Not unlike the popular psychology that emerged in the late 20th century, in the legal world, “self-help” is a powerful notion that calls upon the individual to take an active role in creating his or her best legal outcome. For whistleblowers, particularly those reporting corporate misconduct, this is mission critical. Given the spate of high-profile bounties awarded to SEC whistleblowers, individuals across the globe are coming out of the shadows to report securities violations by their employers.  How to do that safely, setting up the best chance of success, is not always straightforward or simple.

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Securities And Exchange Commission SEC
By U.S. Government [Public domain], via Wikimedia Commons

Know the Ground Rules

In 2010, the Dodd Frank Wall Street Reform and Consumer Protection Act created the SEC Whistleblower Program. In the ensuing years, the program has proved to be a phenomenally successful public-private partnership, resulting in more than $1 billion in monetary sanctions levied by the SEC and to date providing nearly 50 individual whistleblowers a collective bounty north of $155 million.  As the program gains notoriety and the awards grow more frequent and substantial, prospective whistleblowers should take note of the ground rules that govern whistleblower submissions.

Perhaps the most important provision for employee whistleblowers makes it illegal for any employer to punish a whistleblower “because of any lawful act done by a whistleblower – in providing information to the Commission.” In its plain language, the government crafted the rules precisely to protect lawful self-help that facilitates a whistleblower’s transmission of important information to the Commission.  This includes the obvious sharing of relevant information based on an employee’s personal observations. For example, a corporate finance employee who sees purposeful accounting irregularities that lead to false statements in the company’s annual 10-K report can report those irregularities without fear of reprisal.

Where things get tricky is when we look beyond the obvious methods and means a whistleblower may use to report corporate malfeasance. In other words, can a whistleblower engage in self-help in providing the Commission with more than just the information they have personally observed and retained in their memory?  Well, yes, but whistleblowers must proceed with caution.

The SEC rule makes clear that whistleblowers must act lawfully in providing information to the Commission. So if an employee breaks into a supervisor’s office in the middle of the night and absconds with a computer hard drive, this is clearly illegal.  It would also be illegal and improper for an employee to place and leave a recording device in another employee’s car or home.  In these examples, the employees are engaging in unlawful behavior, would have no protection under the rule and would probably also be ineligible to receive a whistleblower award.

There are grey areas, particularly with respect to surreptitious recordings.  Consider the case of an employee who may be in a position to attend an office meeting in which she knows that a fraudulent scheme will be discussed.  Or an employee who “tees up” a telephone conversation to elicit damning information from a bad acting colleague. Certainly a contemporaneous recording is more accurate and more reliable than after-the-fact note taking.  And, to be sure, such evidence would go a long way to support law enforcement in an ensuing investigation.  But there are limitations. While the majority of U.S. states are one party consent jurisdictions where it is not illegal for an individual to surreptitiously record conversations to which he or she is a consenting participant, this is not true for all states.  In New York, for instance, such recordings would be permissible under the law.  Not so in Connecticut.

Ways to Build a Better Case

The investigative workload carried by the SEC is tremendous.  Each year, the Commission receives more than 20,000 tips, complaints and referrals, of which over 4,000 are whistleblower tips. At any one time, the SEC actively conducts about 2,000 investigations, which typically take between 2-4 years to complete. The numbers are daunting. To prepare a whistleblower submission with the best chances of going from tip to investigation relies on, among other things, the quality and quantity of information to support the alleged violations.

Email is a powerful body of evidence and can often be a potent indicator of securities fraud.  If an employee is an intended recipient on an email (including as a cc), it can be retained and shared with law enforcement.  There are occasions, too, when an employee may be an inadvertent recipient of a ‘smoking gun’ email, which, in most cases, can be shared with regulators.

The same would be true for documents that the employee receives during the regular course of employment, such as financial or accounting records. For example, if an accounts receivable manager identifies material misstatements in the corporate books and records that result in revenue being improperly recognized, the manager would likely report internally, but is also entitled to report it to the SEC and provide the SEC with the relevant supporting documentation.

Common Minefields

Although it’s true that employee action is especially important if the employee suspects that the original documents may be destroyed or altered, again, employees have to proceed with caution.

By way of example, sometimes print and electronic documents are protected by the attorney-client privilege and are clearly marked as such. Prior to sharing such material with regulators, employees need to take specific steps to protect themselves and the ultimate investigation.

Laptops.  Laptops can be a serious minefield for prospective whistleblowers.  When an employee considers removing a laptop from company property, a case-by-case analysis must ensue to determine who owns the laptop, who has access to the hard drive and whether taking the laptop could potentially damage the organization’s computer system. There is no quick and easy answer and acting impulsively, without legal counsel, can cause a world of hurt for the whistleblower and the larger investigation.

The Power & Pitfalls of Note taking

Taking good notes in real time is a common – and often useful – way to preserve recollection of incriminating meetings or exchanges. The practice is not without its downsides, however. In some cases, handwritten notes have been a way to establish the identity of a whistleblower who sought anonymity.  With decades of combined experience in federal law enforcement, our partners have participated in investigations and trials where the journaling backfires in other ways.  Indeed, extensive note taking and rigid timelines can lock a potentially powerful witness into a written set of facts that can then be used to impeach or otherwise discredit the person at a later point in time.  In a perfect world, whistleblowers would work with lawyers under the protection of the attorney-client privilege so that the statement of facts and efforts at self-help support the worthy end.

Don’t Delay

As a general rule, successful whistleblowers report misconduct early, often in real time.  The passage of time is the whistleblower’s enemy.  The older the conduct becomes, the less likely the SEC will institute a successful enforcement action.  The statute of limitations for an SEC enforcement action is generally five years but if an individual has been sitting on a file drawer full of incriminating documents for the past four years without reporting, the odds of a successful enforcement action are already diminished no

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