Last week, SEC Chair Gary Gensler gave a speech at a celebration for National Whistleblower Day, which commemorates the first U.S. whistleblower law that was passed unanimously on July 30, 1778. The law was passed after ten whistleblowers reported wrongdoing and abuses committed by a superior officer in the Continental Navy. Since 2015, the National Whistleblower Center has held an annual celebration on July 30th to honor and celebrate whistleblowers.
In his speech, Gensler noted that the SEC has paid out more than $900 million to nearly 180 whistleblowers through the SEC’s program administered by the Office of the Whistleblower. Gensler indicated that he has asked staff “to examine whether and how the program could be further strengthened to ensure that misconduct within the remit of the SEC is identified, addressed, and stopped.”
Yesterday, the SEC announced that it had paid more than $4 million to four whistleblowers who provided information and assistance in two separate enforcement proceedings. In accordance with the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not reveal a whistleblower’s identity.
Unfortunately, companies must continue to be on guard for bogus whistleblower complaints. As Liz first noted back in June, companies began receiving a variety of bogus whistleblower emails out of the blue, and John recently identified additional fake emails that were received by companies. The prospect of receiving fake emails complicates matters for company whistleblower programs, as they must implement additional steps to vet incoming messages to determine if they are legitimate complaints. We still do not know why this hoax has been perpetrated.
In this memo, Troutman Pepper provides an overview of the fake whistleblower complaints that companies have been receiving and addresses the best course for approaching this unusual situation:
Although the motives of the complainants in these cases are unclear, it appears that these complaints may relate to attempted cybersecurity scams. These potential “hoax” insider trading, bribery, or accounting fraud claims may present initial challenges for companies in evaluating whether the whistleblower complaints are legitimate grievances, or attempts to circumvent company cybersecurity controls. Accordingly, companies should take special care in investigating purported insider trading or other whistleblower claims where the source of the complaint and/or the employee involved in the alleged misconduct is/are anonymous. Specifically, company counsel (both internal and outside counsel) should collaborate with the company’s compliance and ethics, internal audit, cybersecurity and information technology personnel to evaluate the legitimacy of the complaint and determine whether any response to the complaint is warranted. If a company is unsure whether a recent whistleblower complaint alleging insider trading or other alleged misconduct is a hoax, we recommend that the company err on the side of caution and include IT when responding to the complaint to avoid downloading any links or other information that may be contained in the complaint.
We can only hope that whoever is sending these fake complaints will grow tired of the hoax, or will realize that their efforts are being thwarted by companies carefully vetting the complaints when they are received.
I started the Deep Dive with Dave podcast last year as a successor to the Dave & Marty Radio Show podcast that Marty Dunn and I had done on and off over the past decade. Much like the Dave & Marty Radio Show, the Deep Dive with Dave podcast covers topics that I believe are of most interest to our members, bringing you the practical advice that everyone expects from TheCorporateCounsel.net and our related publications. I have hosted a few workshops on topics such as risk factors and confidential treatment, and covered the implementation of several of the rulemakings that the SEC completed in 2020. I would love to hear from you about topics that you would like to be covered on the Deep Dive with Dave podcast – send me an email or give me a call with your suggestions.
As Liz mentioned last week, John Jenkins and I take a deep dive into the latest issue of The Corporate Counsel in this new episode of the Deep Dive with Dave podcast.
I am excited to return to the blog here on TheCorporateCounsel.net! When I left the SEC and became an Editor on TheCorporateCounsel.net over 14 years ago, I recognized the importance of this blog, TheCorporateCounsel.net and our other websites and publications to all of our members who practice in the areas corporate law, securities law and corporate governance. While for the past several years I have focused my attention on The Corporate Counsel and The Corporate Executive newsletters, I have missed the chance for more frequent interaction with our members through this blog. It is great to be back, and I look forward to bringing you the latest developments in upcoming posts.
On Friday, SEC Chair Gensler issued a statement highlighting disclosure concerns with China-based companies, prompted by recent actions taken by the government of the People’s Republic of China. In particular, Gensler noted a concern that U.S. investors may not fully understand the risks associated with the typical public offering structure in which China-based companies that are not allowed to have foreign ownership raise capital in the U.S. through variable interest entities (VIEs). In light of these concerns, Gensler announced that he has asked the Staff to request additional disclosure from offshore companies associated with China-based operating companies:
I have asked staff to ensure that these issuers prominently and clearly disclose:
That investors are not buying shares of a China-based operating company but instead are buying shares of a shell company issuer that maintains service agreements with the associated operating company. Thus, the business description of the issuer should clearly distinguish the description of the shell company’s management services from the description of the China-based operating company;
That the China-based operating company, the shell company issuer, and investors face uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements; and
Detailed financial information, including quantitative metrics, so that investors can understand the financial relationship between the VIE and the issuer.
Gensler has also asked to the Staff to ensure that all China-based operating companies seeking to register securities with the SEC disclose whether the operating company and the issuer, when applicable, received or were denied permission from Chinese authorities to list on U.S. exchanges, the risks that such approval could be denied or rescinded and a duty to disclose if approval was rescinded. Further, the Staff is directed to seek disclosure that the Holding Foreign Companies Accountable Act, which requires that the PCAOB be permitted to inspect the issuer’s public accounting firm within three years, may result in the delisting of the operating company in the future if the PCAOB is unable to inspect the firm. For more about the Holding Foreign Companies Accountable Act, check out our China practice area.
The Staff will now be conducting targeted additional reviews of filings for companies with significant China-based operations.