‘A Year of Corporate Wrongdoing: Presenting Potential Solutions from Across the Atlantic’

By

                 

Jordan Thomas

Chair of the Whistleblower Representation Practice at Labaton Sucharow

Former senior regulator at the Securities Exchange Commission

6 – 7pm, Monday 19th November 2012

Committee Room 5, House of Commons, London SW1A 0AA

To attend please RSVP to: emma.pike@henryjacksonsociety.org 

In this era of corporate scandal, the world needs to address how and why the financial services industry has lost its moral compass, and what the necessary steps for recovery are. 2012, in particular, has been a phenomenal year for corporate wrongdoing and following scandals such as Libor rigging, to name just one, the integrity of British businesses is lying in the balance.

What will it take for the financial services industry to admit that it has a corporate ethics problem? What kind of measures would be effective enough to bring about real change? How can we ensure that corporate wrongdoing will not go unnoticed?

By kind invitation of John Mann MP, The Henry Jackson Initiative is delighted to host Jordan Thomas, Chair of the Whistleblower Representation Practice at Labaton Sucharow and former senior regulator at the Securities Exchange Commission. As a long-time first responder to corporate wrongdoing, Mr. Thomas will share his unique insights on how responsible organizations can establish and nurture a culture of integrity.  He also will highlight the need for the UK to follow the lead of the US and implement far-reaching programmes to encourage potential whistleblowers to come forward, internally or externally, to expose corporate wrongdoing and corruption. Assigned to some of the most high profile matters during his time at the SEC, he will draw on his experience of Enron, UBS, Citigroup and Fannie Mae and talk about how the new framework in the US has already reaped significant benefits and led to more people to breaking their silence and reporting a wide-range of significant securities violations.

TIME: 6 – 7pm

DATE: Monday 19th November 2012

VENUE: Committee Room 5, House of Commons, London, SW1A 0AA

To attend please RSVP to: emma.pike@henryjacksonsociety.org

Biography

Jordan A. Thomas is Chair of the Whistleblower Representation practice at Labaton Sucharow, a leading New York law firm.  Jordan protects and advocates for whistleblowers who have information about potential violations of the federal securities laws throughout the world. He also is the editor of www.SECwhistlebloweradvocate.com, a website dedicated to helping responsible organisations establish a culture of integrity and courageous whistleblowers to report possible securities violations.

A career public servant and seasoned trial lawyer, Jordan worked at the Securities and Exchange Commission, where he served as an Assistant Director and, previously, as an Assistant Chief Litigation Counsel in the Division of Enforcement. He had a leadership role in the development of the Commission’s Whistleblower Program, including leading fact-finding visits to other federal agencies with whistleblower programmes, drafting the proposed legislation, implementing rules and briefing House and Senate staffs on the proposed legislation. He is also the principal architect and first National Coordinator of the Commission’s Cooperation Program, an initiative designed to facilitate and incentivise individuals and companies to self-report securities violations and participate in its investigations and related enforcement actions. In recognition of his important contributions to these national initiatives, while at the Commission, Jordan was a recipient of the Arthur Mathews Award, which recognises “sustained demonstrated creativity in applying the federal securities laws for the benefit of investors,” and, on two occasions, the Law and Policy Award.

Throughout his tenure at the Commission, Jordan was assigned to many of the Commission’s highest-profile matters such as those involving Enron, Fannie Mae, UBS, and Citigroup. He successfully investigated, litigated and supervised a wide variety of enforcement matters involving violations of the Foreign Corrupt Practices Act, issuer accounting fraud and other disclosure violations, audit failures, insider trading, market manipulations, offering of frauds, and broker-dealer, investment adviser and investment company violations. His cases resulted in monetary relief for harmed investors in excess of $35 billion.

Prior to joining the Commission, Jordan was a Trial Attorney at the Department of Justice, where he specialised in complex financial services litigation involving the FDIC and Office of Thrift Supervision. He began his legal career as a Navy Judge Advocate on active duty and continues to serve as a senior officer in the Reserve Law Program.

Throughout his career, Jordan has received numerous awards and honours. At the Commission, he was the recipient of four Chairman’s Awards, four Division Director’s Awards and a Letter of Commendation from the United States Attorney for the District of Columbia. He is also a decorated military officer, who has twice been awarded the Rear Admiral Hugh H. Howell Award of Excellence—the highest award the Navy can bestow upon a reserve judge advocate.

Transcript

Gisela Stuart MP

OK, welcome ladies and gentlemen. Your first-hand of experience of this place is that it does many things well. Welcoming its visitors and outsiders is not one of them. So what happens is that we change rooms at frequent intervals and at the last moment, so there may be some people who are searching the House of Lords who will eventually join us, but the key thing is we’re here. I’m Gisela Stuart, I’m the MP for Birmingham Edgbaston, and I was one of the founder signatories of the Henry Jackson Society.

But this is a Henry Jackson Initiative meeting, of which Fleur will tell us a little bit later, but for the moment, what we’ve got is Jordan Thomas, who I’m told is Chair of the Whistleblower Representation Practice at Labaton Sucharow – is that pronounced correctly? OK, and I have this very sort of cheap habit of – rather than reading out the CV of the speaker – I invite them to tell us what they think we should know about them, and hand it back to the speaker, who really is the reason why we’re here. So, what I suggest is, you do your presentation, Fleur will then give us a very short explanation of the Henry Jackson Initiative, and then we throw it open to questions and answers. If that’s fine with you? Over to you –

Jordan Thomas, Chair of the Whistleblower Representation Practice, Labaton Sucharow

Well, Ms Stuart, ladies and gentlemen, thank you for allowing me to speak before you today. I am deeply honoured to be able to address you in such a historic location. After all, I’m not a Member of Parliament nor a distinguished British solicitor or barrister. I am an American lawyer, and I’m here to share with you my observations as a first responder to corporate wrongdoing and to suggest new ways that the United Kingdom can protect the investing public.

