December 16, 2010
The SEC should stick with its proposed rules on compliance programs and ignore the self-serving proposals by the fraud lobby to require internal reporting. Internal reporting requirements have a chilling effect on whistleblowers.
Another concern is whether the SEC, like the IRS and the DOJ initially, will seal itself off from the assistance that whistleblowers and their attorneys can provide. Unlike the IRS, the SEC has no secrecy statutes that limit its ability to share information with whistleblowers. If the SEC cuts itself off from private resources, it will be due to agency choice rather than statutory restrictions. Unfortunately, the SEC's newly created form letter sent to Dodd-Frank whistleblowers is hardly encouraging. Citing longstanding SEC "policy" to keep its investigations confidential, the letter informs whistleblowers, "we are unable to report to you if any action has or will be taken with respect to the issues you have raised." The decision whether to shut whistleblowers and their attorneys out of SEC investigations could be the linchpin of whether this new law will be successful at curtailing fraud that has cost investors billions.
The DOJ's experience with the False Claims Act is, again, instructive. Once the DOJ overcame its initial reluctance to allow whistleblower lawyers "inside" their investigations, they were able to exploit the greatly increased resources those lawyers were able to provide. This multiplied the number of cases that the DOJ could effectively pursue with its limited staff. Although DOJ does have a backlog of pending cases, it concludes a large number of cases each year with impressive results, due in part to the assistance of whistleblowers and their lawyers.
The IRS provides the opposite example. Limited to its own internal resources, the IRS has a growing backlog of over a thousand cases, and since the law was passed in late 2006, not a single one of those cases has been resolved (other than the cases that lack merit and have, therefore, been rejected). The IRS is drowning in good cases that it simply lacks the resources to pursue in a timely way.
Congress has specifically required the SEC inspector general to report on whether there should be a qui tam mechanism for SEC cases, allowing whistleblowers to file their own cases. That approach is likely to be adopted unless the SEC follows the current DOJ approach and works closely with whistleblowers and their lawyers during the investigation of their submissions. Given the enormous volume of cases the SEC will likely receive, any other approach will swamp the agency and cause interminable investigative delays, allowing the Ponzi operators to bilk many more victims out of millions of dollars in savings.
Conclusion
As the SEC moves forward with its new program, it should ignore the strident howls of corporate lawyers beseeching the agency not to shred the fabric of corporate governance, and should rely on experience rather than rhetoric. The power and money of corporate lobbyists should not trump the proven track record of success established by whistleblowers under the False Claims Act.