by Miriam Baer
Next October, the Supreme Court will hear oral argument in Digital Realty Trust, Inc. v. Somers. The case asks the Court to resolve whether the Dodd-Frank Act’s anti-retaliation protections for “whistleblowers” apply to those individuals who first report information solely to the SEC, or instead to the broader group of individuals who report information internally or other enforcement agencies before seeking out the SEC. As noted in an earlier post on this blog, circuit courts are (PDF: 161 KB) split (PDF: 1,469 KB) on the issue, and whereas the SEC itself has embraced the broader definition, Dodd-Frank’s explicit definitional language offers some room for doubt.
When the case does reach the Supreme Court, litigants favoring the broader definition presumably will portray what has now become the standard depiction of the whistleblower’s dilemma: An employee knows her bosses are cooking the books. She would like nothing to do with this sort of activity but she fears she will lose her job and be iced out of her industry if she says anything.
Fear of retaliation—and all of the social, psychological and economic pain that goes with it—has long animated whistleblowing scholarship. Legal regimes such as the Dodd-Frank Act (PDF: 62 KB), transparently attempt to redress these fears, first by strengthening anti-retaliation protections, and second by offering the whistleblower monetary bounties for information that substantially aids government enforcement efforts.
My recently published article, Reconceptualizing the Whistleblower’s Dilemma, 50 U.C. Davis L. Rev. 2215 (2017), focuses on Dodd-Frank’s bounty program. Since its inception in August 2011, this program has received thousands of tips and has distributed over thirty awards. Over the course of the program’s relatively short existence, the SEC’s Enforcement Division has become one of the program’s strongest cheerleaders, emphasizing its whistleblower-related recoveries (over $500 million, total) as well as its generous bounties (over $100 million).
From the number of tips alone, one might conclude that the SEC has solved the whistleblower’s dilemma. Nevertheless, as the SEC’s annual reports to Congress (PDF: 1,637 KB) indicate, the number of credible reports that have actually resulted in recoveries meriting a bounty are in fact quite modest: over the first five years of its existence, the SEC announced roughly twenty-six “covered actions” (several involving more than one whistleblower) out of a field of more than 18,000 tips. If one cares about the number of credible reports relative to the total number of tips, one ought to find such a low “hit rate” reason for further inquiry.
In my Article, I advance an explanation for this low hit rate and a new way to think about the whistleblower’s dilemma. First, fear of retaliation is not the whistleblower’s only, or even his primary, concern. For a non-insignificant subset of employees, whistleblowing’s potential effect on criminal liability is the key lever, one that plays an integral and underexplored role in the employee’s decision to disclose information or remain silent. As I explain in my article, whistleblowing becomes a particularly dicey proposition when criminal liability hinges strongly on the government’s proof of mens rea or “state of mind.” After all, the very act of “blowing the whistle” implicitly requires an individual strip herself of the protection defense attorneys value most in criminal prosecutions: the ability to plausibly deny knowledge of what was actually going on.
To illuminate this problem, my Article proposes a very simplified model consisting of Complicits (those who have violated the law) and Innocents (those with no legal exposure whatsoever). Because wrongdoers rationally desire to limit their exposure, they purposely quarantine information among themselves and other wrongdoers, to the extent possible. Thus, as a general rule, Complicits are more knowledgeable about wrongdoing than Innocents. At the same time, Complicits retain very strong incentives—wholly apart from fear of retaliation—to stay silent. If a Complicit submits information to the SEC, he effectively makes an admission of knowledge – he knows something illicit has happened, is still happening, or is about to happen, and this admission will almost certainly lead to follow-up questions regarding his own behavior.
Thus, we have a mismatch in incentives and rewards. The SEC’s program promises a contingent and highly uncertain monetary bounty, but the Complicit would benefit most from a binding promise of leniency or amnesty. Of course, the government already employs these latter types of programs, but they exist separate and apart from the SEC’s whistleblowing program.
Now, some might wonder whether this matters if the number of Complicits relative to Innocents remains rather small. After all, if even a few Innocents detect the wrongdoing going on in their midst, a bounty program can still elicit valuable information. There is reason to fear, however, that the number of Complicits is larger than many of us realize. In my Article, I identify three factors that inflate the number of Complicits relative to Innocents. The first is federal criminal law. Conspiracy and fraud laws are infamously broad. Although in lay terms, we imagine a coconspirator as someone who tangibly benefitted from a criminal scheme, the law of conspiracy requires no such benefit. A person can become a conspirator simply by “agreeing” (even with much reluctance) to join a scheme.
At the same time, behavioral psychology explains why employees allow themselves to fall into perilous situations in the first place. Putative employees may ignore objective red flags overoptimistically rely on their ability to distinguish good and bad actors. And once these employees find themselves in trouble, they may prey to short-term desires for approval or conflict-avoidance, despite their sincere long-term interest in obeying the law.
Finally, organizational factors themselves inflate the number of Complicits. By educating employees on the scope of the law, internal compliance efforts (ironically) increase the number of employees who consider themselves Complicits. Someone who previously might have incorrectly deemed herself an “Innocent” may realize, after the fact, that she is in fact a Complicit. Once she makes that realization, she is more likely to avoid the SEC’s whistleblowing channel.
The point of the Article is not that we should do away with bounty programs. The Complicit/Innocent framework does, however, illuminate two caveats. First, it serves as an important reminder that bounty programs are not all the same. The fact that an employee hotline works in one scenario does not mean that an elaborate whistleblowing program will flourish in another. Second, the whistleblower’s dilemma entails more than fear of losing one’s job or social network. For some subset of employees, a qualitatively different concern drives the decision to disclose or remain silent. Once we recognize this fact, we can more ably respond to the limitations inherent in programs such as the SEC’s.
Miriam Baer is a Professor at Brooklyn Law School. Professor Baer teaches in the areas of corporate law, white collar crime, criminal law and criminal procedure. Professor Baer’s scholarship, which focuses on organizational wrongdoing in public and private settings, has twice been selected for the prestigious Stanford-Yale-Harvard Junior Faculty Forum.
Disclaimer
The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.