By way of background, early on in my legal career I served as a trial attorney at the US Department of Justice and an assistant director at the Securities Exchange Commission. At the Department of Justice I litigated and tried cases associated with the savings and loan crisis. After the Enron scandal became public, I joined the Securities Exchange Commission where I was Assistant Director and Assistant Chief Litigation Counsel. In these roles, I supervised, investigated and prosecuted a number of high profile cases including the Enron, Fannie Mae, UBS and Citigroup.

I’ve seen first-hand the devastation that can be caused by corporate wrongdoing. In the wake of these scandals I’ve witnessed companies going out of business, people losing their jobs and homes, hard-earned corporate reputations squandered and investors’ faith in the market tested. To do my job well, I had to be able to quickly determine whether a violation of law had occurred and who was responsible. However, over the years, my work started to feel a little bit like the Whack-A-Mole game. I don’t know if you’re familiar with it? You know the one where you hit one and two more pop up even more fast than the last one. Naturally, I began to spend more time thinking about the origin of corporate wrongdoing and law enforcement authorities’ effectiveness in combating it.

Over time I came to believe that significant corporate wrongdoing was rarely caused by rogue employees, insufficient compliant resources, inadequate policies and procedures or compliance personnel that lacked vigilance – as is commonly thought and reported on in the papers. I found that big misconduct often resulted from a long chain of little mistakes: one breakdown in ethical judgement cascading to another breakdown and then another. It could be smoothing out revenue figures one financial quarter and creating non-existing accounts the next to cover up the prior misconduct. In time, isolated and seemingly random bad choices tended to snowball into front-page scandals. Ultimately, I concluded that the most common cause of significant corporate wrongdoing is that the organisations involved lacked a culture of integrity and that too often they discouraged people from speaking up.

Given the vast scope and complexity of our markets, products and transactions, corporate wrongdoing can be extremely difficult to detect, investigate and prosecute without inside information and assistance from participants in the schemes and others that are associated with them. As a result, responsible organisations, regulators and law enforcement authorities cannot effectively and efficiently police the marketplace if individuals are unwilling to report wrongdoing.

While in law enforcement and up until recently, one of the great mysteries to me has been why more witnesses have not come forward in a long series of corporate scandals, beginning with Enron and continuing through the current economic crisis. After all, in many ways, corporate scandals are like bank robberies: they are rarely one man jobs and there are always witnesses.  In the real world, it is highly unlikely that the alleged $2 billion lost by the “rogue” trader at UBS or the $250 billion could have been laundered for Iranian clients at Standard Chartered or the LIBOR being manipulated at Barclays without many people knowing about it.  For some reason, individuals with relevant information have remained silent, disengaged and disenfranchised while countless investors have been seriously harmed.

In searching for answers to this significant corporate governance and law enforcement problem I’d like to tell you about a woman by the name of Kitty Genovese.  Ms. Genovese is not a distinguished academic, a prominent business executive nor a UK citizen.  In fact, she is dead.  She was murdered in Queens in 1964 while scores of her neighbours looked the other way.  While some of the facts of the story have been called into question, the tragedy nevertheless prompted considerable research into what has since been called the Bystander Effect.  The theory is that the larger number of bystanders actually decreases the likelihood that someone will step forward.  The bystander effect was codified, as it were, in 1968 when two researchers launched a series of experiments to test the phenomenon.  Now, I’d like to spend a few minutes going over their research so that we may consider whether these factors influence the reporting of corporate wrongdoing.

First, the researchers started with the premise that a bystander must notice the situation.  In an experiment, scientists asked students to complete a questionnaire either in a room alone or in a room with other strangers.  Smoke was then pumped into the room to simulate an emergency. When the test subjects were alone, they often looked around the room and, as a result, noticed the smoke within 5 seconds.  The students who worked in the company of others were less likely to gaze around the room and it took them four times longer (around 20 seconds) to notice the smoke. Think about that, in the context of corporate environment.  In the work community, particularly in times of economic stress, when few employees feel their jobs are safe, they are more likely to keep their heads down as opposed to speak up.

Another factor that’s believed to drive the bystander effect is that bystanders must recognize the situation as a sort of emergency.  The catch is: how we gauge the seriousness of an event is based upon the reactions of others that are present.  If you doubt this, consider how many times the fire alarm has gone off in your workplace and every single person stayed in their office, going about their business, no one activating an urgent emotional response.  Now, imagine what the office response would be if someone said “Fire!”  OK? The response would have been very different.  Interestingly, particularly with respect to work dynamics, in the non-emergency context, researchers have found that non-reactions were even more pronounced.  Bystanders are even less likely to respond if a situation isn’t perceived as life or death.

Finally, with respect to the smoke-filled room experiment, which makes me shake my head every time, researchers discovered that even when we notice a situation and recognise it as an emergency, group behaviour has everything to do with how we interpret and respond to the situation. Those test subjects in the smoke-filled room who sat in the groups, even when they had clearly noticed the smoke or its presence had affected their vision, made them cough, burned their eyes, they were still unlikely to report it. Only one participant in the group-set reported the smoke within the first four minutes.  In five of the eight groups – that’s 63% for those of us who are not strong in math – no report was made whatsoever.   More startling, when surveyed later, the groups that didn’t report the smoke remarked that they didn’t believe the smoke constituted an emergency. Possibly, one subject later remarked, it was an air-conditioning leak.

