SOX Whistleblowers Protection

 As reported by Financial News Online, and Mutual Fund Wire  a  former employee of Fidelity Investments in the US is suing the company for wrongful discharge, including violations of Section 806 of the Sarbanes-Oxley Act of 2002.  The former employee alleges that she was harassed and forced out after bringing attention to problems in the way Fidelity reports profitability figures for its funds. The case was filed in Boston Massachusetts. The complaint  also alleges that Fidelity contends that US whistle-blower protection regulations, do not apply.

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SOX Whistleblowers Protection gives its total support to the post in Work/ Life/Law 3.0   by whistle blowing scholar Terry Morehead Dworkin.

Dworkin point is that Sarbanes-Oxley Whistleblowers should be given the same incentives as  given in the False Claims Act.  He points to the recent 671 million dollar award against Merck. 

Dworkin writes:

“The Sarbanes-Oxley Act (SOX) relies on whistleblowers to help enforce it. It tries to promote whistleblowing through requiring companies to set up anonymous whistleblowing procedures, protecting whistleblowers from retaliation, and providing criminal penalties for intentional retaliation. It does not give rewards though. While most employees who work in companies covered by SOX thought they were protected when they blew the whistle, this has proved to be an illusion. SOX whistleblowers are most commonly fired, and they have been unable for a variety of reasons to get redress. Not surprisingly, whistleblowing has gone down under SOX. Because of these problems, many are calling for changes in the law, including a reward system similar to that in the FCA.”

Dworkin asks suppose that you are working for a company and that you discover that it is misleading shareholders and the public about its financial stability. Would you blow the whistle? Would you be more likely to if you got a reward? If your answer to the latter is yes, how much do you think would be just compensation for the risks invovled? Who should have to pay for the reward?

 The answer is the the upper management that reap the huge financial gains from their fraud. Like the defrauded government agencies that benefit from the False Claims Act whistleblowers, investors will benefit more if SOX whistleblowers have more incentive and should be willing to compensate them from the monies disgorged from the wrong doers.

SOX WHISTLEBLOWERS deserve our encouragement, help AND MORE SARBANES-OXLEY PROTECTIONS!!!

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Kudos right back to  SoxFirst for its recent discussion of  an interesting paper  written by Adair Morse and Luigi Zingales and Alexander Dyck  entitled Who Blows the Whistle on Corporate Fraud?  As SoxFirst  summarizes, the article  discusses an indepth study of all reported cases of corporate fraud in companies with more that 750 million dollars in assets between 1996 and 2004.

Employee Whistleblowers were the highest contributors to fraud detection.  The article also found that monetary incentives for detection of frauds against the government influence detection without increasing frivolous suit.  The article encourages extending more incentives to corporate whistleblowers. 

The “proof is in the pudding” and in this article. The problem continues to be corporate fraud and SOX Whistleblowers are the answer. 

SOX WHHISTLEBLOWERS deserve our encouragement, help  AND MORE SARBANES-OXLEY PROTECTIONS!!!

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In a recent City Journal article, Nicole Gelinas, a City Journal contributing editor and the Searle Freedom Trust Fellow at the Manhattan Institute,  is overly critical of Sarbanes-Oxley.  Her article entitled Criminalizing Capitalism  warns investors not to rely upon agency regulation and/or criminal prosecutors to protect their investments.  Ms. Gelinas writes:

 ”Criminalizing bad internal controls ignores another big problem. As the Wall Street Journal’s George Anders wrote recently of the mortgage blowup, paraphrasing John Reed, Citicorp’s CEO for much of the 1980s and ’90s, “Everyone in banking points to risk management as a top priority . . . but that is often just lip service. Risk analysis can easily become a series of routine chores that offer little protection from the unexpected.” Sarbanes-Oxley, a burdensome risk-management tool, isn’t free of this weakness.”  http://www.city-journal.org/2008/18_1_criminalizing_capitalism.html

Her argument falls apart when she attempts to portray Enron’s Lay, Skilling and Fastow as victims of overzealous prosecution. Perhaps  more telling is what Ms. Gelinas doesn’t write in her article, however.  She does not criticize the whistleblower protections of SOX because she can not. As Ms. Gelinas undoubtedly understands it is the whistleblowers help protect the investors. It was whistleblowers that brought the Securities fraud at Enron and WoldCom into the open and it is whistleblowers that deserve our respect and require the most stringent protections from us. 

