February 4, 2011
Secretary, Securities and Exchange Commission
100 F Street, NE, Washington, DC 20549 – 1090
Reference: File Number S7-33-10
First let me start by thanking the Security and Exchange Commission for this opportunity to respond to certain portions of its promulgation of the Section 21F to the Securities Act as required by the Dodd-Frank legislation (HR 4173). Though I have missed the deadline, I hope that my comments which are based on my experience as a compliance personnel, whistle blower, current witness in ongoing regulatory proceedings against my former employer, and subsequent victim of the harsh realities of retaliatory termination for whistle-blowing, with the inherent difficulties of finding employment, near career-ruination, and incredulity at the inadequacy of existing whistle-blower remedies via The Department of Labor (OSHA) process.
Item: Code of Conduct Ethics
A primary driver of fraud and securities violation is personal enrichment for those who benefit. A primary barrier to whistle-blowing among employees with knowledge of, but who do not participate in or benefit from such activities, is often fear.
The Tone at the top as practiced and as reflected in an entity's Code of Conduct is still the basis of any robust internal compliance program. In the advent of the Sarbanes Oxley Law of 2002, many companies, in particular medium to small companies, drafted boiler-plate Codes of Conduct, as issued to them by their external auditing entities, and viewed that as the end of the compliance requirements. No mechanisms were then put in place to track or measure compliance to Codes of Conduct as the most frequent violators are often the most senior levels of management, and employees soon realized that these Codes of Conduct were not worth the paper on which they were.
Additionally, individuals in functions such as compliance and internal audit are then often used to cover up or paper over enforceable infractions of varying violations by applying false and corrupt standards of "materiality". The end result has therefore been compliance and internal audit functions with little teeth or real authority to remediate or prevent fraud and other enforceable violations of securities laws.
Since the Commission has listed among its concerns, the obvious fact that while many employers have compliance processes that are well-documented, thorough, and robust, and offer whistle-blowers appropriate assurances of confidentiality, others lack established policies and protections for employees. I therefore believe the Commission has missed an opportunity to re-enforce the importance of Codes of Conduct and Ethics within an entity's internal compliance functions in this promulgation of Section 21F.
I believe some dimensions of the application and measurement of Codes of Conduct should be delineated in the Commissions approach as a way of emphasizing the importance of human behavior in any robust internal compliance programs in all types of reporting organizations.
Item: Question number 13 - Proposed exclusions for information obtained by a person with compliance, or internal audit, or governance responsibilities for an entity
While this is done under an expectation that persons with such titles or supposed responsibilities of compliance and internal audit would cause the entity to take steps to respond to violations, in reality many individuals in such functions are often limited in their abilities to remediate, correct, or prevent further infractions.
The Rules of promulgation should be expanded to clarify the roles of the above individuals as having "Actual" and "Real" authority to correct, remedy, or otherwise ensure compliance with the law. In most companies, compliance officers and internal audit heads, for example, report to line managers such as CEOs CFOs, or divisional Presidents who are intent on driving financial performance through any means necessary. These superiors will often interfere with, suppress, retaliate, or restrict an entitys efforts to compliance in the face of huge personal rewards to be gained. Compliance or audit personnel who appropriately report wrong doings to such supervisors or to the board of directors in good faith and with an expectation that they or others will be empowered to remedy the situation, should not be excluded from consideration for whistle-blower awards, in the event where the entity suppresses or restricts their abilities to perform remediation or even retaliate against them for making such efforts, as I experienced in my capacity as a compliance personnel in a previous life.
In my case, reports written to the CEO, the CFO, and to the board of directors delineating corruption in the entity's culture, went unheeded while I became a target for retaliation of the entire organization, which came to see me as 'persona non-grata' as a result of my efforts to cease and remedy violations in accounting activities. Knowing the realities on the inside, I believe exclusion of individuals such as compliance and internal audit personnel who act in good faith by bringing to the Commissions attention, violations of securities laws, would be unfair. If they can prove appropriate good faith intent in escalations to their superiors who hold the authority to ensure remediation and correction of any such violations, then such compliance or internal audit personnel should be afforded the whistle-blower awards as well, subject to other applicable conditions for all other types of employees.
