Warning: Whistleblowing May Be Hazardous to Your - Roy Cohen

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1 CFA_J-F-11_Blowing It_CFA Feature Template 12/13/10 10:32 AM Page 32 BLOWING Warning: Whistleblowing May Be Hazardous to Your Careers Health. Do investment professionals still have an ethical obligation to take action? BY LORI PIZZANI 32 CFA MAGAZINE / JANFEB 2011

2 CFA_J-F-11_Blowing It_CFA Feature Template 12/13/10 10:32 AM Page 33 H ollywood has a fascination with intriguing and was fraud and Skilling knew it too and was getting out compelling whistleblower stories. From Silkwood before the whole thing imploded. in 1983 (an employee exposes dangerous prac- When Watkins met with Lay a second time, she was tices at a nuclear power plant in Oklahoma) to 1993s armed with several pages of memos, an Excel spreadsheet The Firm (a young attorney who exposes his law firms confirming her allegations, and a presentation to the board ties to members of the Mafia) to the abusive sales tactics of directors. She assumed that Lay would be forced to con- used by hungry stockbrokers in the more recent Boiler front the situation, and she was confident that the right Room, whistleblowers have often been romanticized as steps would be taken. do-gooders who seek to right ethical wrongs in a single None of those optimistic assumptions happened, bound and leave the world a better place. she continues. In fact, when I testified in front of In the real world whistleblowers arent always Congress after Enron went bankrupt, I was shown a docu- celebrated as champions of truth and justice for blowing ment from Enrons outside attorneys outlining, at Lays the cover off illegal or unethical conduct and corporate request, the potential consequences of discharging malfeasance. Instead, they can be ostracized and defamed, employees who raise accounting concerns. The date on and their efforts to do the right thing may cost them the document was 24 August 2001, two days after Id met their careers. with Lay. His first reaction was to determine if he could dump me on the street. THE BALANCE OF POWER In October 2001, Enron wrote off the structures that In light of the corporate scandals of the late 1990s and the concerned Watkins, but the write-off was not done in a early 2000s (as well as passage of the SarbanesOxley Act way that was acceptable by accounting standards. of 2002, which imposed tougher corporate requirements), Questions about the company swirled. Creditors withdrew TIME magazine celebrated two corporate whistleblowers their lines of credit, the ability to conduct business evapo- for their courageous actions: Sherron Watkins, formerly rated, and Enron declared bankruptcy in early December vice president and managing director of corporate devel- 2001. Watkins corporate memos were later leaked to the opment at Houston-based energy company Enron, and press, and she became a symbol of whistleblowers world- Cynthia Cooper, former vice president of WorldCom. wide. But she admits that the aftermath was challenging. (The magazine also honored a government whistleblower: Although doors of employment in corporate America Coleen Rowley, the U.S. Federal Bureau of Investigation are closed to me, many other opportunities to lecture and agent who accused her superiors of ignoring terrorist tell my story have opened, she says. Watkins considers warning signs.) But few whistleblowers are ever rewarded herself fortunate. The stories of whistleblowers rarely have with high praise or even a pat on the back, and many find a happy ending, primarily because the companies they the aftermath to be very different from what they expected. report on do not implode but continue with their poor Even the much-lauded Enron whistleblower has regrets. behavior and often prosper. With the benefit of hindsight, I do not regret that Whistleblowers need to realize that once theyve I went to Ken Lay [Enrons chairman] to alert him to reported the truth, theyve done their part. Unfortunately, accounting irregularities at Enron, but I do regret that says Watkins, most whistleblowers become obsessed with I went alone, says Watkins. I should have realized that seeing the wrong corrected and drive themselves nearly when speaking truth to power, one has to try to change the insane trying to rectify the problem single-handedly. balance of power. If five of us vice presidents/managing directors had met with Lay, then he could not have dis- DEFINING WHISTLEBLOWING missed my concerns as just that of one voice, one opinion. Whistleblowing means different things to different peo- I discovered what I thought was a significant mate- ple, says Curtis Verschoor, professor emeritus at DePaul rial accounting fraud at Enron an overstatement of the Universitys School of Accountancy and Management prior years net income by nearly half and was contem- Information Systems and a current member of the Com- plating what to do next. I immediately started looking for mittee on Ethics at the Association for Accountants and another job, circulating my rsum, refreshing my network Financial Professionals in Business. He notes, for example, of business connections, etc., Watkins recalls. Within that Watkins reported internally but never went outside two weeks of my discovery, Jeff Skilling, our CEO, of her company. She had the best of intentions, to protect resigned in an abrupt, inadequately explained departure the company she worked for, he says. from a job hed sought for over 10 years yet held for less Verschoor embraces the definition of whistleblowing than eight months. It confirmed for me what I was seeing that was included in the 1999 book The Whistleblowers CFA MAGAZINE / JANFEB 2011 33