Smoke pouring into a room.  An air-conditioning leak.  It’s hard to fathom. Or is it? Flash forward four decades and consider the case of Bernie Madoff, the ring leader of the greatest Ponzi scheme in history.  One that deeply affected many here in the United Kingdom as well as in the United States. After the scandal became public, we learned that for several years before the story broke, numerous individuals and entities suspected wrongdoing.  After doing due diligence, they advised their clients not to invest with him. But everyone failed to report the problem to law enforcement authorities.

In fact, two dozen big-hitters at JP Morgan admitted in court filings that they knew something was off.  In an email excerpted in a complaint filed by the bankruptcy trustee, one JP Morgan executive wrote to his team:  “so-and-so” – and this is a direct quote – “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme,” he said, and then he put it in capital letters: “if we google the guy, we can see the articles for ourselves – Please do that and let us know what you find.”  That email was dated a year and a half before the scandal came to light. Incredibly, no one sounded the alarm.  As a result, hundreds of millions of dollars of additional investor funds were invested while the bank raked in substantial fees. Maybe it wasn’t a Ponzi scheme, it was an air conditioning leak…

Now, for those of you that question the relevance of the Bystander Theory to the corporate world here in the UK, consider the alarming findings of the US/UK Financial Industry Survey conducted by my law firm Labaton Sucharow and recently released to the public.  In it, 24% of UK financial services professionals surveyed reported that they had personally observed or had first-hand knowledge of wrongdoing in the workplace.  And given the human tendency to under-report bad behavior associated with themselves, the true figure is likely to be higher.  36% percent of these individuals believed that their competitors had engaged in illegal or unethical behaviour.  25% percent thought that you may have to engage in unethical or illegal behaviour to be successful.  And an astonishing 16% admitted that they would engage in illegal activities – insider trading – if they could get away with it.

Let me be clear.  I do not believe that financial services professionals in the UK are fundamentally unethical.  Although it’s true that the survey findings found that there are slightly more cowboys in the UK than in the US – which was surprising to me –

Gisela Stuart MP

Surely not!

Jordan Thomas

I know – it’s hard to believe. But both countries have their fair share of Gordon Gekko-like characters, there’s no doubt. What I suggest to you is that the ethical culture within the financial services industry has led too many otherwise ethical people to believe that illegal or unethical behavior is acceptable. And in the same way that Kitty Genovese’s neighbours did and in the same way that participants in the experiment did.

Now for my last foray into social psychology, I’d like to address another scientific finding that suggests that the relationship between parties in conflict has much to do with the larger community’s response.  In this experiment, scientists staged a man and woman fighting on the street.  When the woman yelled, “Get away from me. I don’t know you,” bystanders intervened 65% of the time.  When she yelled, “Get away from me. I don’t know why I ever married you,” the figure dropped to 19%.  Now in other words, when bystanders perceived an existing relationship between the couple, despite the same elevated pitch and cause for concern, others were nearly 50% less likely to get involved. Now if my wife were here, she might say this is just a reflection of how the world views husbands, but it’s interesting to contemplate in the context of corporate wrongdoing.

To illustrate this point, consider the significant fraud case recently concluded involving a $500 million sham reinsurance transaction that Gen Re made to AIG to artificially inflate AIG’s loss reserves.  Numerous senior executives of both companies reportedly were aware of, and involved in, the structuring of the phony deal, from in-house lawyers and actuaries to CEOs, CFOs and business unit heads.  While everyone involved knew it was a sham transaction that exposed the individual parties and both companies to serious risk, the deal team turned a blind eye because the deal was cut by the two mega-CEOs: Maurice Greenberg and Ron Ferguson.  A marriage, you might say.  In fact, when a Senior Vice President & Assistant General Counsel of Gen Re expressed concern about the deal, the business executive told him “it was Ron’s deal,” and if he had issues, he’d have to take it up with Ron.

Take it up with Ron?  The CEO?  His boss.  Everyone’s boss.  That lawyer articulated in an email that the deal would expose Gen Re to reputational risk and regulatory scrutiny.  Later, he sent another email saying, “There’s folks at, at pay grades higher than mine, that have made the business decision they’re willing to do that.” If bystanders won’t cross the boundary of marriage to protect a woman at risk, why would we expect a gaggle of corporate executives to speak out against a half-billion dollar deal crafted by, and between, their bosses?

So, what can Parliament and the UK financial regulators do to address the seemingly endless series of corporate scandals if history repeats itself, as it often does? Some will argue that the problem is government.  These proponents will suggest that deregulation or self-regulation is necessary.  Others will suggest that the relevant governmental organisation just needs new leadership or need to be reorganised.  And my favorite is the long running debate across the pond about whether the prudential approach favoured historically by the UK is better than the punitive approach favoured by the US.  What’s so funny to me about these discussions is that the passionate debaters haven’t noticed that neither approach has successfully worked.