With that said, I do believe that the Commissions approach for exclusion of others such as external auditors and legal professional is appropriate, since they are not subject to managements coercion or suppression.
Item: "Reasonable time"
Reasonable time should not be codified as rule-based but should instead depend on the circumstances – industry, company characteristics, risks inherent to share-holders, or other special circumstances which may have legitimately impeded an entitys ability, in spite of its good faith attempts, to disclose in a 'timely' manner.
The absence of firmly defined timelines such as 30 or 60 or 90 days will not undermine a valid and robust internal compliance platform within an entity with goodwill and which acts in good faith. Arbitrary time-limits may on the other hand, result in forced investigations and errors in production of evidence which could lead to even greater omissions of substantial and potential addressed risks posed to share-holders, as entities will seek use a knife where a shovel is necessary, in their effort to meet time-lines. In defining this as based on relevant circumstances with reasonable parameters, the Commission staff will be well placed to apply their own judgement, in cases of abuse or violations.
Item: Question number 14 – Exclusion to include violation of foreign laws
Inclusions of violations of criminal laws of other countries, given variations in jurisprudence in many parts of the world would only serve to reduce the effectiveness of Section 21F. Much will be made about possible encouragement of potential whistle-blowers to break foreign laws but this should be disregarded. It is the opposite which would prove dilutive to Section 21F in that US quoted entities might seek to encourage the undertaking of fraudulent activities outside of the United States where secrecy laws might afford them protective shelter or where their influence could bring to bear contrived prosecutions upon employees who blow the whistle, thereby barring their employees from disclosures with the sanctions of potential prosecution in other jurisdictions.
I do not think that consideration to violations of foreign laws, especially secrecy laws, should be applicable to Section 21F
Item: Question number 15 – Violations of protective orders of the types issued in private judicial litigations or administrative proceedings
In terms of violations of protective orders of the types issued in private judicial litigations or administrative proceedings, the promulgation of Section 21F should weigh a balance and lean in favor of the greater benefits to society in terms of risks posed to shareholders, over that of the interest of parties in a judicial or administrative proceeding, since such protective orders may indeed be a result of an entitys own desires and interests in limiting enforceable actions for its violations of securities laws by trying to keep them secret.
Protective orders in administrative proceedings and in some private litigations are not issued with consideration of underlying risks posed to the market by an entity's infractions, or potential infractions which might still be ongoing. These are not generally issued in the interest of society at large, but rather in the interest of one or both parties involved. An exemption (from violating such protective orders) should be afforded to whistle-blowers who disclose such information to the Commission with good faith intent of seeking to prevent an entity from further possible infractions, while in the middle of an ongoing private litigation or judicial or administrative proceeding.
Protective and other judicial or administrative orders should not be allowed to dilute the intention of Congress in the promulgation of Section 21F, by disallowing from whistle-blower awards, information derived where such orders might exist. In my experience as a whistle-blower in a proceeding before OSHA, the Department of Labor took a strict and narrow, if casual evaluation of only my internal escalations to my superiors. OSHA had little care as to whether or not the entity continued to be engaged in crimes, which I desperately pointed out during the proceeding.
In spite of delineating several instances of fraud which I opposed and escalated to my superiors during my tenure and which were known to be still ongoing after my departure and yet still ongoing during the OSHA investigation, the administrative body disregarded this information in its entirety. The OSHA investigator informed me that this was beyond OSHAs mandate, while at the same time, my former company continued to inflate revenues, suppress costs, and issue false financial disclosures.
