Risks of ignoring corporate whistleblowers: Ignorance is not bliss

The recent closure of Abbott Nutrition’s plant in Sturgis, Michigan highlights an all-too-familiar problem that companies and their lawyers need to address: the consequences of ignoring internal whistleblowers. For more than two years, an Abbott Nutrition employee repeatedly raised concerns about quality control failures and food safety violations directly to company management, with no response. The employee then sent a report to the FDA in October 2021 – but that letter was also ignored. The FDA is now the target of public criticism, as is Abbott Nutrition, for their alleged failures, which have already had deadly consequences – four infants were hospitalized, and two eventually died, from Cronobacter sakazakii infection. linked to bacteria found in infant formula made in Abbott’s factory. As experience has shown, in addition to tragic personal consequences, deliberately ignoring whistleblowers often has serious financial ramifications in the form of shareholder lawsuits and increased financial penalties from regulators, the ministry of justice and the courts.

Historically, cases like Enron, Madoff, and Wells Fargo show how criminal activity is often detected and reported with startling accuracy, but, even when reported to regulators as well as the C-suite, it can go unaddressed and ultimately result in the dropping of a case and jail time for the executives. Although regulators who miss the signal usually suffer nothing but embarrassment, recent cases, including USAA Bank and Wells Fargo, demonstrate that courts and regulators impose stiffer penalties on companies that ignore regulatory violations. attention of the company by internal complaints from whistleblowers. Conversely, the DOJ and agencies consider the company’s efforts to investigate and remedy reported violations when deciding how to impose penalties or bring charges against a company. Because, however, in many regulatory regimes, a whistleblower’s first report must be internal, the company’s attorney is in a unique position to stem the problem before the storm.

Historical chess

The news about Abbott Nutrition is a stark reminder that whistleblower complaints are often ignored until far too late. In 2001, Enron executive Sherron Watkins warned senior management about fraudulent accounting practices five months before the company faced a major congressional investigation. Enron Corporation would become the largest bankruptcy in U.S. history, resulting in combined prison sentences of more than 20 years for former Enron CEO, former chief accounting officer and founder and chairman Kenneth Lay – the man to whom Sherron Watkins expressed his initial concerns.

Similarly, the 2008 discovery of the Bernard Madoff Ponzi scheme was well overdue. As early as 1992, the SEC received six substantive complaints “that raised significant red flags about Madoff’s hedge fund operations.” The SEC later admitted that these red flags should have revealed Madoff’s investment scheme that resulted in the loss of billions of dollars for his firm’s clients and a 150-year prison sentence for Madoff, who died in prison l ‘last year. A very persistent analyst, Harry Markopolos, tried to expose the SEC in 2000 without success. Madoff’s company itself also reportedly received at least two internal “anonymous” employee whistleblower reports raising concerns about the operation.

Legal consequences of ignoring a whistleblower

Ignoring whistleblower complaints can increase the severity of a criminal, civil or regulatory penalty. In 2014, five years after Bernard Madoff was sentenced to 150 years in prison, JP Morgan Chase Bank was criminally charged and ordered to pay $1.7 billion over its failure to investigate and raise concerns. to the bank’s anti-money laundering department, even though bank managers had “developed their own suspicions about Madoff” for many years. The DOJ noted that JP Morgan’s risk staff wrote emails to JPMC UK executives raising the possibility that Madoff was running a Ponzi scheme, but ultimately failed to alert the appropriate US entities.

In 2019, Walmart was accused of violating the Foreign Corrupt Practices Act for “failing to have in place an adequate anti-corruption compliance program for more than a decade”, adding that the company had allowed violations “even in the face of red flags and corruption”. allegations. Some of these “red flags” included Walmart employees writing letters and emails to Walmart executives expressing their concerns. An employee received “a wink and a nod” from another employee when he asked if a real estate transaction would violate the FCPA. Another employee noted that Walmart employees in India were making “inappropriate payments to government officials.” The DOJ said Walmart executives were aware of the complaints but did not investigate at the time.