3 CFA_J-F-11_Blowing It_CFA Feature Template 12/13/10 10:32 AM Page 34 WHAT MAKES A TRUE CFA CHARTERHOLDER Its extremely difficult to stand up tions are taking place. In this way, you The following steps represent against the crowd of senior executives give a very clear message to the organi- appropriate actions for members and who want to go ahead with actions that zation and you dont run the risk of candidates to undertake to dissociate are wrongfully intended, says Rik being a spectator which may later be from the unethical actions of others and Albrecht, a CFA charterholder who is construed as a cooperator, Albrecht personally remain in compliance with vice president of the CFA Society of The counsels. the Code and Standards: Netherlands (as well as a board mem- As happened in the case of this Express your concerns to the individ- ber for outreach and awareness, advo- portfolio manager, sometimes the ulti- ual committing the actions in hopes of cacy, and technology). Albrecht, who mate victim of unethical behavior is an correcting the situation. also teaches ethics at two CFA Program anonymous one; one without a voice. Inform your employer, through a Partner universities, notes the usual Its the general marketplace. Its the supervisor or compliance department, excuses: Im just following orders, investor base. Its the confidence of of the activity(ies) causing concern in Everybodys doing it, and If we dont ordinary investors in the financial sys- order to bring about a correction of do it, the company will show losses and tem, says Albrecht. Why would you the situation. thousands of people will lose their put the anonymous marketplace first? jobs. Going along is easier than chal- You will not be rewarded for it; the Ask to be removed from the environ- lenging decision makers, and ignoring anonymous investor will not give you a ment where the problem is occurring instructions from senior management pat on the shoulder. However, your (e.g., request a new project or refuse may result in punishment. Its exactly readiness to put the integrity of the cap- to accept the new client). This may not this that makes it hard to be a CFA char- ital markets first is what makes you a correct the situation, but it serves to terholder and follow the Code and true CFA charterholder. remove you from being viewed as Standards, he says. assisting in the activity(ies). One notable case involved a CFA WHAT SHOULD CFA Report the activities to appropriate charterholder who was a portolio man- INSTITUTE MEMBERS outside authorities for investigation. ager based in a major eurozone market. AND CANDIDATES DO? For violations committed by fellow When asked by an employer to execute Say youve come to the unwelcomed CFA Institute members or candidates, obscure financial transactions that were realization that your boss, co-worker, the Professional Conduct Program designed to hide financial losses, the employer, or organization has been investigates complaints based on the portfolio manager faced the difficult engaging in some illegal activity. You requirements of the Code and Stan- task of trying to convince a group of know its wrong, and you know it dards. Industry regulators also spon- worried senior executives to disclose shouldnt be allowed to continue. What sor reporting services concerning the rather than conceal the banks trouble- should you do? Jonathan Stokes, head activities under their jurisdiction. some situation. Even reporting to the of Standards of Practice at CFA Institute, Resign from the organization if your banks compliance officer did not help offers the following suggestions in light continuing association with those because the compliance officer was in of the CFA Institute Code of Ethics and involved with illegal or unethical con- on the game. In the end, the charter- Standards of Professional Conduct. duct may be construed as participa- holder chose to avoid being associated Under Standard I(A)Knowledge tion in or assistance with such con- with unethical conduct. of the Law, CFA Institute members and duct. Members and candidates may Albrecht recommends that CFA candidates are prohibited from partici- delay taking this step if there is an charterholders first dissociate from the pating or assisting in violations of laws, ongoing investigation of the activities unethical behavior and then, in plain rules, or regulations. Dissociation from by the appropriate oversight authority. writing, explain their reasons and activities of others is required when a suggest an alternative course of action. member or candidate has reasonable Additional guidance on all principles Communication is key, he says. grounds to believe the actions are ille- of the Code and Standards can be found Make it clear from the start what your gal or unethical. The Code and in the Standards of Practice Handbook position is so that it doesnt come as Standards do not compel members to (10th edition, 2010), which is available a surprise to your boss. report suspected activities to outside on the CFA Institute website Next, stay well clear of unethical parties unless such disclosure is (www.cfapubs.org). conduct. Take the day off, or call in mandatory under applicable law, but sick on the day any unethical transac- disclosure may be prudent. 34 CFA MAGAZINE / JANFEB 2011

