the following tips for whistleblowers exploring the option of disclosing fraud or other securities law violations to the SEC:

Tip #1: Quickly Determine Eligibility

Analyzing an individual’s eligibility is complex. The analysis differs depending on the individual’s relation to the company and how the individual obtained the information. For example, auditors may report to the SEC and be eligible for an award if:

  • they have a reasonable basis to believe the disclosure is necessary to prevent conduct that is likely to cause “substantial injury” to the financial interest or property of the entity or investors;
  • they have a reasonable basis to believe the entity is engaging in “conduct that will impede an investigation of the misconduct”; or
  • at least 120 days have passed either since they properly disclosed the information internally, or since they obtained the information under circumstances indicating that the entity’s officers already knew of the information.

Eligibility depends on various factors. If whistleblowers are uncertain about their eligibility, then they should consult with an experienced SEC whistleblower attorney. A skillful analysis may be the difference between a multimillion-dollar whistleblower award and no award at all.

Tip #2: Protect Yourself 

Many whistleblowers risk being retaliated against for reporting information to the SEC. Fortunately, the SEC allows whistleblowers to report anonymously if represented by an attorney. If it is imperative that you remain anonymous, you should hire an experienced attorney to skillfully guide you through the process, maximizing the likelihood that your identity is not revealed.

In addition, if an employer retaliates against a whistleblower because of lawful whistleblowing, the Dodd-Frank Act and the Sarbanes-Oxley Act offer substantial protection. In a recent case, a California jury awarded a whistleblower more than $11 million after they whistleblower was terminated for raising concerns about a potential violation of the federal securities laws.

Tip #3: Know the Rules Before Filing with the SEC

Whistleblowers should be aware of the factors that influence the size of awards before filing with the SEC. For example, the SEC Whistleblower Office may reduce the amount of an award if the whistleblower:

  • unreasonably delayed reporting the violations(s);
  • participated in, or was culpable for, the reported securities-law violation; or
  • interfered with the company’s internal compliance and reporting systems.

On the other hand, the whistleblower office may increase the amount of an award based on:

  • the tip’s significance to the success of any proceeding brought against wrongdoers;
  • the assistance that you and your legal representative provide in the SEC action or related action;
  • the SEC’s law-enforcement interest in deterring the specific violation; and
  • whether, and the extent to which, you participated in your company’s internal compliance and reporting systems.

Accordingly, whistleblowers have an incentive to report internally to their companies’ compliance personnel before going to the SEC. If whistleblowers choose to report internally, then most whistleblower should also report the same information to the SEC within 120 days. That way, in evaluating a potential award, the SEC will consider the date of the internal report, rather than the date that the whistleblower reported to the SEC. As the SEC puts it, the whistleblower office will “hold your place in line.” This may determine, for example, whether a whistleblower submitted “original information.”

Tip #4: Draft a Tip that Grabs the SEC’s Attention

The SEC Whistleblower Office is relatively small, and thousands of tips are submitted annually. Whistleblowers and their attorneys should tailor their tips to quickly grab the SEC’s attention. While we could write a book on this section alone, here are a few “rules” to keep in mind when drafting submissions:

  1. Provide the SEC with a clear roadmap for a successful enforcement action. Do not submit a pile of documents and expect the whistleblower office to figure it out. Instead, walk the SEC, step by step, through specific and credible examples of the violation(s).
  2. Demonstrate how the violation is “material.” As mentioned, the SEC investigates only those violations that are serious enough to warrant the use of its limited resources. While demonstrating materiality, be sure to analyze the legal issues and tie them to the specific violations. This should include a discussion of potential challenges that the SEC may encounter and how the agency should address them.
  3. If possible, provide the whistleblower office with documentation of the violation. The SEC is much more likely to act on a tip that is supported by strong evidence. The SEC does not, however, want all types of evidence. For example, the SEC does not want information that may violate the company’s attorney-client privilege (e.g., documents, including emails, that involve advice from inside or outside counsel).

Tip #5: Act Fast

The timing of a whistleblower’s tip is a significant factor that the SEC considers in determining whether, and how much, to award the whistleblower. Waiting to file with the SEC runs the risk that someone else may provide the same information to the SEC first, thereby rendering you ineligible for an award.

Resources About the SEC Whistleblower Program

The following FAQ about the SEC Whistleblower Program identifies the key facets of the program.  For more information about the SEC Whistleblower Program, call Zuckerman Law at 202-262-8959 for a free, confidential consultation.

  1. What is the SEC Whistleblower Program?
  2. What violations qualify for an SEC whistleblower award?
  3. How can I submit a tip to the SEC?
  4. Why should I choose the Zuckerman Law to represent me in my SEC whistleblower claim?
  5. Can I submit an anonymous tip to the SEC Whistleblower Office?
  6. When is the best time to report the fraud or misconduct to the SEC?
  7. Can I submit an SEC Whistleblower claim if the SEC already has an open investigation into the matter?
  8. Who is an “eligible” SEC whistleblower?
  9. Can compliance personnel, auditors, officers or directors qualify for an SEC whistleblower award?
  10. What is “original information”?
  11. How might my information “lead to” a successful SEC enforcement action?
  12. Can I submit a claim if I had involvement in the fraud or misconduct?
  13. Do I have to report a securities law violations to my company before reporting the violation to the SEC?
  14. Can I submit a tip if I agreed to a confidentiality provision in an employment/severance agreement?
  15. What factors does the SEC consider when determining the amount of the award?
  16. What employment protections are available for SEC whistleblowers?
  17. What type of evidence should I provide to the SEC?
  18. What happens after I submit a tip to the SEC?
  19. How long does it take to receive an SEC whistleblower award?
  20. What are the largest SEC whistleblower awards?

Experienced SEC Whistleblower Attorneys

best sexual harassment attorneys Washington DC Maryland VirginiaThe experienced whistleblower lawyers at Zuckerman Law represent whistleblowers worldwide before the SEC under the Dodd-Frank SEC Whistleblower Program.  The firm has a licensed Certified Public Accountant and Certified Fraud Examiner on staff to enhance its ability to investigate and disclose complex financial fraud to the SEC, and two of the firm’s attorneys served on the Department of Labor’s Whistleblower Protection Advisory Committee and in senior leadership positions at a government agency that protects whistleblowers.

Firm Principal Jason Zuckerman has been named by Washingtonian Magazine as a “Top Whistleblower Lawyer” and the firm has been ranked by U.S. News as a Tier 1 Firm in Labor & Employment Litigation.

Leading whistleblower law firm Zuckerman Law has substantial experience investigating securities fraud schemes and preparing effective submissions to the SEC concerning a wide range of federal securities violations, including:

For more information about the SEC Whistleblower Program, download our free ebook SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award and see the following resources:

 

SEC whistleblower rules

Avatar of Matthew Stock

Matthew Stock is an associate at Zuckerman Law, where his practice focuses on representing whistleblowers in whistleblower rewards and whistleblower retaliation cases. He is also a Certified Public Accountant, Certified Fraud Examiner, and former KPMG external auditor.

Avatar of Jason Zuckerman

Jason Zuckerman, Principal of Zuckerman Law, litigates whistleblower retaliation, qui tam, wrongful discharge, and other employment-related claims. He is rated 10 out of 10 by Avvo, was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” in 2015 and selected by his peers to be included in The Best Lawyers in America® and in SuperLawyers.