This month’s digest features whistleblower collections for a corporate insider who helped solve a fraud case and for five individuals who uncovered a False Claims Act violation. This digest also features a section of news targeted to your CCO, including the suspension of an investment adviser firm president for failing to provide his CCO with necessary resources (!) and the highlights of a new Consero Group survey.
Corporate Insider Collects $3M as SEC Whistleblower
The SEC announced a whistleblower award of more than $3M to a company insider whose information helped crack a complex fraud. It was the 3rd biggest award under the SEC’s whistleblower program. “The whistleblower’s specific and detailed information comprehensively laid out the fraudulent scheme which otherwise would have been very difficult for investigators to detect,” the SEC said. As you know, whistleblowers who provide the SEC with “unique and useful information” can collect up to 30% of the financial sanctions in cases with recoveries of at least $1M. By law, the SEC protects the confidentiality of whistleblowers. It doesn’t intentionally disclose information that might directly or indirectly reveal a whistleblower’s identity. SEC enforcement director Andrew Ceresney said, “Insiders may hold the key to helping our investigators unlock intricate fraudulent schemes.” The SEC’s whistleblower program has paid more than $50M to 18 whistleblowers since 2011. The biggest award was more than $30M in 2014.
Whistleblowers Share $1.8M in For-Profit School FCA Settlement
Five whistleblowers who alleged a chain of for-profit schools admitted unqualified students and created fake high school diplomas for them will split $1.8M as part of a False Claims settlement. Education Affiliates (EA) agreed to pay $13M million to the United States to resolve allegations that it violated the False Claims Act. EA operates 50 campuses in the US under various trade names, including All State Career, Fortis Institute, Fortis College, Tri-State Business Institute Inc., Technical Career Institute Inc., Capps College Inc., Driveco CDL Learning Center, Denver School of Nursing and Saint Paul’s School of Nursing. The schools operate in Alabama, Florida, Maryland, Ohio and Texas.
The settlement resolved 5 lawsuits filed under the whistleblower provisions of the False Claims Act. The five whistleblowers are splitting about $1.8M. The suits, which the DOJ took over, alleged that employees at EA’s All State Career campus in Baltimore “altered admissions test results so as to admit unqualified students, created false or fraudulent high school diplomas and falsified students’ federal aid applications.” The suits also alleged that multiple EA schools referred prospective students to “diploma mills” to obtain invalid online high school diplomas.
US Appeals Court Finds SEC Cannot Retroactively Apply Dodd-Frank Bans
In a unanimous decision, a US appeals court ruled that punitive industry bans created by the 2010 Dodd-Frank Wall Street reform law cannot be applied to defendants whose misconduct predated the law. The US Court of Appeals for DC found that the SEC was wrong to bar defendant Donald Koch from working in the municipal advisory and credit-rating sectors. “The commission cannot apply the Dodd–Frank Act to bar Koch from associating with municipal advisors and rating organizations because such an application is impermissibly retroactive,” the court wrote.
The decision arose out of a case the SEC initiated against Koch in 2011 over alleged misconduct that occurred in 2009. In its complaint, the SEC accused Koch and his firm Koch Asset Management of “marking the close” – a manipulative tactic involving heavy buying and selling right before the market closes to inflate prices. An SEC administrative law judge found Koch liable for the violations, and the decision was also upheld in an appeal before the 5-member commission. But the agency also decided to bar him from the municipal advisory and credit-rating sectors as well, two types of industry bars that were created by the Dodd-Frank law. The appeals court largely upheld the SEC’s findings against Koch, noting that there was “ample evidence” that Koch manipulated the market and that the SEC applied the correct legal standard in the case. However, the court disagreed with the agency’s decision to invoke its new powers under Dodd-Frank.
News Your CCO Needs to Know
These stories aren’t specifically whistleblower related, but you’ll win serious brownie points for dropping them on your CCO’s desk.
SEC Suspends Investment Adviser President for Ignoring CCO Pleas
Compliance officers everywhere are cheering about this! The SEC suspended the president of an investment advisory firm for one year over claims that he consistently dedicated insufficient resources to the firm’s chief compliance officer, which contributed substantially to the firm’s compliance failures. As part of the settlement, R. Strauss, president of registered investment adviser Pekin Singer, will pay a civil penalty of $45K. In addition, the firm will pay a $150K civil penalty.