Now, some will argue that the answer is government.  These proponents will suggest to effectively police the marketplace, we just need more laws and regulations.  Others will suggest that all we need to do is provide our dedicated public servants with more resources to combat corruption.  Now, it all sounds familiar doesn’t it? Because it is.  All of these approaches have been announced at press conferences with great fanfare in countries around the world at one time or another. And often, they’ve been announced in the same country just a few decades earlier. Now, if I had a dollar for every law enforcement official who made these sorts of statements – that their organisation was going to make a reorganisation or they’re going to adopt a new approach and that they’re going to be harder on crime – I wouldn’t need to work anymore.  So, you shouldn’t rely on those statements any more than I do. But the truth is that these commendable and sometimes necessary reform efforts have only made a marginal difference in combating corruption and lasting change has been elusive.

In the wake of the economic crisis, the United States engaged in a lengthy and robust debate about how to break the cycle of corporate corruption.  And we landed on a simple, yet fundamental truth: Law enforcement authorities, financial regulators, and responsible organisations cannot effectively and efficiently police the marketplace without the assistance of private individuals and entities. It’s just that simple. They can’t do it alone. The reality is, and you won’t hear it admitted often or publicly, that corporate wrongdoing is extremely difficult to detect, investigate and prosecute without insider information or assistance from participants in the schemes or their associates.  And, due to the vast scope and dizzying complexity of the markets, products and transactions that they are responsible for, law enforcement authorities, financial regulators and responsible organisations are out-manned and the problem is growing.

In short, what the key stakeholders have lacked was actionable intelligence.  This is something I can tell you with great confidence, having worked at the Department of Justice and the SEC and having dealt with foreign regulators and law enforcement authorities around the world, they’re practical people. They’re focused on what works. If I could stand here and tell you that wearing clown costumes is the best way to catch criminals, I guarantee you that police officers across the world would get into clown costumes because they want results. And the thing that gives results in the law enforcement industry is actionable intelligence.

Now without actionable intelligence, law enforcement authorities have been doomed to basically show up late at the scene of corporate scandals and be less effective in identifying those responsible and holding them accountable. Too often, in effect, we have been operating like beat cops: policing the streets without the benefit of what, in the United States, is called a 911 system. And it is hard to argue that our most successful cases have always involved witnesses, cooperators and whistleblowers. That’s true in the United Kingdom, it’s true in the US and it’s true around the world.

So, we then have to ask ourselves how can we get knowledgeable individuals, bystanders if you will, to break their silence and report corporate wrongdoing? Ultimately, after extensive research and due diligence, the SEC Whistleblower Program was established as the answer. In developing this innovative program, the first problem that had to be addressed was the fear of retaliation.  Based upon my experience at the SEC and now in private practice, where I represent whistleblowers, the greatest impediment to reporting—internally or externally—is fear of retaliation.  Historically, to address this concern, legislative bodies have passed anti-retaliation statutes. The problem is that these laws, like the Public Interest Disclosure Act here in the United Kingdom,  have been on the books for decades and they have not provided adequate protection for whistleblowers, especially for those in the financial services industry, to come forward and report possible corporate wrongdoing.

As someone whose clients are often executives in public companies, I understand why these laws have been ineffective.  Consider, if you were a banker in the London financial district and you learned about a possible securities violation in your financial institution, would you risk being blacklisted in the industry, losing your job, in exchange for the possibility that you might be able to get your job back a couple of years’ later after expensive litigation?  Although some whistleblowers have the courage and principles to do that, most are unwilling to make that sacrifice. Accepting this reality, the SEC Whistleblower Program provides both robust employment protections and the ability to report anonymously if represented by counsel.  After all, there is no better protection against blacklisting and retaliation than anonymity.

Following the establishment of the SEC Whistleblower Program, and I suspect in an attempt to address this problem in the United Kingdom, as you may have heard, the UK Serious Fraud Office recently announced a new initiative called “SFO Confidential.” In the press release announcing the program it is described as a new service for confidential reporting of suspected fraud or corruption. SFO Confidential is now live online for concerned individuals to help expose situations that might deserve a closer look. Anyone in an organization or connected through business or providers of professional services, and with some inside information of suspect practices, can call a dedicated team of trained SFO operatives. A new on-line reporting form underpins the service together with an SFO Confidential hot line.

There is no question that this is a positive step forward that will help to minimise the concerns of some whistleblowers but more can and should be done in the United Kingdom. Most notably the FSA should adopt a similar program because of the broad reach of that organisation. Even if this occurs, more will need to be done in the United Kingdom to establish a successful whistleblower program where people are willing to break their silence.

And the final pillar of the SEC Whistleblower Program, part of that answer and the one that has received the most media attention, is the ability to receive monetary awards. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that the Commission pay a monetary award or awards of 10 – 30% of the monetary sanctions collected to one or more whistleblowers, regardless of citizenship, who voluntarily provide the SEC with original information that leads to the successful enforcement action by the Commission in a federal court or administrative action in which the SEC obtains monetary sanctions in excess of $1 million. Now to give you a sense, only about 20% of the SEC’s cases exceed $1 million.

The SEC is also required to pay the same monetary awards based upon amounts collected in certain related actions. So if the Department of Justice also brings in enforcement actions based on the same person’s information, 10 – 30% of the monetary sanctions they would be eligible for also. And if some of you are starting to think in your head that that could be a lot of money, you’re right. Potential awards can be significant.  Consider that in Fiscal Year 2012, the SEC secured more than $3 billion in monetary sanctions. In several cases, the monetary awards exceeded $100 million.  Accordingly, to ensure that adequate funds are available to pay whistleblower awards, the SEC – Congress established for the SEC – an Investor Protection Fund that replenishes and currently it has $450 million in it to ensure that whistleblowers over time will have money to be paid. And it does not come from injured investors. These funds come from cases where the SEC has collected monetary sanctions, but it’s impossible to distribute the funds to investors. So those funds instead of going to  the Treasury Department will go to this replenishing Investor Protection Fund until it reaches the amount of $300 billion and then it would start going to Treasury again.