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The President’s Corporate Fraud Task Force created in July 2002, recently issued a report which showed the number of senior executives convicted of Fraud. Some high- profiel CFO’s, including Enron’s Any Fastow ane WorldCom’s Scott Sullivan were not on the list because their cases were handled by another fraud team with the U.S. Attorney’s office. The charges brought included securities fraud, insider trading, market manipulation, false statements, stock-option backdating, conspiracy, money laundering, and violations of the Foreign Corrupt Practices Act. In addition to the convictions, the task force noted, more than $1 billion in forfeitures has been distributed to victims of corporate fraud.The task force cited the role that Sarbanes-Oxley and SOX Whistleblower Protections played in facilitating convictions (or, more precisely, plea deals, which occurred in more than 75 percent of cases). In fact, three CFOs were convicted based on direct violations of SOX. New securities-fraud provisions from Title 18 of the U.S. Code, Section 1348, played a role in more than 50 cases. 
 

Among the 1,236 people convicted by the Task Force were:  214CEOs & presidents;  53 CFOs; 23 Corporate counsels or attorneys; and 129VPs.

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Cynthia Cooper, the internal auditor who unearthed the WorldCom accounting scandal has written a  book about her investigation — Extraordinary Circumstances.  Cooper writes that she was following the lack of information.  Time and again, as she worked her way through the accounting records, she encountered lingo that sounded authoritative, but proved to be completely phony. Cooper knew better. When an accounting piece of financial reporting didn’t make sense to her, she asked about it — even if it meant questioning two of the most powerful executives in the country at the time: Bernie Ebbers, CEO, and Scott Sullivan,  CFO.

The book, to be published by John Wiley & Sons, should be a must read for SOX Whistleblowers looking for help and protection from the Act.

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Last spring Chalace Epley Lowry reported  what she believed could have been insider trading by a senior executive at Wal-mart and then found herself looking for a new job.

According to a recent article in Buiseness Week, soon after she reported her  complaint Lowry’s identity as the whistleblower was disclosed to the boss she was complaining about.  Wal-Mart told Business Week that  Lowry agreed to the disclosure, but Lowry disagrees. A distressed Lowry said it was impossible to remain in her  department after the disclosure.  When she  asked to be transferred Lowry reported that she was told she had 60 to 90 days to find another position at the company.

Four months later, Lowry has a full-time job at Wal-Mart headquarters. But her job search was any thing but easy.  She thinks that the stress of the situation  contributed  to a  recent diagnosis of “stress-induced angina”  and to the breakup of her marriage. “The past four months have been very hard and, in my opinion, unfair to an honest, 51-year-old woman who chose to do the right thing,”  Lowry reported to Business Week.

While she was looking for a job within Wal-Mart, Lowry on Sept. 5 filed a whistleblower complaint with the Occupational Safety & Health Administration. OSHA administers whistleblower protections under the Corporate & Criminal Fraud Accountability Act of 2002, better known as Sarbanes-Oxley or SOX. 

Around mid-August, Lowry was moved to assist a legal team of two attorneys in Wal-Mart’s human resources group, known as the People division. On Oct. 1, Lowry was informed that her job is no longer temporary and she could work there full-time. Lowry told Business Week “I guess I should consider myself lucky at this point, but all of this should never have happened. I still feel I’m under the microscope.”

One of the two attorneys that Lowry will be working for is Sharon Butcher. She was the attorney at Enron who was given the task of handling Sherron Watkins’ request for reassignment to a new position after Watkins wrote a memo to then-CEO Ken Lay questioning the company’s accounting.

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According to Forbes, corporate crime remains rampant and a costly problem for businesses worldwide, despite heavy spending, tough new laws and technological countermeasures aimed at stamping it out, according to a survey  released today  by PricewaterhouseCoopers.

Steve Skalak, PricewaterhouseCoopers’ global investigations leader, said in a interview

“Economic crime remains an intractable problem, but the most effective approach to it is to combine financial controls with the right cultural structure,” Skalak says. “That means creating a good tone at top, emphasizing intolerance for wrongdoing, establishing whistleblower hotlines and giving employees the sense they can report wrongdoing without fear of reprisal.”

