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Companies can reduce threats from whistle-blowers by encouraging them to first report allegations internally

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Companies can reduce threats from whistle-blowers by encouraging them to first report allegations internally

A corporate culture that encourages employees to feel comfortable reporting problems internally is the most effective factor in discouraging whistle-blowers from first going to federal agencies, legal experts say.

Experts say whistle-blowers are a looming problem for companies, particularly given the generous awards that have been granted to date, including the recent $104 million whistle-blower award to an IRS employee.

At the federal level, particular attention has focused on whistle-blower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, for which the Securities and Exchange Commission adopted final rules last year.

Under the SEC's whistle-blower program, whistle-blowers are entitled to an award between 10% and 30% of the monetary sanctions collected in actions brought by the SEC. The SEC issued its first payout of $50,000 under its whistle-blower program in August.

SEC chairman Mary L. Schapiro said recently, “We're seeing high quality tips that are saving our investigators substantial time and resources.”

The headline-making cases with significant awards “have generated some buzz among plaintiffs' counsel,” said William J. Tarnow II, a partner with law firm Neal Gerber Eisenberg L.L.P. in Chicago

“It's become a huge industry for the plaintiffs bar,” said Michael E. Clark, special counsel with law firm Duane Morris L.L.P. in Houston. “You're looking at having, potentially, plaintiffs' lawyers directing employees to grab documents … and if the government gets involved, subpoenas and search warrants. It's a parade of horribles for companies.”

“It would not be surprising to see an upsurge in the number of claims that whistle-blowers are filing, now that the government has incentivized those reports with monetary benefits,” said Andrew T. Wise, a member of law firm Miller & Chevalier Chartered in Washington, D.C.

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Thomas O. Gorman, a partner with law firm Dorsey & Whitney L.L.P. in Washington D.C., said, “It's a significant question for companies particularly because the whistle-blowers are not required to notify the company before they bring it to the SEC, so the company doesn't have an opportunity to take a look” at the issue, and either fix the problem if there is one, or if there is not a problem, explain why.

Steven J. Pearlman, a partner with law firm Proskauer Rose L.L.P. in Chicago said it is “one of the most troubling issues” confronting employers because while these cases certainly pose a financial risk, “many employers have an even greater concern on the reputational risks these cases pose to them, and those risks are enormous.”

Jacob S. Frenkel, an attorney with law firm Shulman, Roberts, Gandal, Pordy & Ecker P.A. in Potomac, Md., said if a whistle-blower goes outside to report a complaint rather than using internal processes, it is a business disruption and leaves the company without “the opportunity to get the credit that it deserves for the appropriate compliance response” for meritorious complaints.

As for non-meritorious complaints, “there is a heightened concern of an ineffective, or unproductive, employee using the whistle-blower process either to churn trouble for the company, or to prolong employment when the writing on the wall reads termination is forthcoming, because whistle-blowers do enjoy certain protections in the law and companies must be careful in framing their response to avoid retaliation charges,” Mr. Frenkel said.

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A corporate culture that encourages reporting is the most effective factor in encouraging workers to report issues internally, legal experts say. Mr. Clark said, “You have to instill that culture from the ground, all the way to the top in the C-suite, so that everybody gets the message, 'We take this very seriously.'” And follow up on complaints and provide feedback as to what the company is doing, “so it doesn't look like a whitewash,” he said.

Robert D. Rose, a partner with law firm Sheppard Mullin Richter & Hampton L.L.P. in San Diego, said, “A lot of people become whistle-blowers reluctantly because no one listens to them, because they feel they will be punished if they speak up.”

Firms have to have a corporate culture that removes “some of the intimidation and fear that goes along whenever an employee raises an issue,” said W. Gregory Valenza, managing partner at San Francisco law firm Shaw Valenza L.L.P.

“Employees in general want to feel that they can talk to you,” said Jordan Eth, a partner with law firm Morrison Foerster L.L.P. in San Francisco.

“People don't naturally say, 'I'm going to wake up today and be a whistle-blower.' But if they feel frustrated, they don't see an outlet” and they are discouraged “that could push someone” into becoming a whistle-blower, Mr. Eth said.

Mr. Frenkel said also, “The average person is not looking to compromise his or her relationship with his employer and become a whistle-blower. That person is about making sure the company does the right thing.”

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“Employers need to view whistleblowers as assets rather than as Benedict Arnolds,” Mr. Pearlman said. Companies' attitude should be that the whistle-blower can help ferret out problems and they are acting in the company's best interests “and that's a different mentality than what we've seen for decades,” Mr. Pearlman said.

Experts say with the right culture in place, companies can proceed to effectively encourage whistle-blowers to report their complaints internally by introducing appropriate procedures and processes, including anonymous hotlines, appointing a member of management to handle complaints, and effective training.