Now for many of us, the idea of paying people to perform their civic duty of reporting violations of law is probably troubling.  In an ideal world, that would not be necessary.  The inconvenient truth is that we don’t live in an ideal world and the status quo isn’t working.  In fact, some would argue that things are getting worse.  To demonstrate this point, in the UK, are people, especially financial service professionals, regularly reporting significant corporate wrongdoing because it’s the right thing to do or because they have the benefit of the public PIDA if they are fired?  If your answer is no, as the long series of corporate scandals here suggests that it must be, you have taken the difficult step of acknowledging that there’s a problem that needs to be addressed.

Now, remember, the first instinct of witnesses to corporate wrongdoing, because of the bystander theory and some of the other factors that are out there, is to keep their head down and pretend that they didn’t see or know anything.  Even the more courageous potential whistleblowers carefully weigh the pros and cons of reporting possible wrongdoing before breaking their silence. And protections alone have consistently proven to be inadequate.  This is especially true for those in the financial services industry where the personal financial stakes are high and many of these professionals didn’t get into the business because they wanted to save the world, if you know what I mean.

Whether we like it or not, money can motivate people to do the right thing and when it is coupled with robust employment protections and the ability to report anonymously, it has the power to break the corporate corruption cycle.  Because the SEC Whistleblower Program and programmes like it have the ability to deputise virtually every company employee, vendor, customer, and their second cousins, to serve as the eyes and ears of law enforcement authorities. And in doing this, the probability of detection has dramatically increased. Now, because the probability of detection has dramatically increased, potential wrongdoers are discouraged from engaging in misconduct before they actually do it.  Corporations are more likely to strengthen their internal reporting systems before someone else, and to self-report before someone reports to the law enforcement authorities. Law enforcement authorities and financial regulators are able to be more effective and efficient because whistleblowers can provide early and invaluable assistance in identifying the scope, participants, victims, and ill-gotten gains associated with fraudulent schemes at an earlier stage.  As a result, more corporate wrongdoing is able to be stopped, and stopped earlier.

Although the SEC Whistleblower Program is relatively new, the number and quality of whistleblower submissions has been extremely encouraging.  In the coming years, I predict, admittedly an educated guess, that many of the SEC’s most significant cases will be the result of whistleblowers.

Evidence of this can be found in the SEC’s recent annual report to Congress on the SEC Whistleblower Program: the first full-year analysis of the program since its enactment. According to the report, the SEC received more than 3000 tips, complaints and referrals from whistleblowers in all 50 states, the District of Columbia and the U.S. territory of Puerto Rico, along with 49 foreign countries.  To give you a sense of context, at any one time, the SEC is only actively investigating 2,000 cases and these cases can take two to four years to complete.  So, literally, the SEC Whistleblower Program has the ability to potentially independently fill the agency’s pipeline for more than a year. And it’s just started. Now, not unlike the contributions of whistleblowers in the Department of Justice’s successful False Claims Act Program where over $40 billion has been recovered by the government and 85% of those cases are the result of whistleblowers. I expect and predict that the SEC Whistleblower Program will be the engine that makes the SEC Enforcement Division dramatically exceed all records both in the number of cases and the monetary sanctions collected.

The SEC Whistleblower Office report is full of other interesting information. A few things that may be of interest to you: first, the SEC continues to report the high-quality of the whistleblower tips that it has received. The Chairman of the SEC states: “In just its first year, the whistleblower program already has proven to be an incredibly valuable tool in helping us ferret out financial fraud.” The SEC received 17% more whistleblower submissions than it did in the prior fiscal year. 10.8% of whistleblower submissions were received from whistleblowers living abroad. Now, the top five countries to submit whistleblower submissions to the SEC were: number 5 being Australia, number 4 being China, number 3 being India, number 2 being Canada and, you should be very proud, the number 1 being the United Kingdom. Now, the United Kingdom not only was the number 1 but it filed 22% – 22.8% of all international submissions and it was 62% higher than the next highest country making submissions.  The number of submissions from the UK is extraordinary when you consider that the programme has not been advertised. It’s an American programme: it relates to American law. One can only wonder at the implications of a programme that focused on UK laws and would allow people in the United Kingdom to report on corporate wrongdoing.

Now, to conclude my remarks, I would like to talk with you about another famous individual, a British citizen by the name of Nick Leeson.  Mr. Leeson was a 26 year old trader who famously brought down the British merchant bank Barings in 1995 after racking up $1.3 billion in trading losses before being detected.  As you may recall, after Barings realized the extent of Leeson’s losses, it was forced to declare bankruptcy. The bank was sold to ING for just one pound. Twelve hundred employees lost their jobs.  Predictably, the government and the corporate community promised a thorough investigation, the implementation of necessary reforms, and that it would never happen again.  Of course, remarkably similar US and UK scandals have happened, most recently at UBS where another “rogue” employee racked up more than $2 billion in trading losses.

Unless you are prepared to brace yourself for the next scandal, it is time to recognize that the status quo is not working and will not work any better than it did at the time of the Barings Bank scandal or at the time of the UBS scandal – pick your favourite scandal. To be successful, the UK law enforcement authorities and financial regulators need more than anything actionable intelligence about corporate wrongdoing.  And the SEC Whistleblower Program is a new and successful investor protection initiative that could be a model for the United Kingdom.  It is already revolutionising the way that we’re enforcing security laws in the United States.