4 CFA_J-F-11_Blowing It_CFA Feature Template 12/13/10 10:32 AM Page 35 Handbook: How to Be an Effective Resister by Brian Martin, Securities and Exchange Commission (SEC). Whistle- a professor of social sciences at the University of Wollon- blowers will be able to collect from 10 percent to 30 per- gong in Australia: Whistleblowing is an open disclosure cent of the monetary sanctions imposed by the regulator about significant wrongdoing made by a concerned citizen, as long as those sanctions exceed US$1 million. The SEC totally or predominantly motivated by notions of public is now drafting necessary and definitive rules to imple- interest, who has perceived the wrongdoing in a particular ment the new provisions. role and initiates the disclosure of her or his own free will DoddFrank now provides a real financial incentive to a person or agency capable of investigating the com- for whistleblowers, says Peter Mina, senior associate at plaint and facilitating the correction of wrongdoing. the Tully Rinckey law firm in Washington, DC. A whistle- Verschoor acknowledges that opting to blow the blower must be a direct source about the information or whistle is a gut-wrenching decision. But even though illegal activity, and the disclosure must be a real disclo- every employee has the duty of loyalty, one cant turn a sure, not merely a disagreement over policies. The law blind eye to illegal activities. Going along with your boss also provides a new anonymity provision. Whistleblowers should not be an option, says Verschoor. Dont look can report activity directly to the SEC or choose to the other way. remain anonymous by reporting through an ombudsman A section of the SarbanesOxley Act was intended or representative. Still, past experience has shown that to protect employees who refused to go along with fraud- the process can take years. In addition, absent a financial ulent or unethical acts, including fudging financial state- benefit, there is little personal benefit to disclosure other ments, but the results of those whistleblower supports than knowing youre doing the right thing, Mina adds. have been abysmal, according to Verschoor. The U.S. Department of Labor, which has been administering the PERSONAL AND PROFESSIONAL IMPACT whistleblower provisions, is more accustomed to working Whistleblowing doesnt necessarily mean reporting an with workplace safety, discrimination, harassment, and activity that is going to rock the world, counsels Roy other human resource issues rather than dealing with Cohen, a New York-based career coach and author of the securities law issues, such as creative accounting and dis- book The Wall Street Professionals Survival Guide. Because closure concerns. Decisions by lower courts or adminis- many financial institutions are in the business of taking trative law judges have been overturned at a high rate. risks, an activity seen as illegal by one person may be a Very few cases have had favorable outcomes for whistle- case of aggressive risk taking that borders on but blowers. According to the Center doesnt cross over to illegality. for Public Integrity, since the Whistleblowing happens at enactment of the SarbanesOxley Your readiness every level of organizations, he Act whistleblower provisions continues. At higher levels, you through 30 June 2010, the to put the integrity of have a greater support system, but Department of Labor has tossed the capital markets first if youre further down the food out 1,066 claims while upholding chain, you may not have that sup- only 25. In other words, only is what makes you a port system. Your boss may say, 2.3 percent of the claims have true CFA charterholder. I dont want to hear about this been successful. Moreover, the right now. Resigning a position RIK ALBRECHT, CFA law provides for no mandatory once an employee becomes aware monetary damages. Government of questionable activity is a viable employees and some (but not all) industries have addi- option, even if the whistle is never blown. If you havent tional protections for whistleblowers, such as restrictions told anyone but you leave, you dont damage your reputa- on employer retaliation. tion. But if you have a non-compete agreement in place, The DoddFrank Act of 2010 includes a formal defi- it can become dicey, he counsels. Unless you are willing nition of a whistleblower as any individual who provides, to expose your former employers bad behavior, theres or two or more individuals acting jointly who provide, usually no way to contest a non-compete. information relating to a violation of the securities laws Moreover, if you do blow the whistle and then leave, to the Commission, in a manner established by rule or you will have to do damage control. When you apply for regulation, by the Commission. Under the new law, a new job and have to provide your former employer as whistleblower provisions are being ratcheted up for those a reference, you can say, Here are my references, but I who provide so-called original information to the U.S. should tell you that the company is angry at me because CFA MAGAZINE / JANFEB 2011 35

