I recently had the pleasure – and I say "pleasure" because I'm kind of odd – of attending a legal conference sponsored by the U.S Securities and Exchange Commission. One of the highlights was a luncheon keynote by Sean McKessy, chief of the SEC's Office of the Whistleblower.
With a bunch of lawyers in attendance, Mr. McKessy spent a lot of time on micro issues of attorney-client privilege and similar matters, and less on the big picture. In fact, he said early on in the talk that he was going to skip right over the question of whether a whistle-blower should receive financial compensation for "doing the right thing."
It is a question that's relevant in Canada, however, because the Ontario Securities Commission is working on its own whistle-blower rewards program, patterned in large part after the SEC's plan. The OSC is holding a round-table discussion of the topic on June 9, and has already gathered comment letters from the public on the topic.
There are plenty of issues to be worked out, such as whether a whistle-blower must first attempt to report the problem internally to be eligible for an award, and whether audit and compliance employees, whose job it is to make sure the company is doing the right thing, can be whistle-blowers.
But there are some who feel that the very core of the SEC program – the payment to the whistle-blower – is inappropriate for Canada. And they're squaring off against investor advocates who say the OSC's proposed reward structure isn't nearly lucrative enough.
Thanks to the U.S.'s Dodd-Frank law, born of the financial crisis, the SEC can pay someone "who come[s] forward with high-quality original information" that leads to an SEC enforcement action with a penalty of at least $1-million (U.S.). The award range is between 10 per cent and 30 per cent of the money collected – with no upper cap.
The OSC's proposal repeats the $1-million minimum threshold for fines. The award is no more than 15 per cent of the penalties, however, with a maximum of $1.5-million. The Canadian Foundation for Advancement of Investor Rights, or FAIR, notes that the average sanction in Canada is "significantly lower" than in the U.S.: Only six out of the 23 enforcement proceedings concluded by the OSC in 2014 had fines of $1-million or more.
Still, some of the groups providing comment to the OSC seem to suggest even a $1 reward is too much. Law firm Davies Ward Phillips & Vineberg LLP, which sent out a press release titled Blowing the Whistle on the Whistle Blower Program, said in its comment letter that "offering any form of financial award for information from whistle-blowers could create perverse incentives." Examples: encouraging claims without merit; incentivizing employees to stand by as "potential future misconduct ripen[s] into actual misconduct"; and discouraging whistle-blowers from reporting the issue internally.
The last point is made with purple prose by FundEx Investments Inc. of Vaughan, Ont., which wrote: "We fear that the proposed whistle-blower program supports a type of avaricious mentality among employees and agents who, lured by exponentially rising bounties, have every incentive to report malfeasance to the Commission instead of to their company." The Prospectors & Developers Association of Canada raises the spectre of "bounty hunting behaviour and framing companies for financial gains."
With all due respect, phooey. What's more important here is the lifelong risk to a livelihood that a whistle-blower faces. FAIR notes a 15-per-cent payment on a $1-million penalty is $150,000, which might not cover one year's salary for a senior accountant. Siskinds LLP, a securities class-action firm that works exclusively for plaintiffs, named six U.S. whistle-blowers who came forward, internally or externally, prior to the SEC program, and who have since been laid off or fired.
But let's hear from Robert Patterson, a Calgary-based certified internal auditor who has worked in the energy industry. In his OSC comment letter, Mr. Patterson said that while internal auditors "are often in the best position within companies to identify and report on serious fraud and noncompliance issues," they're also employees who "are often manipulated and coerced to conceal and not report sensitive issues concerning serious noncompliance and fraud."
"I know of one … situation where an auditor reported a sensitive fraud issue to the official internal ethics hotline," he wrote. "The issue and [the auditor's] identity [were] disclosed to the CEO by the hotline staff, and the auditor was fired and escorted out of the building within an hour of the issues being reported to the CEO."
Why do we need to pay people to do the right thing? Because sometimes the costs of doing the right thing can be so very high.
David Milstead