Deviating from Whistleblower Programs may have more risk than payoff
Background
The whistleblower at the heart of the multi-billion dollar Madoff fraud has set his sights on a new target; General Electric Co. Harry Markopolos is the whistleblowing analyst who was flung to fame after the U.S. Securities and Exchange Commission (“SEC”) ignored his warnings about Bernie Madoff’s Ponzi scam 15 years ago. Dissatisfied with the SEC’s whistleblower award process, Markopolos is employing a new strategy to earn a profit this time around. The strategy, however, doesn’t necessarily mean it will be easier for others to follow suit.
Markopolos partnered with an undisclosed hedge fund to publicly release a report [PDF] in August 2019 alleging a $38 billion accounting fraud at General Electric Co. According to the report, those who prepared the report will be eligible for a share of any profits made from bets that GE shares will decline. In addition to releasing the report publicly, Markopolos submitted the report to the SEC and U.S. Department of Justice. The company has called his claims “meritless”.
Whistleblower Programs in the U.S. and Canada
The SEC's whistleblower program allows the regulator to reward whistleblowers who give the agency information that leads to a successful enforcement action. Whistleblowers can receive between 10% and 30% of the monetary sanctions paid by the offenders if the sanctions total at least $1 million. According to the 2018 Annual Whistleblower Report to Congress [PDF], 69% of the recipients of SEC whistleblower awards have been company insiders.
Although the whistleblower award landscape in Canada is relatively nascent as compared to the U.S., the regime in Ontario in particular is quickly gaining steam. As we have previously discussed, the Ontario Securities Commission (“OSC”) Whistleblower Program was established three years ago and was the first of its kind by a Canadian securities regulator. Awards are now being paid out under the program, demonstrating that the OSC is committed to its newly-adopted bounty-based approach to incentivizing tipsters to report potential misconduct.
According to the SEC’s 2018 Annual Whistleblower Report to Congress, the SEC’s whistleblower program received more than 5,200 whistleblower tips and ultimately awarded $168 million to 13 whistleblowers in 2018. By contrast, in the two years after its launch in July 2016, the OSC reported that its whistleblower program generated approximately 200 tips, where 10% of the tips had been referred to Enforcement and 7% of those were associated with active investigations.
The OSC paid out its first-ever whistleblower awards under its Whistleblower Program on February 27, 2019, awarding three whistleblowers in separate matters a total of $7.5 million.
Potential implications
The OSC’s Whistleblower Program does not reveal what cases were the result of whistleblowers’ intervention. This raises the question of whether insiders seeking to publicize what they perceive to be wrongdoing will adopt the “go public” Markopolos strategy as an alternative means of pursuing redress – rather than reporting confidentially under the Whistleblower Program. If insiders are motivated to go this route, this could harm investors by propagating confusion in the market. Moreover, when allegations become public, companies tend to deny wrongdoing (as GE did in the Markopolos case) thus making it more difficult for companies to ultimately settle with regulators.
That said, the Ontario Whistleblower Program is demonstrating signs of promise and robust take-up among whistleblowers. It is more important than ever for businesses to have in place a strong controls system and corporate culture in order to detect potential problems as early as possible and to protect employees who come forward to report those problems internally. A robust approach to internal compliance is the best defence against the increasingly real risk that boards and management will first hear about serious misconduct within their organizations from the OSC as a result of a whistleblower tip.