We are unfortunately witnessing the demise of many well-known companies. Some of these implosions have been the result of alleged malfeasance on the part of those in control.  Two examples that immediately come to mind are Bernard L. Madoff Investment Securities and the Peanut Corporation of America.
 
Let’s say that you worked for Madoff or the Peanut Corporation before the internal problems became widely known, i.e., the calm before the storm. You discover improprieties that will, in retrospect, eventually bring the company down.  Conventional wisdom (and a preponderance of whistleblower stories in the media) indicates that you should alert the media or a regulatory agency as to your concerns.  Company lawyers and human resources representatives will likely say that you should use the internal mechanisms put in place for reporting these concerns.  But conventional wisdom may be wrong.
 
Whistleblowers serve an important role to both their employers and to the general public by bringing to light an employer’s ethical, or even legal, violations.  Because of this, federal and state laws exist to protect certain whistleblowers from retaliation by an outed employer.

But how effective are these laws at truly preventing retaliation?  While some whistleblowers, such as Sherron Watkins of Enron fame, managed to not only avoid retaliation but were actually lauded as heroes, few whistleblowers receive the same treatment.  Instead, statistics show that employers’ retaliation against whistleblowers runs rampant; in one study, a shocking 82% of whistleblowers experienced harassment after making allegations against a company and a full 60% were discharged from their jobs.¹   In addition, whistleblowers may be blacklisted from future employers, face social ostracism from coworkers, and undergo stressful psychological strain.²  

A potential whistleblower may chose between three main mechanisms to report allegations: via an internal reporting system, such as an anonymous hot-line, via the media, or via a regulatory agency.  From a whistleblower’s perspective, downsides exist for all three outlets.

Internal Reporting Mechanisms

Many companies have now instituted internal reporting mechanisms, such as “hot-lines” where employees may make anonymous telephone calls to report allegations of criminal or unethical behavior.  Supposedly, the caller’s identity remains unknown and thus the caller is protected from any retaliatory conduct.  Yet, unfortunately, this rarely holds true.

For one thing, calls to an anonymous hot-line may not truly be anonymous.  By asking the caller to provide details regarding the complaint, the caller’s identity can usually be determined by piecing together the allegations with general knowledge regarding an employee’s previous conduct or concerns.  Yet, at the same time, the whistleblower’s identity is officially anonymous.  The end result is that actions can be taken against the caller, and the caller cannot complain, because, again, the caller’s true identity supposedly remains unknown.³   Ultimately, the caller can be retaliated against, losing the protections that whistleblowing anti-retaliation laws created, without any repercussions to the company. Because of this, an employee who suspects wrongful behavior may be best served by avoiding the “confidential” hot-line. 

Going to the Press

Some employees who suspect illegal or improper conduct may wish to speak to the media, and some even relish the idea of creating media frenzy and/or receiving compensation for sharing a story.  But this could result in disastrous consequences. 

First and foremost, state and federal anti-retaliation laws rarely protect employees who blow the whistle by reporting wrongful conduct to the media.  In these situations, an employer is entitled to take action against the employee, and the employee will likely have no legal ground to prevent such actions.  Second, given the media’s broad base, a news organization rarely reports on any matter that is not sensational and even more rarely compensates its sources. 

Further, a significant hurdle exists when an employee seeks to reveal confidential company information or to disclose corporate documents.  Because a company has a common law proprietary interest regarding its information and any internal documents created by its employees, it may prevent an employee from sharing such information with the general public.  In addition, many employees (and most, if not all, executives) are bound by confidentiality agreements which further restrict their ability to disclose information or documents.  For example, Jeffrey Wigand, the senior executive who blew the whistle on the tobacco industry—in part by turning to the media—was not only vilified by the tobacco industry in the press, but also sued by his former employer to prevent him from testifying in cases involving tobacco-related issues and to recover monetary damages based on his previous disclosures.⁴

In short, an employee who attempts to blow the whistle on a company by turning to the media risks not only losing his job, but also risks defending a lawsuit against his employer.

Reaching Out to a Regulatory Agency

Finally, some employees believe that the best way to address corporate wrongdoing is to report the allegation to a regulating agency. An employee might reason that this enables a neutral third-party to investigate and to resolve the issue.  Yet, this plan can backfire.

