Risks Of Tuning Out Company Whistleblowers: Ignorance Is Not Bliss

The recent shutdown of the Abbott Nutrition plant in Sturgis, Michigan highlights an all too familiar problem that companies and their counsel need to address: the consequences of ignoring internal whistleblowers. For more than two years, an Abbott Nutrition employee repeatedly voiced his 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 this letter also went ignored. The FDA is now the target of public criticism, as is Abbott Nutrition, for their alleged failures, which already have had deadly consequences – four infants were hospitalized, and two ultimately died, as a result of a Cronobacter sakazakii infection linked to bacteria found in baby formula products produced in the Abbott plant. As experience has demonstrated, in addition to tragic personal consequences, deliberately ignoring whistleblowers often has serious financial ramifications in the form of shareholder suits and increased financial penalties from regulators, the Department of Justice, and the courts.

Historically, cases like Enron, Madoff, and Wells Fargo, show how criminal activity often is detected and reported with surprising precision but, even when reported to regulators as well as to the C-suite, can go unaddressed and ultimately result in the downfall of a business and jail time for the executives. Although regulators who miss the cue generally suffer little more than embarrassment, recent cases, including USAA Bank and Wells Fargo, demonstrate that courts and regulatory agencies are levying more severe penalties for companies that ignore violations brought to the company’s attention by internal whistleblower complaints. Conversely, the Department of Justice and agencies do take the company’s efforts to investigate and remedy reported violations into consideration when deciding how to assess penalties or whether to bring charges against a company at all. Because, however, under many regulatory schemes, a whistleblower’s first report must be internal, company counsel is in a unique position to stem the problem before the storm.

Historical Failures

The news about Abbott Nutrition is a stark reminder that whistleblower complaints often are ignored until much too late. In 2001, Enron executive, Sherron Watkins, warned upper management about fraudulent accounting practices five months before the company became the subject of a major congressional investigation. Enron Corporation would become the largest bankruptcy in U.S. history, resulting in combined prison sentences of over 20 years for Enron’s former CEO, former Chief Accounting Officer, and it’s founder and chairman, Kenneth Lay – the man to whom Sherron Watkins brought her initial concerns.

Similarly, the 2008 discovery of the Bernard Madoff Ponzi scheme was well past due. As early as 1992, the SEC received six substantive complaints “that raised significant red flags concerning Madoff’s hedge fund operations.” The SEC later admitted that these red flags should have uncovered Madoff’s investment scheme that resulted in the loss of billions of dollars for the clients of his firm, and a 150 year prison sentence for Madoff, who died in prison last year. One very persistent analyst, Harry Markopolos, attempted to blow the whistle to the SEC in 2000 with no luck. Madoff’s firm itself also reportedly received at least two internal reports from “anonymous” employee whistleblowers raising concerns about the operation.

Legal Consequences Of Ignoring A Whistleblower

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

In 2019, Walmart was charged with violating the Foreign Corrupt Practices Act for “failing to operate a sufficient anti-corruption compliance program for more than a decade,” adding that the corporation allowed violations to occur “even in the face of red flags and corruption allegations.” Some of those “red flags” included Walmart employees writing letters and emails to Walmart executives expressing their concerns. One employee had received “a wink and a nod” from another employee when inquiring about whether a real estate transaction would violate the FCPA. Another employee noted that Walmart employees in India were making “improper payments to government officials.” The DOJ asserted that Walmart executives were aware of these complaints but did not conduct an inquiry at that time.

In February 2020, Wells Fargo reached a $3 billion settlement with the Department of Justice, SEC, and other regulatory agencies for its unlawful sales practices that spanned more than 15 years. In reaching a decision, the DOJ announced that it had taken into account the fact that top bank leaders 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 sales practices. The DOJ noted that “senior leadership failed to take sufficient action” and “refused to alter the sales model” to prevent the unlawful practices even after they were aware of the conduct.

More recently, a USAA Bank employee’s internal complaints regarding its numerous banking law violations apparently went unheard for nearly six years before finally reaching the doors of federal regulators in March 2020. FinCEN levied $140 million in fines against the bank for violations of the Bank Secrecy Act and anti-money laundering laws after the corporation knew, but ignored, the existence of violations. FinCEN considered “management’s complicity in, condoning or enabling of, or knowledge of the conduct underlying the violations” noting that “for some time, Bank management explicitly acknowledged a monitoring gap” and “had knowledge of the violations” yet failed to “quickly and effectively remediate the identified deficiencies.”

Mitigating the Risks

Because some states, such as New York, require those who seek to take advantage of whistleblower protection laws to report violations within the company before reporting to the government, an internal complaint may just be the whistleblower’s first step before going to an outside agency. This heads up – assuming it makes its way to the company’s counsel – is an opportunity to seize the day. In criminal investigations, the DOJ will weigh all the factors in determining whether to charge a corporation with a crime, including “the pervasiveness of wrongdoing,” “the corporation’s timely and voluntary disclosure of wrongdoing,” and “the corporation’s remedial actions, including, but not limited to, any efforts to implement an adequate and effective corporate compliance program.” (§ 9-28.300 of the Principles of Federal Prosecution of Business Organizations). Where necessary, companies must 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 Justice Department with all non-privileged information about individuals involved in or responsible for the misconduct at issue.”

In FCPA matters, the DOJ gives corporations credit for voluntary self-disclosure, full cooperation with an investigation, and timely and appropriate remediation. (§ 9-47.120 of the FCPA Corporate Enforcement Policy). The SEC also considers the company’s efforts in “self-policing” prior to the discovery of a violation, “self-reporting” a violation when it is discovered, and remediation. (SEC Enforcement Division Cooperation Program). Conversely, sitting on one’s hands not only results in more severe criminal and regulatory consequences but, as in the Abbott Nutrition matter, can result in billions of dollars of liability from a slew of class action and derivative lawsuits, unwanted public scrutiny, and unintended market impacts. Walmart shareholders brought a derivative suit against the board after the DOJ announced a formal investigation into its FCPA violations and, although the suit ultimately was unsuccessful, it resulted in costly legal defense fees and public criticism. In December, Tesla saw its shares fall as much as 6.4% when the SEC announced it had launched an investigation after Tesla’s former quality control manager, Steven Henkes, blew the whistle about fire safety risks associated with Tesla’s solar panels. Henkes claims he was terminated for raising his concerns internally.

Although history demonstrates that no real consequences befall government agencies who fail to act in response to whistleblower reports, the negative business and regulatory consequences for companies that deliberately ignore whistleblower complaints are real in both financial and reputational terms. A company also risks losing any leniency with the government it might have otherwise had if it taken the whistleblower’s complaint seriously at the outset. Company counsel is on the front lines in taking preventative steps to avoid such outcomes by implementing and enforcing an internal review procedure for complaints and, if a violation is discovered, ensuring the company takes meaningful action to address it.

To read more from Robert Anello, please visit www.maglaw.com.

Sloane Lewis, an associate at the firm, assisted in the preparation of this blog.