In September 2015, Martin Shkreli became infamous after his company purchased the rights to an AIDS drug (Daraprim) and increased its price from $13.50 per pill to $750 per pill. This price gouging quickly earned Shkreli the title as “the most hated man in America.” Only a few months later, however, Shkreli got a dose of his own medicine.
In December 2015, the FBI arrested Shkreli and charged him with securities fraud. According to the SEC’s complaint, Shkreli misappropriated investor funds and lied to investors in his two hedge funds, MSMB Capital Management LP and MSMB Healthcare LP (MSMB). After those investors sued Shkreli, he founded and took public a pharmaceutical company named Retrophin, Inc. From September 2013 through March 2014, Shkreli induced Retrophin to issue stock and make cash payments to the disgruntled MSMB investors. Shkreli characterized these payments as “consulting services” from Retrophin.
Compliance Officer Raised Concerns About Shkreli
At Shkreli’s trial, the former chief operating officer of MSMB, Jackson Su, testified that he raised concerns internally about Shkreli’s misconduct on several occasions. Despite Su’s complaints, the hedge fund refused to take corrective action. Seeing no other option, Su filed a complaint about Shkreli with the SEC in May 2012.
Su continued working at the hedge fund until December 2012 and continued to witness Shkreli’s misconduct. According to Su’s testimony, the last straw came when he saw Shkreli take $10,000 from MSMB for Retrophin. Su testified that he “got really tired of all the things I saw going on in the company” and told MSMB’s President, “I’m not going back to work, all these things don’t add up.”
Whistleblower Laws Protect Compliance and Ethics Personnel from Retaliation
Su’s experience is but one example of the significant challenges that compliance and ethics personnel face when their internal disclosures about fraud or other wrongdoing fall on deaf ears. Indeed, when Sherron Watkins raised concerns about accounting irregularities at Enron and when Cynthia Cooper raised concerns about accounting fraud at WorldCom, they were unable to persuade senior management to halt the fraud. As Cooper said, “Nobody wants to believe that the CFO is perpetrating a multi-billion-dollar fraud.”
In the wake of Enron and other massive accounting fraud that harmed investors, Congress enacted robust protections for corporate whistleblowers. In particular, whistleblower-protection provision of the Sarbanes-Oxley Act (SOX) of 2002 was enacted to combat a “corporate code of silence,” a code that “discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the Federal Bureau of Investigation and the SEC, but even internally.” S. Rep. No. 107-146, at 4–5 (2002). Congress wanted to empower whistleblowers to serve as an effective early warning system and help prevent corporate scandals.
Section 806 of SOX protects whistleblowers working at publicly-traded companies or at contractors and subcontractors of publicly-traded companies when raising concerns about securities fraud, shareholder fraud, bank fraud, a violation of any SEC rule or regulation, mail fraud, or wire fraud. If a whistleblower suffers retaliation after lawful whistleblowing, SOX allows the whistleblower to recover:
- lost wages and benefits;
- reinstatement; and
- special damages, which includes emotional distress, impairment of reputation, personal humiliation, and other non-economic harm resulting from retaliation.
There is no cap on special damages under SOX. Recently, some SOX whistleblowers have obtained significant jury verdicts:
- Jury Awards Former Bio-Rad Counsel $11M in Sarbanes-Oxley Whistleblower Case
- Jury Awards Six Million Dollars to Whistleblower in Sarbanes-Oxley Case
- Sarbanes-Oxley Whistleblower Obtains $2.7M in Front Pay
Compliance and Ethics Personnel Can be Eligible to Obtain an SEC Whistleblower Award
The SEC Whistleblower Program issues awards to “eligible” whistleblowers who provide original information about violations of federal securities laws that lead to enforcement action with total monetary sanctions in excess of $1 million. Under the program, whistleblowers may receive an award of between 10-30 percent of the total monetary sanctions collected. To date, the SEC has paid more than $154 million to whistleblowers.
Many key compliance personnel, including internal auditors, external auditors, officers, and directors may incorrectly assume that they are ineligible for SEC whistleblower awards. The program’s rules include exceptions (found in Section 21F-4 of the Securities Exchange Act) that allow these individuals to report violations and become eligible for an award in certain circumstances. Specifically, key compliance personnel may report to the SEC and receive awards under the program if:
- they reasonably believe the disclosure is necessary to prevent conduct that is likely to cause “substantial injury” to the financial interest or property of the entity or investors;
- they reasonably believe the entity is engaging in “conduct that will impede an investigation of the misconduct”; or
- at least 120 days have passed either since they properly disclosed the information internally, or since they obtained the information under circumstances indicating that the entity’s officers already knew of the information.
The analysis is complex, however, and eligibility may vary depending on the whistleblower’s position at the company. For example, the 120-day exception (third bullet listed above) does not apply to external auditors who obtain the information during the audit of an issuer. Instead, external auditors can immediately report to the SEC after they inform a superior in their accounting firm about improper or illegal client activity and the accounting firm fails to promptly report the securities law violation to the SEC. Moreover, the first two exceptions (the first and second bullet listed above) will only apply to external auditors when the violation is “material.”
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