First, a perpetrator (like Madoff or Stewart Parnell, the owner of Peanut Corp. of America) may hold a position of trust within the regulating agency or at least have strong contacts with its members.  In the cases of Madoff and Parnell, both individuals possibly had some influence over the regulating agencies: Madoff as a former chairman of the NASDAQ stock exchange and Parnell as a member of the United States Department of Agriculture's Peanut Standards Board—the board responsible for advising the agriculture secretary on quality and handling standards.  It is also not unusual for corporate compliance officials to have actually come into the private sector after government service, in many instances at the actual agency charged with regulating the conduct in question.  Under these circumstances, the obvious question is whether their role in the private sector is truly compliance or regulatory avoidance.  And, sometimes the issue is as simple as inaction on the agency’s part.  For example, Harry Markopolos apparently provided the Securities Exchange Commission with sufficient evidence of Madoff’s Ponzi scheme for it to investigate (if not indict) Madoff, yet the agency failed to do anything for almost a full decade.⁵  

But a concern even more important from the whistleblower’s perspective exists: Providing information to a regulatory agency may expose the employee to harmful acts by other companies.  For example, if the employee finds himself out of a job (as he likely will), few employers may be willing to hire someone who (albeit, unfairly) is perceived as disloyal to a company’s interest.  While whistleblower statutes protect an employee from discrimination from his current employer, no law protects a former whistleblower from being “blacklisted” by other companies.

Failing to Report a Concern

For all these reasons, an employee may think it is best to ignore illegal, unethical, or improper behavior.  Yet, the consequences for not reporting certain conduct can be as severe as those described above.  In essence, a subtle Catch-22 is at work; the employee faces harsh consequences for either reporting or ignoring the same conduct if a company’s ethics policy subjects employees to termination for failing to report certain violations.

Bottom Line

Say an employee grew concerned about Madoff’s or the peanut factory’s practices. What would have been the best course of action?  Although this does not hold true in every situation, there is an argument to be made that an employee should bypass any internal hot-line mechanisms and also forego whistleblowing to either the media or to a regulatory agency, mainly because experience, unfortunately, has shown that these approaches will often yield little in the way of positive results.
 
Instead, the employee should immediately contact his own attorney who should be prepared to guide the employee in navigating through a company’s internal complaint process.  First, the attorney and the employee should assess whether a report of wrongful behavior will be covered by a whistleblowing statute.
 
 If so, instead of reporting the conduct internally via an anonymous hot-line system, the employee should identify himself and his concerns to both the company compliance officer and the employee’s direct supervisor.  By doing so (in writing), the employee can at least ensure that the employer will not be able to easily retaliate against the employee by claiming not to have known about the whistleblowing.
 
Next, the employee should have a clear idea of what remedial steps should be implemented to bring the company into legal and ethical compliance.  If the company voluntarily resolves the issue, then a laudatory goal has been accomplished.  If this solution is not so easily accomplished (assuming both Madoff and the peanut plant have financial goals that are more important than complying with the law), then the employee should be prepared to leave the company, presumably with a severance package that adequately reflects the value of his suggestions/demands for remedial action.   The benefit to the company is that it now has a roadmap for appropriate compliance and it can take time in deciding whether to do the right thing.  The departing employee may conversely seek employment in an environment that is more to his or her ethical standards.  A knowledgeable attorney’s assistance in this regard is not only helpful, but critical.  And, hopefully, by following these steps, the concerned employee will not only have a clear conscience, but also be in a strong position regarding job stability and income.

To speak with an employment lawyer regarding a potential whistleblower situation, please contact Steve Kardell at Clouse Dunn LLP.  Despite the perceived difficulty of prevailing on Sarbanes-Oxley Act whistleblower complaints,⁶  Kardell has been consistently successful in representing corporate executives before various federal tribunals with jurisdiction over these complaints. Kardell recently settled two unrelated Sarbanes-Oxley cases involving allegations of retaliation against corporate executives, recovering in excess of $750,000 (net to each client) in proceedings before the U.S. Department of Labor.

 1  Gerald Sinzdak, An Analysis of Current Whistleblower Laws: Defending a More Flexible Approach to Reporting Requirements, 96 Cal. L. Rev. 1633, 1655 (2008).

2  See Geoffrey Christopher Rapp, Beyond Protection: Invigorating Incentives for Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers, 87 B.U. L. Rev. 91, 95-96 (2007).

3  Relevante, Will Corporate Employees Blow the Whistle on Serious Fraud?, (2005), http://www.relevante.com/images/audit_whitepapaprs/corporate_fraud/Jul05_Wcebwsf.pdf (An anonymous informant will find proving the causal relationship between the act of whistleblowing and the retaliatory conduct “almost impossible.”).

4  Jodi L. Short, Killing the Messenger: The Use of Nondisclosure Agreements to Silence Whistleblowers, 60 U. Pitt. L. Rev. 1207, 1210-11 (1999).

5  Kevin McCoy, Pursuer of Madoff blew a whistle for nine years, USA Today, Feb. 12, 2009, at http://www.usatoday.com/money/markets/2009-02-12-markopolos-madoff-ponzi_N.htm.

6  Terry Morehead Dworkin, Sox and Whistleblowing, 105 Mich. L. Rev. 1757, 1766 (2007) (reporting the results of a study showing that, of 677 Sarbanes-Oxley retaliation complaints, 499 were dismissed and 95 were withdrawn, and that, of those complaints that proceeded before an administrative law judge, only two percent resulted in a decision for the employee).

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