A-2 4 ORANGE COUNTY BUSINESS JOURNAL

GENERAL COUNSEL AWARDS Advertising Supplement

JUNE 6, 2011

B i g B r o t h e r i s Wa t c h i n g . . . a n d H e P a y s R e a l l y We l l
An action plan for public companies and participants in the securities industry under the new SEC Whistleblower rules

reinvigorated SEC finalized its whistleblower bounty program to reward individuals who voluntarily provide original information that leads to a successful enforcement action. An SEC whistleblower can now lay claim to a bounty between 10-30% of monetary penalties over $1 million. This can equate to lottery-sized sums; had a whistleblower made a claim on the recent Goldman Sachs settlement, he could have pocketed $165 million; the Halliburton FCPA settlement may have reaped $173 million. The new whistleblower rules will have a dramatic impact on SEC enforcement activity which are already at record-high levels. Thomas Sporkin, chief of the SECs Office of Market Intelligence, recently remarked that the number of high-value tips...numbered about two dozen a year before the law. But since July [2010], the agency has sometimes been receiving one or two a day.1 Notably, the blitz of tips arrived before the final regulations were unveiled on May 25, 2011. The potential whistleblowers are not only company employees, but can be virtually anyone with whom a public company has contact: competitors, vendors, employees jilted spouses, neighbors, friends or family members.2 Tips are also coming in from lawyers, complete with briefs and supporting evidence. Companies can take important steps now to minimize whistleblower risks. First, internal policies designed to prevent securities violations, including insider trading, ethics, FCPA and corporate governance policies should be given a makeover. For example, a strong insider trading policy will emphasize that information regarding the company is confidential property. Companies should also consider limiting the distribution of confidential company in- John Cannon, Shareformation to an as needed basis according to project or respon- holder, Stradling Yocca sibility. Carlson Rauth Second, training should be provided to all employees on compliance issues and company policies should be routinely distributed. Merely providing policies to an employee on his first day of work or passively posting the policy online may be insufficient. The SEC expects public companies to be actively engaged in educating employees about securities regulations, as well as monitoring employee activities. Finally, companies should formally encourage employees to report concerns internally. Whistleblowers need not report internally to qualify for an award, but the rules provide financial incentives for whistleblowers who report internally and the company thereafter self-re-

by Kathleen Marcus & John Cannon, Shareholders, Stradling Yocca Carlson & Rauth

ports to the SEC. While many whistleblowers may still opt to go directly to the SEC, the SEC looks favorably on established internal reporting channels. Moreover, the receipt of an internal report provides companies with a valuable opportunity to investigate. Accordingly, companies must ensure that they have clear reporting channels, a publicized whistleblower hotline and regular training on these channels. More generally, companies should think creatively about ways to reinforce employee commitment to handling compliance concerns. When a colorable internal complaint is received, companies should consider hiring outside counsel to conduct an investigation. Engaging a firm that will lend expertise, objectivity and independence to the findings encourages the SEC staff to rely on the investigation results in lieu of conducting their own investigation. Additionally, a self-reporting company can request cooperation credit for their investigation efforts, which may ultimately lessen sanctions. Finally, the SECs rules call for liberal retaliation protections for employee whistleblowers. Companies should provide clear directives to management that retaliatory behavior will not be tolerated. Moreover, while companies can require employment agreements and company policies to mandate the protection of confidential information and non-disparagement, it is illegal to restrict an employees right to be a whistleblower or otherwise communicate with the government. The bounties offered by the new whistleblower rules will undoubtedly yield more complaints to the SEC. Companies should prepare to deal with all types of complaints from the frivolous to Kathleen Marcus, Share- the serious. The steps identified above will assist companies irreholder, Stradling Yocca spective of the merit of the allegations. Companies that prepare now will ultimately assert greater control over the ultimate outCarlson Rauth come. For more information, please contact Samantha McDermott at 949.725.4000.

1 Thomas Sporkin, Chief of Office of Market Intelligence, Speech, Enforcement, (The SEC Speaks in 2011, Washington, D.C., Feb. 4, 2011) (available at <http://www.pli.edu>). 2 Individuals occupying positions of trust within the company are excluded from qualifying as whistleblowers, including company counsel, public accountants and compliance personnel.