After receiving the companys initial responses dismissing my allegations of internal fraud as baseless, OSHA was subsequently informed of other developments which then forced the companys hand in admitting to the basis of my allegations by issuing its 1st press release announcing its intention to restate financial statements for previous years financial disclosures. Some five or more press releases later expanded the scope of the entity's restatement back a whole 7 years (statute of limitations?). This all occurred during the OSHA investigation which lasted some 20 months, yet OSHA nonetheless disregarded those facts in its inept investigation and findings. I respectfully direct the Commission's attention to the Department of Labor's own GAO August 2010 report highlighting OSHA's overall failures, to illustrate that protective orders issued by inept agency staffers could impede the success of Section 21-F:
In other words, an entity engaged in criminal activities was allowed to continue unabated even where it knew OSHA was conducting an investigation of a whistle-blower claim based on those same allegations. The company then sought a protective order from OSHA to cover my submission of evidence which contained proof of its engagement in fraud. OSHA was then more than willing to grant confidentiality to several key witnesses who testified, including members of the external auditing body which issued unqualified opinions for the company year after year over many years (and which is currently excluded from the Commissions proposed rules promulgating Section 21F).
The final proof of its activities resulted in the entity being de-listed from the NYSE. As a result of the entitys inability to restate its financial statements (which it initially denied to OSHA) within the time frame allotted by the NYSE, it was ended up being de-listed from the NYSE, to great harm to shareholders who had to liquidate. Were it not for astute actions taken by other regulatory bodies which co-opted my initial OSHA complaint in the first place, the OSHA investigation which ignored all evidence of violations by the company, would have afforded the company's request for protective orders (in an effort to contain the possibilities of exposing its behavior), and I would have been barred from alerting the Commission while the entity continued its business as usual mode with its fraudulent practices while it continued trading as an NYSE stock.
My point to the Commission therefore, is that adherence to protective orders issued in private litigation or administrative proceedings serve different purposes from the intent of Section 21F. In fact, these orders could even advance the cause of fraud within an entity and afford corrupt management the time needed to clean house by auditing and destroying evidence etc., thereby resulting in the manifestation of a greater risk to share-holders and the capital markets. Excluding from whistle blower awards, those persons who provide information in violation of such protective orders, might thus defeat the intent of Congress to encourage employees to report enforceable infractions of securities laws, in its effort to protect the capital markets.
Additionally, my former employer was able to perpetrate multi-year duplicitous accounting activities as a result of its abuse of a non-disclosure and arbitration clause signed by each employee on hiring. Knowing very well that most employees are essentially gagged at the outset and are at a distinct disadvantage in arbitration proceedings, the company effectively suppressed through intimidation, each and every potential whistle-blowers ability to expose its fraudulent activities while it benefited from the protections offered in law, out of a legitimate need to preserve intellectual property rights and afford alternative means to court proceedings in resolving conflicts among opposing parties.
I strongly believe that without an exemption for potential whistle-blowers from any such protective orders, Section 21F's effectiveness will be vastly reduced. Relevant information on violations of securities laws must be brought to the Commission's attention where an entity has not remediated, reported or where it actively engaged in, especially where such entity might attempt to cover up its violations by silencing those with knowledge of its actions through the cover of protective orders.
Item: Section 21F-4(b) Paragraph (6) Original Source
I believe in cases where the Commission receives a referral from the Department of Justice, self-regulatory organizations, or other administrative proceedings, "Original Source" should be clarified to include derived-information from voluntary submissions by the whistle-blowers of any time of type of infractions – both financial and non-financial - to any such agencies or regulatory bodies.
Non finance or accounting personnel may not immediately recognize fraud or enforceable infractions of securities laws within their organizations, and so their submissions to a regulatory body could be related to safety, health, etc. Where such a whistle-blowing complaint leads to referable enforcement by the Commission, of violations of securities laws, whistle-blower awards under Section 21F should be made available to original complainant(s), regardless of their original intent. If their information derives revelations of securities fraud, they too should be availed the chance to apply for whistle-blower awards from the Commission subject to other applicable conditions of Section 21-F
Again, my thanks for this opportunity to comment
M. Paul Sinclair, New York, NY