August 12, 2011

W-Day is Here: The SEC’s Whistleblower Rules Are Now Effective

Over one year after enactment of the Dodd-Frank Act, the SEC’s whistleblower rules go into effect today, establishing a process for lucky whistleblowers to cash in with bounties of up to 30% of the government’s recovery when cases involve in excess of $1 million. The SEC’s whistleblower website is expected to be updated later today to provide a link to the new Form TCR and FAQs about what the whistleblower rules require with regard to submitting information to the SEC, to submitting a claim for an award under the program and the procedures and considerations in connection with assessing award claims. According to this Reuters article, the SEC Staff has indicated that it will seek to remedy problems with the whistleblower program if they arise.

What will be the hot buttons for whistleblowers? Most likely, alleged Foreign Corrupt Practices Act violations will represent a large portion of whistleblower claims, given the high SEC penalties in those cases and the potential for individuals within an organization to be directly aware of bribes and other potentially illegal conduct. The opportunities are so great that U.S.-based plaintiffs’ lawyers are ramping up their advertising throughout Europe, Asia and Africa in order to bring SEC whistleblowers out of the woodwork. Some plaintiffs’ lawyers have set up websites or retooled their websites to become SEC whistleblower lawyers – here are just a few:

What will the SEC’s whistleblower program mean for companies? At this point it may be too soon to tell, but certainly the specter of whistleblower recoveries puts a premium on (1) having an effective internal reporting program that employees have confidence in, (2) establishing the right tone at the top and (3) educating employees about the internal reporting mechanisms and how they interact with the SEC’s whistleblower rules. Further, every manager in the organization should be versed in the anti-retaliation provisions of the SEC’s whistleblower rules, so that no inappropriate employment actions or threats are carried out when someone either comes forward internally or goes directly to the SEC. Finally, we will be watching how the whistleblower program affects self-reporting by companies to the SEC, as the prospect of highly motivated whistleblower claims may compel companies to “head them off at the pass” by going directly to the SEC first.

Be sure to tune into our upcoming webcast “Preparing for the SEC’s New Whistleblower Rules: What Companies Are Doing Now” on Tuesday, September 13th. We will be joined by Sean McKessy, Chief of SEC’s Office of the Whistleblower, as well as a great panel of outside counsel.

Is it a Crisis Because They Say it is So?

The events of the last couple of weeks have inevitably drawn comparisons to the Fall of 2008 (see, e.g., this New York Times article from yesterday), when the bottom fell out of the global financial system and by all accounts we came way too close to the end of the economic world as we know it. Who knows where things will go from here, but there are certainly a few things we can learn from our foggy memories of the 2008 fiasco.

First, things appear to be somewhat different this time – at least for larger companies – because their cash balances are high and leverage is lower, making it easier to weather the storm of volatile markets. In 2008 and 2009, portions of the capital markets were shut down at various times, making it exceedingly difficult for companies to raise capital, turn over maturing obligations, etc.

Second, the dark days of a few years ago taught us the value of having a shelf registration statement on file with the SEC. During and ever since the financial crisis, offerings are generally conducted with as much speed and stealth as can be mustered, because of market volatility and hedge funds that are always looking for a reason to short a company’s stock. Many of the offering techniques that are in vogue today, such as over-the-wall deals and registered directs, generally work best when a shelf registration statement is already on file and a takedown can be done quickly and quietly. Getting a shelf on file when you are a WKSI is best, because you generally want to avail yourself of the advantages of that status, which means that the shelf should be filed before your stock price plummets and you know longer qualify for WKSI status (e.g., $700 million or more of worldwide public float).

And finally, August is just a terrible month to try to do a deal or to have bad stuff happen in the economy and the markets, given that so many traders around the world often decamp for their holiday during August, particularly in the last two weeks of the month. It always strikes me as interesting how such a human element – the overriding desire to take a vacation – can have such a significant impact on the markets as a whole.

Webcast Transcript: “Key Disclosure Policies: The Dangers of Standing Pat”

We have posted the transcript for our recent webcast: “Key Disclosure Policies: The Dangers of Standing Pat.”

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– Dave Lynn