Gisela Stuart MP

Thank you very much indeed, and I think significant food for thought. Fleur, would you just like to say a little bit about the Henry Jackson Initiative before we open up for questions?

Fleur Brading, Director, The Henry Jackson Initiative

So the Henry Jackson Initiative was launched about six months ago out of the Henry Jackson Society. We are focusing on economic policy and business integrated programmes for corporate philanthropy that builds a more inclusive capitalist system. And one of the reasons we wanted to host Jordan today is that we really believe in his passion for this subject and I suppose, for us, why we focus on ethics as part of our work on business, is that we believe that fundamentally business is to do with relationship and to do with trust. So we feel that a lot of work that you’re doing, looking at ethics and looking at corporate integrity, relates to a lot of the heart of what we’re working on. And just to respond to you, Jordan, I thought that your summation of corporate fraud as a breakdown in ethical judgement leading to a cascade of bad choices was a pretty great sound bite, so I enjoyed that very much, thank you.

Gisela Stuart MP

Thank you. And as I was listening to you, Jordan, two thoughts came to me. One was Bob Diamond in evidence to the Treasury Committee who said, there was talk about corporate culture, he said: “culture is what you do when you think no one’s looking.” And I thought that’s something very useful. And as you were going on, whistleblowers, I remembered Lauren Bacall’s ‘You Know How to Whistle’. But on that rather frivolous note, any questions?

Jordan Thomas

May I make one comment? Professor Clayton Christensen, a Harvard Business School professor talks about culture and one of the things he talks about is, whether you like it or not, there will be a culture established in your organisation. And that culture is established kind of like the dynamics within your home. If your children are allowed to get away with things, they will keep getting away with things. And after a while, the culture of your home will be the consistent with that.  It’s the routine, it’s the habit that exists within organisations. And so, we would all be wise to assess with care what culture we’re creating and change it if we can. Anyway, I’m happy to answer questions.

Gisela Stuart MP

If you tell us, I know you’re Lord Kalms, if you tell everybody that’s who you are.

Question 1 – Lord Kalms

You’ve told them already – you’ve spoilt my surprise. I started thinking about the principle – having ethics basically fundamental to business, but I just wanted to pick up three points you made. One, Hank Greenberg and that, that scam he did with the insurance, and whether he got any punishment for it, because almost straight away, he was the main culprit of the whole debacle of the collapse in 2008. So, you’re claiming that the American system works and identifies him, but why the heck didn’t you put him in prison then, because he is the guy who brought AIG down, which was the starting point of the whole debacle. Two, it does seem obscene the amount of compensation and it seems to be totally out of all proportion that this guy could get 100 million dollars or more. And I saw a case of one and I thought, this cannot be right (inaudible). Any system where the compensation is grotesquely out of proportion to requirements and purpose. I mean, he was a whistleblower – his award shouldn’t be in this grand scam. And – what was my third one? I can’t even think of it now, but I’ll –

Jordan Thomas

I’d be happy to address both points. First of all, your point about Hank Greenberg reminds me of, I don’t know if folks here enjoy the Oscars, but a couple of years back, the person who won the Oscar for best documentary was for a documentary called the ‘Inside Job’, and he said: “Thank you so much for the award, but I want to tell you how troubled I am that, so many years after the financial crisis, not one person is in jail.” And I think that’s a widely held feeling. The problem that law enforcement authorities have had, and you know you might not get them to say it in front of a big microphone, but if you have a candid conversation about the challenges they face, they would admit that lack of actionable intelligence has been a big problem.  For too long, they’ve had to respond at the scene without an inside person and then attempt to build a circumstantial case from the ground up.

It’s horribly inefficient and the trail often runs cold. Perhaps it’s because senior people are smart and they don’t put things in emails or perhaps they have other people running the scams for them, but at the end of the day, getting to Hank Greenberg without an insider is virtually impossible. And another way of looking at it is that you look at the situation and you say, “Which cases have we successfully brought?” These great cases that law enforcers have brought, and I would bet a house that you’re going to see that they had co-operators, witnesses or whistle-blowers. And so, that’s why we haven’t gotten there before and that’s changing. I can tell you that I have had one of the top 25 people in a public company consult with me, some of them come with incrminating tape recordings—which is permissible in New York state.  So, the world’s changing and it’s changing fast and for law enforcement authorities it’s like Christmas. It’s what they always dreamed about, people on the inside wanting to help and giving them the leads to stop the misconduct and hold violators accountable.

The next point that you made is that even if we were to accept the proposition that incentives are helpful or necessary should a person, in this case Bradley Birkenfeld, get a 104 million dollar whistleblower award? My focus, my goal here, is not to drive a specific resolution into how the UK would design a system but what I do think is important is that you have, that you introduce the idea of a monetary award system and that it be a reliable metric. And that’s the thing about the Bradley Birkenfeld case: he brought, and I forget the numbers, I think about 20 billion dollars or 40 billion dollars to the US Treasury that they weren’t even aware of. There was this whole tax shelter scheme that was offshore, so from a good business perspective, a good law enforcement perspective, it was a great trade. Now, what you’re talking about is what we (inaudible). We want people to do what they should: do the right thing. But they’re not. And so it’s this kind of balancing: what works with what, what’s cost effective? And one of the things we’re finding in the United States is the fiscal conservatives’ view of whistle-blowers; their first instinct is perhaps that it’s bad for business. But they also have a view that law enforcement authorities should do more with less, that they’re wasting money, they’re less efficient. And whistleblowers are the most efficient law enforcement mechanism possible. They don’t get paid unless they achieve results. So, whatever the metric, I would encourage people in the UK to consider having some reliable metric. Because the system before Dodd-Frank allowed discretion to both the IRS and the SEC and people weren’t willing to bet their careers on a discretionary choice that might change as the leadership of the regulatory agency changes. So, those are some thoughts.

