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Officer Requirements When Blowing the Whistle on SEC Violations

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Over at Risk Management, we have a new article on some of the considerations corporate officers must consider before blowing the whistle on their own companies. With the new SEC Whistleblower Program, there are some new nuances but the core advice remains the same as common sense would suggest: officers should first try to report the problem internally but if that isn’t possible (for example, because the violations are occurring at the very top or the officer fears retribution) then they should by all means inform the SEC.

Here is more from article authors Lawrence A. Hamermesh and Jordan A. Thomas.

It is when the internal reporting system breaks down that the most serious problem for officers arises: the officer reports misconduct through the appropriate channels, but the report is ignored or the response is otherwise inadequate.

In that situation – and also when the officer has a reasonable belief that reporting internally will be inappropriate or futile — the officer must determine whether to report the matter to an outside party, such as the SEC or another law enforcement authority. It is here that the officer’s fiduciary duty of loyalty intersects with the potential for an SEC whistleblower award.

Would the officer’s duty of loyalty prohibit him or her from reporting the misconduct to the SEC, where such reporting is at least partly motivated by the hope of receiving a monetary award?

For several reasons, the most likely answer is “no.”

The duty of loyalty does not prohibit self-interested conduct by officers; it simply prohibits such conduct if it unfairly affects the corporation. Yet, in at least some cases, external reporting will actually be in the best interest of the corporation: while a whistleblower submission could lead to an eventual enforcement action against the corporation, it might result in substantially smaller sanctions and related private settlements than if the officer remained silent and the illegal conduct was allowed to continue and grow larger.

Related to that, adverse effects on the corporation’s reputation might be minimized by limiting the reach of corporate misconduct.

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