5 CFA_J-F-11_Blowing It_CFA Feature Template 12/13/10 10:32 AM Page 36 I reported this activity. I knew I was jeopardizing my to tax authorities in the United States. Although they reputation, but I didnt want to ruin the reputation of were interested in the data, they offered no personal pro- the company, says Cohen. tections, according to Elmer. In 2005, Elmer says he was Rudolph Elmer is the whistleblower at the center arrested in Switzerland and jailed for 30 days on suspi- of a recent and still controversial case. He spent 15 years cion of violating bank confidentiality laws. Three years working for the Swiss investment giant Bank Julius Baer, later, he turned to WikiLeaks.org to get his story out. most recently in the Cayman Islands. Elmer alleges that he Public attention is a kind of security, Elmer says. To became aware of his employer assisting several American protect his interests, he also hired a lawyer based in clients and others with tax evasion, including his own Washington, DC, who specializes in legal cases involving firms attempts to avoid paying taxes to the Swiss govern- money laundering and offshore tax evasion. Elmer will ment, among other illegal activities. After having tried, get his day in court in January 2011 when his case, in-house, to solve the issue, I was fired, Elmer tells the first whistleblower case to be heard in a court in CFA Magazine. Switzerland, will begin. Julius Baer has a different version of events. The Elmers subsequent efforts to find new employment bank claims that Elmer expressed concerns only after failed. He lost two jobs one in Switzerland and another being denied a promotion and further alleges that he sub- in Mauritius not long after being hired, and he believes sequently stole internal bank documents, an action for those employers were motivated by concern about his which he was dismissed. In a public statement, a represen- reputation as a whistleblower. tative of the bank depicted Elmer as a disgruntled former Elmers advice to anyone considering blowing the employee who didnt receive the financial settlement whistle is to plan ahead. You have to have a very strategic he was seeking. approach, he says. You should not think about the It took two years for Elmer to get the attention of the moment of the whistleblowing but what happens to your proper Swiss authorities. He filed a suspicious-transaction family and friends and know that your lifestyle will change report, but a question of jurisdiction (Cayman Islands dramatically. Moreover, he adds, Financially, you have versus Switzerland) complicated the matter. He also talked to be certain you can survive. Thinking money-wise, WHEN THE WHISTLE FALLS ON DEAF EARS From 2000 to 2008, with analysis from Financial Services Committee, Bernard Madoffs math never two trusted business associates, Harry Markopolos detailed his repeated made sense, his performance charts Markopolos, CFA, tried to report his sus- attempts at getting the regulators to were clearly deceiving, and his return picions that Bernard Madoff was running understand Madoffs bogus split-strike stream never resembled any known a Ponzi scheme. There were multiple derivatives strategy and investigate a financial instrument or strategy, letters and reports to and discussions fictitious performance record that Markopolos told congressional leaders. with a series of officials at both the showed only three down months in 1987, Every bit of information was in Boston and New York offices of the U.S. although the S&P 500 had 28 down the public domain. We never had any Securities and Exchange Commission months during the same time period. sensitive documents or smoking gun as well as a communication with an Other red flags included Madoffs strat- e-mails. We did what we could to stop investigative reporter at the Wall Street egy boasting good performance during Bernard Madoff from bilking the public. Journal. Yet nine years later, Madoff all market conditions, stating that his we failed to achieve a positive was still running his Ponzi scheme, strategy replicated one equity index result, Markopolos lamented. eventually turning himself in to authori- but comparing performance to another, A complete transcript of ties in December 2008. too-good-to-be-true correlations and Markopolos 4 February 2009 congres- In his 4 February 2009 testimony the need for fresh money to be invested sional testimony is available online before the U.S. House of Representatives (which, for a real money manager, would at www.house.gov. have diluted performance returns). 36 CFA MAGAZINE / JANFEB 2011