According to the SEC’s order, “Pekin Singer failed to conduct timely annual compliance program reviews in 2009 and 2010 and failed to implement and enforce provisions of its policies and procedures and Code of Ethics during this same period.” Even though Strauss knew that the CCO had little compliance experience when he filled the role in 2006, Strauss failed to provide the CCO with staff to assist him with compliance responsibilities. The SEC also faulted Pekin Singer for failing to conduct annual compliance program reviews, even after the CCO alerted Strauss that the compliance program and testing needed further improvement.
According to the SEC, Strauss chose not to make compliance a priority. Instead, he directed the CCO to focus on his investment research and other non-compliance responsibilities. Throughout 2009 and 2010, “Pekin Singer did not adequately evaluate the effectiveness of its compliance policies and code of ethics or test the firm’s implementation,” ignoring multiple pleas for help by the CCO. Pekin Singer did not engage a compliance consultant to assist the CCO until 2011. After that time, the SEC discovered that “several violations of Pekin Singer’s policies and procedures and Code of Ethics” had occurred between 2009 and 2011 that were not detected until the compliance consultant and an SEC staff examination assessed Pekin Singer’s compliance program.
Good News and Bad News for CCOs in Consero Survey
Consero Group published a new survey, “Corporate Compliance and Ethics Data Survey,” on which law.com has an article. The last few years have seen growth in corporate regulation and the expansion of new areas of risk for US companies. As might be expected, this has increased the workload of compliance officers and, to some extent, raised their profiles within their organizations. But does all this attention mean the compliance function is getting all the funding and the strategic attention it needs?
The answer, according to a new report from the Consero Group and law firm Broad and Cassel, is fairly mixed. The survey asked CCOs at Fortune 1000 companies about their roles and activities within their companies, which resulted in some revealing answers about the state of corporate compliance. Some good and bad news in the results:
- 65% of CCOs indicated that over the last 12 months the size of their staff has gone up, while only 11% reported a decrease.
- 62% of respondents reported more money being allocated to compliance over the last year, while only 7% said the budget has decreased.
- This sounds like good news, but the truth is that these increases just aren’t enough, as 57% said they still lack sufficient access to the needed resources to effectively manage compliance.
- 54% answered that they didn’t feel the sufficiently integrated into the business.
- 80% of respondents indicated that they currently don’t have the technology in place to fit the compliance function’s needs.
- 67% said that anti bribery compliance training or general anti corruption training was mandatory for mangers at all levels of the organization
- Many compliance officers also will be pleased to hear that companies are seeking better insight into their compliance programs: 65% use metrics to measure how their programs are faring.
Next Steps: Is It Time to Update Your Company’s Code of Conduct?
It’s crazy to think that we’re nearing the end of the year, but we’re already starting to think about some of the initiatives we’d like to undertake in 2016. Get a head start on your planning cycle by learning how to craft your Code of Conduct to meet best practices.
In order for your Code to be truly engaging, it needs to be interactive and available from anywhere. If you’re planning on completely revamping your Code in the upcoming year, check out the details of our Agile Code of Conduct™ launch. With the Agile Code of Conduct, your employees can engage in interactive exercises and dive deep into topic areas relevant to them, while you can easily update each section with supporting or seasonal content, as well as have access to analytics so you can determine which parts of the Code are accessed most frequently, and have insight into potential knowledge gaps.
If you’re working on a global Code, take a look at our latest whitepaper, Cracking the Global Code of Conduct: Developing a Truly Global Perspective. As difficult as it is to create a US-based Code is, a global Code of Conduct provides a very different set of challenges. In this whitepaper, you’ll learn why a global Code is different, the process of constructing one and why it is crucial to have a truly global perspective before you even begin the drafting process.
Share Your Thoughts with Us!
What other whistleblower news would you share with your colleagues in the ethics and compliance industry? You can join the conversation by commenting on the blog, following us on JDSupra or messaging me directly on LinkedIn.
(PS: Be sure to check out our July Picks for the Top 10 Ethics and Compliance Articles You Don’t Want to Miss for a round-up of July’s top ethics and compliance articles from around the web.)