Wednesday, December 31, 2014

Whistle-Blower awards --- wish this NYT article could have been written here

Today's NYT Business section(B3) has an article, "Whistle Blower Awards Get Results, but Also May Lure Wrongdoers", that highlights both the purpose and the risks of awards to those who tell authorities about possible business wrongdoing.  This topic has been thought about here for quite a while, but without enough good information it has never been addressed.  This NYT article fills in the picture well.

In a recent PBS news program, there was the story of a woman who was demoted and eventually fired from her job at a mid-size pharmaceutical company for bringing information about potential fraud to management.  Her job was in the compliance department so she wasn't stepping outside her area of expertise.  She spent seven years working on research to document her claim, and working with attorneys to dispute her firing.  She eventually was given a $7 million whistle-blower award by some area of government.  There is no problem with that here at all.  After-tax, and after seven years of living expenses, the award was helpful to her but it didn't make her ludicrously wealthy and the government received far more in penalties from the company.

What gets attention are the awards for $30mm, $50mm, $100mm, and sometimes much more.  These are related to the size of the amount the government receives but they seem outsized, so much so that it is obvious that these types of settlements could attract people whose goal from the outset is to find a way to sue the company.  No one is going to find $30mm lying on the street, and a tiny few win the lottery.  When these awards go to people who were complicit in the underlying fraud and then have a magic awakening to being a conscientious citizen, that is at a minimum unseemly.

The article does a good job of detailing these risks and the almost complete lack of oversight over what the courts, the SEC,or other regulatory agencies do in handing out these awards.  Why are the awards a percent of the total government gain?  Isn't the risk to reputation, the risk to employment opportunities, and the stress of the situation roughly equal for a $7mm whistle-blower award as it is for $100mm award.   The lack of transparency on this issue could easily lead to the government strong arming companies in a way that is, or should be, short of legal.

A comparison could be made to the government's obsession now with subpoenaing every e-mail in a suspect department of a company that they are investigating.  The government then takes the glib comments of mid-level and low level-employees as examples of widespread company policy, and essentially extorts money from companies under scrutiny.  When it comes to financial companies and their trading in bonds, fx, derivatives, or whatever, the government seems blind to the tradition of "floor talk" which is, or was, essentially one of bragging, cursing, and all manner of politically incorrect remarks.  Maybe that is much less the case now, and if not it should be.  "Floor talk" in no way is emblematic of senior managements thoughts or strategies in most companies excluding, from this point of view, Angelo Mozilo, late of the Countrywide portfolio that is still costing Bank of America an ongoing fortune.

That's another issue and another way of putting companies in the cross hairs of zealous and ambitious regulators.  If one has interest, reading the NYT article on whistle-blowers is informative and provides the best discussion of this almost taboo topic that has been seen here.

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