 In total, 43% of 5,400 companies surveyed in 40 countries reported suffering one or more significant economic crimes since the accounting firm last conducted its survey two years ago. The prevalence of economic crime reported was level with 2005 results but up six percentage points from 2003.

The findings are consistent with headlines implicating companies around the globe in a wide range of wrongdoing, including electronics giant Siemens (nyse: SI - news - people ) (bribery), York International, now part of Johnson Controls (nyse: JCI - news - people ) (foreign corrupt practices), Beazer Homes (nyse: BZH - news - people ) (accounting irregularities) and Biomet (kickbacks to doctors).

According to Steve Skalak “The basic finding is that economic crime is unabated everywhere in world, regardless of the size of companies, and continues to pose a significant business risk,” .

The survey sorts economic crimes into five categories. Asset misappropriation was most common, with 30% of companies reporting it, followed by intellectual property infringement (15%), corruption and bribery (13%), accounting fraud (12%) and money laundering (4%).

The highest perceived levels of economic crime were reported in Africa (52%) and the lowest in Western Europe (38%). In North America, 52% of companies surveyed reported suffering one or more economic crimes in the past two years.

In the wake of the Sarbanes-Oxley Act of 2002, more than 80% of U.S. executives surveyed expressed high confidence in their companies’ internal financial controls. However, only about half were confident of the effectiveness of whistle-blower hotlines.

Those findings contrast with the way economic crimes are typically uncovered, with internal controls revealing about 19% of wrongdoing versus 40% coming through hotlines and tips from employees and outsiders.

By industry, insurance, retail and consumer goods and government reported the highest levels of crime, with more than half of firms claiming to have been victims in the past two years. Health care, aerospace and the drug industry reported the lowest levels–between 27% and 33%.

Each incident of economic crime cost companies an average of $3 million, including direct losses plus legal and managerial costs, the survey found. Companies reporting fraud suffered average losses of $2.4 million each as a result, which was up from $1.7 million two years earlier. While the survey painted a grim picture of the economic crime landscape, there were a few bright spots. One is what PricewaterhouseCoopers terms the “fraud paradox,” in which aggressive countermeasures detect a greater percentage of fraud incidents, even though the total amount estimated to be occurring is declining.Companies implementing compliance programs and ethics training for employees were also found to have had success in limiting the problem. In total, 36% of firms with such programs in place reported suffering economic crimes, versus 48% of those without the programs.

Lynn Brewer, author of Confessions of an Enron Executive: A Whistleblower’s Story, has become a globally known authority on what went wrong at Enron.

Since 2002, she has given close to 200 speeches around the world. At $13,000 per appearance, she has earned hundreds of thousands of dollars for her company, The Integrity Institute. In her presentations, Brewer recounts the wrongs she witnessed at Enron — a company that grossly overstated its earnings and collapsed into bankruptcy six years ago — and exhorts her listeners to act ethically in all of their dealings.
In recognition of her bravery in speaking out as a whistle-blower, the Nobel Peace Center in Oslo, is featuring Brewer in an exhibition devoted to freedom of speech.

Within the world of business ethics, Brewer is considered a star. She is a founding member of the Open Compliance and Ethics Group. She delivered the keynote address at a Sarbanes-Oxley conference hosted by the New York Stock Exchange in 2003 (there are video clips of it on her site, www.lynnbrewer.info).

She has spoken in Great Britain, India, Venezuela, Italy, Canada, Malaysia and New Zealand, and given keynote addresses at dozens of other gatherings in the USA. She’s also a regular speaker at universities, where she lectures students on the importance of ethics in business.
Brewer has even co-authored an article in Business Strategy Review with noted management guru Oren Harari showing how the leadership skills of Colin Powell could have been applied at Enron.

But a USA TODAY investigation that involved interviews with several former colleagues of Ms. Brewer paint her as an astute self-promoter who succeeded in the corporate ethics industry by modeling herself after another Enron whistle-blower, Sharon Watkins. Her past co-workers claim she was not an executive and was not in charge of any revenue responsibilities.

What actually happened may never be fully uncovered but the end result of Ms. Brewer’s recent work to “upgrade” corporate ethics in the United States is greatly appreciated and applauded by this blog.

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