Lord Kalms

One final question – how many fake, or biased, whistleblowers do you come across? Because it’s very tempting for a certain class of person to use this methodology to make some unpleasantness in the company because he’s had a personal prejudice or something. There was a case even in London, this week, where a young man has made some accusations which I know are going to prove ill-founded. Do you find this a problem? I would guess there is a percentage of fake whistleblowing.

Jordan Thomas

There is no question that people have different motives for coming forward and some are not real. What I can tell you is that it is not unique to the Whistleblower Program. Before the SEC Whistleblower Program came into existence, the SEC received 30,000 tips, complaints and referrals. And so they’ve always been in the business of triaging these tips and people always had an incentive to put (inaudible) the SEC on an organisation. Whether they’re shorting the organisation or some other motive, and one of the things about the programme is, unlike some types of legal avenues, the decision to bring the case is solely within the regulatory agencies. So the SEC is a vetter of these tips. And they have every incentive to only work on real cases- their incentives are aligned with the whistleblower. They want to do important cases  and they don’t want to be part of some sort of shorting scheme. So, that is not such a big deal. And when you consider that they had 30,000 before, and that because of the programme they only had an increase of ten per cent, that’s very modest in terms of tips management. Are there other questions?

Gisela Stuart MP

Just before that, is there a review? Because, you know, the logic of paying the bounty for the successful whistleblower is that you charge the malicious whistleblower. So they’ve got a power to investigate, but not a duty. What’s the reviewing process? What’s the legal reviewing process of that decision, whether they pursue a particular accusation and which ones they don’t?

Jordan Thomas

That’s a great question. There, it is the same sort of prosecutorial process that exists for all tips, complaints and referrals. And the way it typically works at the SEC is that there is a request to open a matter under enquiry [inaudible] as you called it. And that would, so basically there’s enough, it doesn’t have to be like, you know, a high standard, but just enough for a good faith enquiry. And if it seems to be, if additional enquiries are warranted, you might want to subpoena people. Subpoena documents, you have to get approval for another, what’s called a formal order, where the commission actually votes on allowing you to do this greater level of investigation. And then of course you investigate. And then there’s a number of different bodies that will assess, kind of, whether it warrants actually charging somebody.

Gisela Stuart MP

Gentlemen, if you tell everyone who you are –

Question 2 – Christopher Stockwell

I’m Christopher Stockwell and I’m here on behalf of the Ecumenical Council for Corporate Responsibility. However, I have for over twenty years chaired the Lloyd’s Names in a whole series of legal battles, both as chairman of the Lloyd’s Names Association and as Chairman of the (inaudible)

Jordan Thomas

I’m sorry – the Lloyd? – I didn’t understand that.

Christopher Stockwell

The Lloyd’s Names – The Lloyd’s Insurance frauds.

Jordan Thomas

Yes, yes of course, ok.

Christopher Stockwell

And therefore I have experience of whistleblowing over a period of some thirty years. And, in that time we’ve taken a number of cases to the Serious Fraud Office here, presenting them with evidence, not simply evidence I’ve assembled, but evidence assembled by loss review committees that have been brought into force by Lloyd’s and so on. And not on a single occasion has the Serious Fraud Office prosecuted any individual. And –

Jordan Thomas

I just want to clarify, are you bringing the case because you believe they’re putting forward something that’s false, or that there’s a legitimate case there that the Serious Fraud Office hasn’t followed up on?

Christopher Stockwell

They’re legitimate cases of fraud, proven and established by independent loss review committees and investigations. And the Serious Fraud Office hasn’t prosecuted one of them. And there have been a whole series of people who have been put in to investigate things at Lloyd’s, who have complained about the fact that nobody who was involved in the wrongdoings at Lloyd’s over a thirty year period has been prosecuted. This is a point that we were dealing with earlier I think, the lack of prosecutions. However in this case it’s not due to lack of insider information and evidence. What it is due to is a defect in the English law.

The fact that the Serious Fraud Office operates under a 19th century piece of legislation (inaudible) and that could have been remedied at any time in the last decade. And successive governments have chosen not to remedy it. And that brings me to the slightly wider point I think, which is that you work on the assumption that governments want laws enforced. My experience is that the frauds at Lloyd’s, and the incompetence at Lloyd’s, that ruined so many – and you know, it’s an 11 billion pound fraud – bigger therefore than Enron or anything else. That actually has produced – after we won a whole series of court cases – because nobody investigated through the criminal authorities – so we took civil actions. We won them, we got court judgements saying that the Names were the innocent victims, a staggering catalogue of incompetence and failure and fraud, and not a dickybird of compensation. And no action taken by successive governments to amend the law, in spite of showing that there had been fraud to Parliament. Now that seems to me –

Gisela Stuart MP

I think you need to be more specific, because the Six Day Test Act was amended to deal with obtaining pecuniary advantages. What’s the bit which the law is missing?

