Telling White From Wrong: Whistleblowers And The SEC

Amidst calls to have Mary Jo White of the SEC resign or be replaced comes a slightly different reaction (pdf) from the National Whistleblowers Center (NWC).[1]

The NWC lays out a detailed explanation of why whistleblowers in particular should be very happy with Mary Jo White’s leadership.  The letter is worth reading, and the impact of whistleblowers on this area of business is going to increase as long as the SEC continues its support.

Of course, I understand that there are many reasons why the SEC would be a relatively easy target for political attacks.  Nobody is particularly happy with a lot of the news coming from Wall Street.  Most of us are a little envious of how much money people in finance make, and that envy extends to issues the SEC actually has no control over, such as the tax break hedge fund managers get to treat their income as capital gains.  The amount of money showered on the banks to save them in 2007 made nobody outside of that world very happy, even if we had to concede something like it had to be done.  The continuing stratification of wealth in the United States is worrying even to some people on the political right. So, I guess it’s only natural that the head of the SEC would take some heat in this environment, and nobody is saying the SEC is perfect either.

The National Whistleblowers Center’s defense of Chairperson White’s tenure focuses on the attitude of the SEC and its whistleblower office under her leadership of the Commission.  It is not so much that there have been numerous large awards, (in fact, the amount of the awards granted Whistleblowers has been relatively modest).  It is that the SEC has repeatedly taken stands in favor of protecting whistleblowers.  It has done everything it can to adhere to the Dodd-Frank legislation’s protections for whistleblowers and to protect the anonymity of those who want to report securities fraud. They not only have protected the names of whistleblowers directly, but they are also careful—they do not, for example, announce a big reward to an anonymous whistleblower around the same time as announcing a successful underlying action against a company committing fraud. They have done their job to keep safe the identify of whistleblowers who could be the subject of retaliation.

Also cited by the NWC is the action taken by the Commission on its complaint filed as in re KBR. This is a matter the SEC determined should be settled for a token $130,000 sanction against KBR, but it created a far-reaching and crucial precedent for whistleblowers. Nondisclosure agreements that prevent employees from reporting to the Commission possible violations of law are illegal according to the SEC. Every corporate counsel in the United States wants to use such agreements to bind employees and prevent them from reporting fraud. This action gives whistleblowers important new legal authority to thwart such attempts.

Obviously the SEC can always improve at its core function of regulating securities and markets. Nobody is saying everything is fixed just because the Chair of the SEC is supporting whistleblowers. Yet that is one of the clearest ways to improve securities practice. Supporting whistleblowers is potentially the most important step the Commission can take to regulate securities trading.

The fact of the matter is that Whistleblowers have been the most effective means for the government to obtain information about fraud in many industries. There is no doubt that incentives under the Federal False Claims Act and State False Claims Acts and the right of whistleblowers to report fraud under these laws has done more to combat fraud in health care than any other government initiative.  The government has been able to use the information provided by whistleblowers to prosecute the most egregious cases of fraud committed in health care.  There has been no other program as successful in fighting fraud committed by government contractors in many other industries as well.

Now if the SEC can continue to protect whistleblowers, it too will get what is really needed to fight wrongdoing in securities trading: information.  There is no substitute for learning what the companies that commit fraud are doing from somebody who has the information.  Only by protecting whistleblowers can the SEC hope to get ahead of the people who want to commit fraud to get ahead in finance.

Therefore, I have to agree that her record in support of whistleblowers alone is reason enough, to keep Mary Jo White in her job.  Only in a world turned upside down should she lose her job and James Clapper be allowed to keep his.


[1] Note I used to work at the NWC.  I also have the honor of being a co-counsel to a whistleblower whose False Claims Act case provided the basis and information for underlying facts determined by in re KBR, but I was not involved in that SEC filing.