6 CFA_J-F-11_Blowing It_CFA Feature Template 12/13/10 10:32 AM Page 37 I lost at least US$3 million or more as well as my job and identity eventually will be made public. Currently, the my reputation. outcome for DoddFrank provisions remains to be Despite the lost money, If you think about the determined. Its unclear whether the SEC will have any ethics and morality and social responsibility we all carry, mechanism for disclosing the name(s) of whistleblowers I would do it again, Elmer says. Make sure you are right or might be forced to provide such disclosures. with your facts. Try to discuss the matter with someone, in-house if possible, in a very informal way, without SOMETIMES THE GOOD GUYS WIN disclosing too much. If nothing changes, then find people Not all whistleblowers are punished for their good deeds. you can trust, such as a lawyer. Do not [blindly] trust Sometimes, they prevail. authorities or journalists. Finally, he says, Try to control Consider the story of an American whistleblower your emotions and play it smart and protect your name who spoke to CFA Magazine on condition of anonymity. as long as possible. As a quality assurance manager for his employer, a manu- facturer of products for the U.S. military, he became A LONELY ROAD aware of a suspicious work-related situation. Based on his The vast majority of whistleblowers who come to us experience in regulatory contractual work, the circum- have gone to their employers first, says Erika Kelton, stances just didnt smell right, but he wasnt entirely sure partner with the Washington, DC, law firm of Phillips & that the situation was wrong. So he did some research. Cohen. Consequences have run the gamut for the firms I found out that it wasnt my imagination. It was some- clients, from seeing the complaint go nowhere to getting thing contractually that [my company] shouldnt have the cold shoulder from bosses and co-workers to having been doing; it was wrong, he says. I uncovered what their jobs marginalized or even being fired. Most people I found to my peers and multiple levels of management, like their work lives and are loyal, but they want to work but I was put off with phrases like Dont worry about it for an ethical firm. Anyone looking to gain by blowing and It will be taken care of, but nothing changed, he the whistle should think again. This is not like playing says. I told an expanded group of people about this, but the lottery, Kelton says. same thing. I talked to the ethics officer and compliance Its a very lonely road being a whistleblower, officer, but zero changed. They never followed up with says Mina. Colleagues are flat out told not to associate me or did an investigation. I was the annoying fly. with you. Retaliation can include a reduction of duties, He decided to blow the whistle on his employers isolation or a transfer, a salary reduction, or termination. activity anonymously and hired a lawyer to protect Moreover, expectations for a pat on the back or huge his interests. It was the single hardest decision I have monetary awards are unrealistic in most cases. There can ever had to make, akin to laying people off as a manager, be recoveries, but sometimes the financial recoveries are he explains. But I could envision our product not doing small, Mina adds. I wouldnt get into the whistleblower what it should for U.S. military personnel when they business to get rich. needed it. That just tore my insides out, the whistle- In the United States, the False Claims Act, which was blower says. strengthened in 1986, covers cases in which bogus or Because he was able to protect his identity, his inflated claims are filed for the payment of federal/gov- employer never knew hed been the whistleblower. I ernment money (e.g., under a federal contract or federally stuck with my job, and I didnt let it interfere with my job funded program). The False Claims Act contains whistle- or my attitude, he says. The process took about three blower provisions called qui tam, which allow citizens and a half years from start to finish, and in the end, the with evidence of such fraud to sue and recover the stolen case was settled with fines being paid to the government, money. As a reward for blowing the whistle, whistleblow- of which he received a percentage. Im no longer with ers can recoup between 15 percent and 25 percent of the company, but that was by my choosing. There never monies recovered. But the False Claims Act doesnt cover was any retaliation, he says. tax fraud. A separate U.S. Internal Revenue Service What I learned is that the system is not as simple whistleblower rule allows for those who expose tax as the news media and movies present it to be, adds the evaders to be awarded a similar 1525 percent of the whistleblower. The cloak and dagger is way over-por- amount recovered. trayed, even though I had to do this secretly. But theres a catch for would-be whistleblowers. Under the False Claims Act, although files are sealed Lori Pizzani is an independent journalist based in Brewster, in U.S. federal court for seven years, the whistleblowers New York. CFA MAGAZINE / JANFEB 2011 37

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