Swiss banker Bradley Birkenfeld joined UBS in 2001. Four years later, Birkenfeld realized that UBS’s practice of storing money for American clients in Swiss bank accounts was illegal. Birkenfeld voiced his concern to his supervisors and UBS’s compliance and legal departments. Since he didn’t receive a response, in 2007 Birkenfeld left UBS and complained to the IRS and SEC, triggering a multibillion-dollar international tax-fraud scandal.
Birkenfeld was hailed as a hero. His story was on the cover of newspapers, and Tax Analysts, a non-profit organization, named him “Person of the Year.” But Birkenfeld got 40 months in jail for not disclosing all information about his involvement in the scandal.
Whistleblowers are often the only ones who can disclose questionable, unethical or illegal actions within governments and private companies. Yet whistleblowers are often blackballed, prosecuted, sued, and/or fired for their actions. Are you obligated under securities legislation to blow the whistle? When does this obligation kick in? And most importantly, what can whistleblowers expect when they sound the alarm?
- is typically employed by the organization they blow the whistle on;
- reports some malfeasance or wrongdoing;
- has a bona fide belief and evidence to substantiate the belief; and
- is exposing misconduct that typically violates a law, rule, or regulation that could harm or threaten the public interest or the organization itself.
Is there an obligation?
Ontario’s securities law includes an obligation to report insider trading, but doesn’t mention whistleblowing. Both IIROC and the MFDA impose professional responsibility on members and approved persons to report wrongdoing internally or to the respective SRO. Not meeting this obligation can lead to substantial fines, reprimands, suspensions and even termination of registration.
IIROC has established a whistleblower service so people can avoid going through internal channels.
Although dealers and their reps have an obligation to act in the best interests of their clients, there are also responsibilities to the general public and capital markets. “Conduct unbecoming” is sufficient cause to impose significant penalties, including suspending registration. Securities legislation says someone who should know about misconduct and doesn’t report it can suffer the same penalties as the actual wrongdoer.
There are often negative career consequences to reporting misconduct. The National Whistleblower Center in Washington found more than half of 200 respondents said they were fired after reporting misconduct. Upon being fired, whistleblowers often found themselves blackballed from the industry.
Those who were not fired were often shunned by colleagues, demoted or passed over for promotions. In Canada, an employer that threatens an employee who blows the whistle can face jail sentences of up to five years.
The Dodd-Frank Act established a whistleblower program that allows whistleblowers to make complaints directly to the SEC or other regulatory bodies. The act also allows the SEC to compensate whistleblowers who provide the SEC with “original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administration action, or related action.” This compensation falls between 10% and 30% of the total amount recovered from the successful enforcement of the violation. The OSC is currently designing a similar program.