In February 2020, Wells Fargo reached a $3 billion settlement with the Justice Department, SEC, and other regulators over its illegal sales practices that spanned more than 15 years. In reaching a decision, the DOJ said it took into account that top bank executives had ‘knowledge of the conduct’ as early as 2002, after groups of employees sent letters to bank management for several years, outlining their concerns about the bank’s business practices. The DOJ noted that “senior management failed to take sufficient action” and “refused to change the sales model” to prevent illegal practices even after becoming aware of the conduct.

More recently, a USAA Bank employee’s internal complaints about his numerous violations of banking law apparently went unaddressed for nearly six years before finally reaching the doors of federal regulators in March 2020. FinCEN imposed $140 million in fines to the bank for violating the Bank Secrecy Act. and anti-money laundering laws after the company knew, but ignored, the existence of violations. FinCEN considered “management’s complicity, condoning, or authorization, or knowledge of the conduct underlying the violations”, noting that “for some time, management of the Bank has explicitly acknowledged a oversight deficiency” and “had knowledge of the violations” but failed to “quickly and effectively address identified deficiencies.

Mitigate risks

Since some states, such as New York, require those seeking to take advantage of whistleblower protection laws to report violations within the company before reporting them to the government, an internal complaint may only be the first. whistleblower stage before approaching an outside agency. This warning – assuming it reaches the company’s board – is an opportunity to seize the situation. In criminal investigations, the DOJ will weigh all factors to determine whether to charge a company with a crime, including “pervasive wrongdoing”, “prompt and willful disclosure of wrongdoing by Company” and “Corporate Corrective Actions, including, but not limited to, any efforts to implement an adequate and effective corporate compliance program. (§ 9-28.300 of the Principles for the Federal Prosecution of Professional Organizations). If necessary, companies should consider reporting what they learn to the government. In a recent speech, Attorney General Merrick B. Garland reiterated that “to be eligible for any cooperation credit, companies must provide the Department of Justice with all non-inside information about those involved in or responsible for the wrongdoing in question.” “.

In FCPA cases, the DOJ gives companies credit for voluntary self-disclosure, full cooperation with investigation, and timely and appropriate remediation. (FCPA Enforcement Policy § 9-47.120). The SEC also takes into account the company’s efforts to “self-monitor” before a breach is discovered, “self-report” of a breach when discovered, and corrective action. (SEC Law Enforcement Division Cooperation Program). Conversely, sitting on your hands not only carries more serious criminal and regulatory consequences, but, as in the Abbott Nutrition case, can lead to billions of dollars in liability from a host of class action lawsuits. and spin-off lawsuits, unwanted public scrutiny, and an involuntary market. implications. Walmart shareholders filed a derivative action against the board after the DOJ announced a formal investigation into its FCPA violations and, while the action was ultimately unsuccessful, it resulted in costly legal defense costs and public criticism. In December, Tesla saw its shares plummet 6.4% when the SEC announced it had launched an investigation after former Tesla quality control chief Steven Henkes exposed fire safety risks associated with Tesla solar panels. Henkes claims he was fired for raising his concerns internally.

While history demonstrates that no real consequences fall on government agencies that fail to act in response to whistleblower reports, the negative business and regulatory consequences for companies that deliberately ignore whistleblower complaints alerts are real in financial and reputational terms. A company also risks losing any leniency with the government that it might otherwise have had had it taken the whistleblower’s complaint seriously from the start. Company counsel is on the front lines of taking preventative action to avoid such outcomes by implementing and enforcing an internal complaints review process and, if a breach is discovered, ensuring that that the company take significant measures to remedy it.

To learn more about Robert Anello, please visit www.maglaw.com.

Sloane Lewis, a partner at the firm, assisted in the preparation of this blog.

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