GOVERNMENT ACCOUNTABILITY PROJECT

Tom Devine, Legal Director

Amidst hand-wringing about Congress’ failure to go beyond cosmetic post-Enron reforms, the Senate Judiciary Committee has quietly brokered a bipartisan breakthrough for genuine corporate accountability. On April 18, the committee unanimously approved a responsible compromise version of the Corporate Fraud and Accountability Act of 2002. The Act lengthens the statute of limitations and empowers state Attorney Generals to prosecute corporate criminals under existing federal racketeering law. Its centerpiece, however, is legal rights for whistleblowers at publicly-traded corporations. Future Sherron Watkins could not be fired at will when warning corporate leaders or shareholders of consequences from cheating such as bankruptcy, liability or other risks that could sabotage investments.

The bill’s strategy is whistleblower protection to create a safe channel for shareholder and management’s right to know, as well as for testimony in law enforcement investigations. Its goal is to frustrate coverups: employees are protected from reprisal for releasing information the shareholders are legally entitled to under Securities and Exchange Commission disclosure rules. Witnesses in criminal investigations also are shielded.

Disclosure has been the trans-ideological, bipartisan cornerstone of all post-Enron reform proposals, from Democrats to President Bush. The common sense logic is unassailable. Two long-accepted truths are that secrecy is the breeding ground for corruption and sunlight is the best disinfectant. Otherwise even the best corporate leaders are ignorant of misdeeds until they are blamed for the consequences. Similarly, shareholders and their investments are blindsided by risks taken behind their backs.

As eyewitnesses to the birth of scandals, whistleblowers are indispensable to bridge the secrecy gap. Their dormant potential already has been proved anecdotally in the 1980’s, when investors believed whistleblowers over Nuclear Regulatory Commission rubber-stamps and pulled the plug on plants that were accidents waiting to happen. Sherron Watkins acted as a corporate Paul Revere by warning that bankruptcy was coming. Enron chief Ken Lay ignored her at his own peril and sealed his doom.

They are equally invaluable for law enforcement. Their disclosures to the SEC doubled normal rates during congressional Enron hearings. As SEC enforcement chief Stephen Cutler commented, “Because of this phenomenon, among other reasons, we are learning of potential securities law violations earlier than ever before. Keep those cards and letters, not to mention emails, coming.”

Unless rights are locked in, things will soon be back to normal as would-be whistleblowers decide instead to stay silent observers. Ironically, as the norm whistleblowers proceed at their own risk when sounding the alarm. Corporate law is a crazy-quilt of hit or (usually) miss protections generally tucked into specific environmental laws. With scattered exceptions, the lucky ones with rights generally are unemployed prisoners of an administrative law system that commonly takes over two years for decisions, with no chance for interim relief – professionally akin to patients who die while waiting for an operation or organ donor.

Ms. Watkins only survived because Enron collapsed before retaliation could be carried out, and then she became a celebrity. As University of Maryland Professor Fred Alford, author of Whistleblowers: Broken Lives and Organizational Power, observed, “[F]or every Sherron Watkins, there are several hundred whistleblowers that lack the protection of visibility.” Those at Paine Webber, Global Crossings and similar firms will confirm his insight. In some instances they were openly fired for disloyalty – to company managers who themselves were breaching their fiduciary duty of loyalty to shareholders.

Initially reform appeared trapped by a partisan deadlock, not surprising for legislation introduced by four senior Democrats -- Majority Leader Tom Daschle and Judiciary Committee Chair Patrick Leahy in the Senate, and Minority Leader Richard Gephardt and ranking Judiciary member John Conyers. Prior to a scheduled April 11 Senate committee vote, the best sponsors hoped for was a 10-9 party line vote. Then the staffs of longtime whistleblower champions Senators Leahy and Grassley went to work and crafted a composite model that sparked a consensus. They agreed to drop punitive damages, and to restrict court access unless administrative proceedings are bogged down over 180 days.

The Leahy-Grassley compromise is a win-win for everyone except corporate crooks. Honest managers, boards, shareholders, whistleblowers and federal law enforcement agencies will be empowered with an early warning system to prevent new Enron disasters by nipping scandals in the bud. Unanimous committee approval suggests the Senate may be ready to stop partisan posturing and make a difference. Now it’s the House Judiciary Committee’s turn.

The Leahy-Grassley bill should be a beachhead for other stalled, pending legislation. The bipartisan Paul Revere Freedom to Warn Act would secure Congress’ right to know through similar protection for anyone who blows the whistle to Congress. Amendments to revive the Whistleblower Protection Act for federal employees also are stalled. That law was the strongest free speech law in history when unanimously approved by Congress in 1989 and strengthened in 1994. But after brazenly hostile activism by a court with a monopoly on judicial review, it is a trap. The rules have been rigged so that whistleblowers are guaranteed legal endorsement of reprisals they challenge, unless they present “irrefragable” proof of government misconduct. That means undeniable, uncontestable proof, although the law as written only calls for evidence of a reasonable belief. In the absence of a confession there is no such thing as a whistleblower. Amazingly, the House has not even scheduled hearings on the bill.

Throughout the Enron hearings, legislators of both parties rhetorically lionized whistleblowers and chastised those who violated their “duty” by remaining silent. It is time to add genuine free speech rights to the rhetoric, which rings cynically hollow to someone fired and facing bankruptcy for warning a corporation of that same risk. It is unrealistic to expect whistleblowers to defend shareholders or the public if they can’t defend themselves. Like current corporate whistleblower laws, Profiles in Courage are the exception, not the rule.