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Whistleblowers: Incentives, Disincentives, and Protection Strategies

ISBN: 978-1-118-09403-7
272 pages
December 2011
Whistleblowers: Incentives, Disincentives, and Protection Strategies (1118094034) cover image
Solid guidance for managing whistleblower policies in light of the new Dodd-Frank Act provisions

In July 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act that greatly expanded whistleblower bounties in connection with violations of federal securities laws, including the Foreign Corrupt Practices Act. Discussing business protection strategies and best practices in dealing with whistleblowers, Whistleblowers will appeal to board members, executives, corporate compliance personnel, attorneys for whistleblowers and defense attorneys, as well as potential employee whistleblowers.

  • Case studies of GlaxoSmithKline, Pfizer and other high profile whistleblower incidences
  • Examines new Dodd-Frank incentives to whistleblowers
  • Recommends best practices for corporations in light of new whistleblowing incentives
  • Explores other federal and state statutory incentives to whistleblowing

Timely and comprehensive, Whistleblowers emphasizes the disincentives to whistleblowing, reviewing the academic studies of whistleblowers with the idea of developing best practices in working with whistleblowers.

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Foreword xiii

Acknowledgments xv

Introduction 1

PART I: THE WHISTLEBLOWERS AND THE DODD-FRANK INCENTIVES

Chapter 1: The Dramatic Expansion of Whistleblower Awards under Dodd-Frank 11

Whistleblower Provisions of Dodd-Frank 13

What Is “Original Information”? 14

What Are Violations of the Federal Securities Laws? 15

Rule 10b-5: Market Manipulation 19

Violating the Accounting Standards 20

False Financial Statements by Public Companies 20

Other Securities Laws 22

Protections for Whistleblowers 23

Commodity Exchange Act 23

Notes 25

Chapter 2: The Remarkable Story of Cheryl Eckard and the $96 Million Bounty under the False Claims Act 27

Who Is Cheryl Eckard? 27

Eckard’s Post-termination Activities 28

Eckard’s Superiors 29

Background Allegations 30

Alleged Violations 31

Timeline of Eckard’s Alleged Activities 33

The Lessons of Glaxo 40

Notes 42

Chapter 3: The Pfi zer Whistleblowers Who Collected Over $100 Million under the False Claims Act 45

John Kopchinski 46

Bextra 47

The Complaint 48

Pfizer Lessons 51

Notes 53

PART II: DISINCENTIVES AND FACTORS MOTIVATING PUBLIC DISCLOSURE

Chapter 4: Disincentives to Internal Whistleblowers 57

Financial Disincentives 58

Nonfi nancial Disincentives 59

Contractual Commitments and Fiduciary Duties 60

Ethics Resource Center Survey 61

Reinstatement as a Remedy 62

Empirical Study 65

Notes 67

Chapter 5: Women as Whistleblowers: Factors Motivating Public Whistleblowing 69

Sherron Watkins 69

Cynthia Cooper 71

Coleen Rowley 71

External Reporting by Internal Whistleblowers 72

Whistleblower Anonymity 74

Notes 74

PART III: ORGANIZATIONAL BEST PRACTICES

Chapter 6: Why Should Organizations Adopt a Robust Whistleblower System? 79

Diminishment of Shareholder Wealth 80

Boards of Directors 81

We Were Duped! 82

Executive Whistleblowers 84

Why Independent Directors Cannot Rely Solely on Independent or Internal Auditors 86

Legal Standard 89

Caremark 90

Recommended Strategy 91

Criminal Liability of an Organization 92

Responsible Corporate Officer Doctrine 93

The Acme Markets Case 94

The U.S. Department of Justice Criminal Guidelines 96

The Disadvantages of a Robust Whistleblower System 97

Notes 98

Chapter 7: Establishing a Robust Whistleblower System 103

Problems with the Current Whistleblower System 104

Initial Steps 107

Elements of a Robust Whistleblower Policy 108

Independent Directors Must Be in Charge 109

The Whistleblower Program Must Be Independently Administered 111

Whistleblower Complaints Should be Investigated by Independent Counsel Reporting Directly to the Independent Directors 113

There Should Be No Presumption that Anonymous Complaints Are Less Deserving of Investigation 117

Motivations and Personality of the Whistleblower Are Not Relevant to the Truth of the Allegations 118

Absolute Protection of Whistleblowers’ Identity Is Essential 119

Assess the Effectiveness of Hotlines and Provide Employee Compliance Training 123

Independent Counsel Should Report the Status and Results of the Investigation 124

Internal Whistleblowers Should Receive Meaningful Monetary Rewards 125

The Whistleblower Policy Must Be Communicated Effectively 127

There Should Be Milder Sanctions for Whistleblowers Involved in Illegal Group Activity 130

Retaliation Claims Should Be Independently Investigated 131

The Director of Corporate Compliance Should Become the Eyes and Ears of the Independent Directors 132

Major Dos and Don’ts for CEOs 134

Notes 135

PART IV: STATUTORY INCENTIVES AND SEC AWARD REGULATIONS

Chapter 8: The False Claims Act: Qui Tam Cases 141

What Is a False Claim? 142

False Claims Act Bounties 144

U.S. Department of Justice Memorandum 146

Statute of Limitations 149

Notes 150

Chapter 9: IRS Whistleblowers 153

Section 7623(b): Mandatory Whistleblower Awards 155

Reduction of Award Percentage 156

Section 7623(a): Discretionary Awards 157

Form 211 158

IRS Whistleblowers Awards 159

IRS Award Determinations 160

Award Administrative Proceedings 162

Appeal to Tax Court 164

Duration of Process and Award Payment 164

Confi dentiality of Whistleblower 165

Right to Counsel 165

IRS Contracts 165

Disqualifi cation of U.S. Treasury Department Federal Employees 166

Notes 167

Chapter 10: Other Statutory Incentives and Protections for Whistleblowers 169

Act to Prevent Pollution from Ships 169

False Patent Marking Statute 170

U.S. Tariff Act of 1930 172

State False Claims Statutes 173

Whistleblower Protections 179

Barker v. UBS 180

Other Statutory Whistleblower Protections 185

Notes 186

Chapter 11: A Step-by-Step Guide to SEC Whistleblowers Awards under Dodd-Frank 189

Summary 190

SEC Investor Protection Fund 194

Does the Whistleblower Need an Attorney? 195

Step-by-Step Guide 196

Determining Whether the Over $1 Million Threshold Is 202

Satisfied Determining the Amount of an Award 202

Must an Employee Comply with the Company’s Internal Compliance Program? 204

Confidentiality 205

Nonwaiver of Whistleblower Rights 205

Appeals 205

Anti-retaliation Provision 206

Notes 206

Appendix 1: IRS Form 211 207

Appendix 2: SEC Form TCR: Tip, Complaint or Referral 211

Appendix 3: SEC Form WB-APP: Application for Award for Original Information Submitted Pursuant to Section 21F of the Securities Exchange Act of 1934 229

Appendix 4: SEC Whistleblower Rules 239

About the Author 265

Index 267

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Frederick D. Lipman is a partner with the international law firm of Blank Rome LLP and is also the president of the Association of Audit Committee Members, Inc. He has more than fifty years of experience in the areas of corporate governance, mergers and acquisitions, private equity, and IPOs. He has appeared on CNBC, CNN, Bloomberg, and Chinese television as a national commentator on business topics and has been quoted in the Wall Street Journal, the New York Times, USA Today, Forbes, and other business publications.
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