Christopher Stockwell

The big point I’m trying to make here really is that you’re dealing with a culture in which it has been acceptable to pay whistleblowers for a long time. We abolished that in this country in the 1950s. The culture here is that you don’t blow the whistle, and if you do you’re going to face problems. And that culture I think runs right the way through to parliament and government, of both political persuasions. And I’m not at all sure how we can make real progress in addressing commercial fraud, without addressing the political issues at the top.

Jordan Thomas

Let me, at great peril, weigh in about what is deeply a UK issue – but it is true in the way that the US system is built, law enforcement authorities have overlapping reponsibilities. So the New York Attorney General’s office could do something that the US Attorney’s Office in the Southern District of New York district could do, and that the Department of  Justice in Washington D.C. could do, and all of these players – it can be even a little bit competitive – in a good way. Ok, so it is different – it sounds like there may be a different law enforcement culture here. One of the things that we have – seems to be different is the huge role the FSA has in all things in the financial services space here, that didn’t – that doesn’t exist – the closest thing we have the Financial Industry Regulatory Association or FINRA. But the FSA has a broader mandate and a more prudential approach. And so – that is an issue. But, I ask – I ask you, and I would ask folks if they were looking to kind of assess the effectiveness of the current system is: do you want that culture? And if there’s an opportunity to change, I bet that opportunity to change is harder on the corporate world than on the politicians. And so, if you think that somehow politicians aren’t doing what they’re supposed to be doing, I think that it’s going to be a crowd-pleaser to constituents to make – hold people accountable. I’ve seen the same surveys that you’ve seen – that the UK population thinks that bankers are held in the lowest esteem. So the politician, or the head of a regulatory organisation that comes strong, and stops all the corruption, I think’s going to get a nice bump in popularity.

Gisela Stuart MP

I mean the problem of corporate – criminal corporate misdeeds  – just look at the problems we had to introduce corporate manslaughter. I think so, you know, if you can suggest to me what the line you want in the 2012 Theft Act, to cover what you’re saying, I’d be very happy to receive that suggestion. Any other questions?

Question 3

Hello, my name’s Shonali Routray, I’m Legal Director at Public Concern at Work. We’re a charity that advises whistleblowers, and we run a confidential advice line, and we’ve advised lots of (inaudible) and whistleblowers in the UK over the last two decades. And over that time there’s a couple of things that kind of resonate with what Jordan is saying, and it’s clear that regulators in this country really do need whistleblowers to help them with their oversight activities. And it’s always struck me as odd that it’s really hard to even sometimes get someone to talk to, even if you’ve got a willing witness. So I really think that that is something that needs to be looked at. We find that people don’t come – are reluctant to come forward, and one of the key issues is: really it won’t make a difference. So perhaps added to potentially the awards that should – there is something there that needs to be looked at in terms of punitive measures. In Ireland, I know in the whistleblowing bill that’s been more of a teashop affair  – they’re looking at giving their equivalent of the FSA some sort of binding power to fine organisations that mistreat whistleblowers up to 250 thousand Euros. So that’s something that –

Gisela Stuart MP

But you still need a whistleblower don’t you?

Shonali Routray

Yes, you still need that. But I think the other thing is what happens if wrongdoing’s not a financial issue – say you’ve got a journalist in a newsroom who is calling up investigators to hack into people’s phones? What happens if you’re dealing with other types of wrongdoing, which are – which can be more symptomatic of general corporate malaise?

Jordan Thomas

I don’t believe that the whistleblower model couldn’t be used more broadly. The thing that I wonder about is basically is the financial mechanism – is there a reliable financial sanctions to basically fund paying whistleblowers. And I should just take a moment to say that, before coming to the United Kingdom, I spoke with the leading thought leaders in the United States, and I was directed to the Public Concern at Work organisation. They are a great resource and as you all are thinking about solving the corporate corruption cycle, I think they’re an excellent organisation for you to work with. I know that their offices are here in London.

Gisela Stuart MP

And of course it’s a great – probably the trade unions need to take more seriously. Last question.

Question 4 – Davis Lewin

Well if I may. I had a conversation –

Gisela Stuart MP

We all know who you are Davis, but tell the rest of the room.

Davis Lewin

Sorry – I’m Davis Lewin from the Henry Jackson Society. I had a conversation not long ago around a dinner table with a bunch of bankers, and they were pretty clear in saying that they didn’t feel that the UBS whale, or those types of occurrences – that it was part of the system, that it was always going to happen, and that this was not something that you can design out of the system in any way, shape or form. What do you think about that? I mean, they were pretty adamant, if I can put it like that.

Jordan Thomas

Well I think that the best proof is the response of corporate America, once this became a reality. First they fought it, they fought the legislation, then the rule-making. And once the rule-making went into force, they went into Humpty Dumpty mode. The sky’s falling, we’ve got to get every consultant in the world to try to get them to fix our organisations. If there was no threat – if there was no real concern that this is going to happen, then they wouldn’t be doing this. But, cut another way, to kind of show it is, I can tell you that clients that we’re seeing: it’s mindboggling the kinds of people that are coming in, and the types of things they’re talking about. And even if you can’t completely – kind of – it’s like drugs, ok? We all don’t like the idea of drugs – we all want to wipe it off the planet. You may not be able to achieve that absolute outcome, but there are strategies that you can adopt to clean up the streets. And this is one strategy that I think will dramatically change – it has dramatically changed what we’re doing in the US, and has a potential to be a positive thing for the UK.

Gisela Stuart MP

Well, plenty of food for thought, and thank you very much for the discussion – thank you very much for coming.

Jordan Thomas

Well thank you for having me.

Gisela Stuart

That’s great.

Jordan Thomas

Thank you.

HJS



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