Sunday, January 9, 2011

ABA Securities Regulation Committee whistleblower comments

Sent: 1/9/2011 4:11:44 P.M. Central Standard Time

Subj: Federal Regulation of Securities Committee comments on SEC whistleblower rules

Dear Mr. Rubin,

Your Committee's comments on the SEC's proposed whistleblower rules are perspicacious about Dodd Frank "involving the balancing of a number of important, and sometimes competing, public policy goals," that the SEC rules should "operate in tandem with, and support and strengthen, the existing matrix of laws, regulations and policies" relative to whistleblowing, and the importance of "the establishment of effective controls and procedures by companies to ensure legal compliance."

Your Committee's comments caution:

In considering its final rules, the Commission should also be mindful of the potential for harm that an unbalanced whistleblower program may present. The risks include rewarding and even encouraging wrongdoers, creating incentives (by reason of over-broad anti-retaliation provisions and substantial monetary awards) to bypass or upend effective company programs for the investigation of and response to wrongdoing, and eroding significant attorney-client protections. An unbalanced program could lead to a flood of frivolous and ill-informed whistleblower claims that would require the devotion, at considerable expense, of significant investigative resources by the Commission and the companies implicated. None of these undesirable results would benefit companies, their shareholders or the investing public generally.

Your Committee's letter then proposes, "by refining certain of the proposed provisions and by adopting additional provisions to further enhance the integrity of Regulation 21F, the Commission can satisfy its statutory mandates and policy objectives, while at the same time minimizing the risks referred to above."

Your Committee's comments then go on for 30 pages meticulously articulating suggested modifications to the rules and discussing how better balances will be attained by the changes.

The Committee's meticulous perspicacity is highly laudable. Similar sensitivities to "important, and sometimes competing, public policy goals" are manifested by many commenters across a range of perspectives, including managment, investors, ethics and compliance officers, and lawyers, as well as the SEC itself. (In its press release, the SEC says, "The proposed rule reflects the consideration of a number of potentially competing interests, and balances the need to encourage whistleblowers to come forward without promoting unintended consequences." Your Committee acknowledges this, saying: "The Committees [referring also to the Committee on Corporate Laws] understand that the Commission has been sensitive to many of these considerations in its Proposing Release.")

The comment I submitted to the SEC on January 3rd takes a different tack, and may even be unique in what it advocates. In my January 3rd comment, I say,

It is submitted that (i) in dealing with corporate wrongdoing, the law is unacceptably deficient from a deterrence standpoint in the way the law fails to punish officers, employees and other individuals who participate in and are responsible for the design, implementation, and carrying out of corporate acts that comprise corporate wrongdoing, (ii) the law is mistaken in its willingness to assume punishment of a corporation can achieve adequate deterrence, and (iii) the law fosters a mindset and a willingness of some persons to take advantage of the foregoing deficiencies and to benefit from them at the expense of innocent parties, such as shareholders . Until these deficiencies are addressed by lawmakers, regulators, judges and others, there will be similar deficiencies connected with the whistleblower program, the program will fall short in achieving deterrent objectives, and the program will be at risk of being unduly exploited for personal gain and benefit in a fashion similar to that referred to in the preceding sentence.
Accordingly, lawmakers, regulators and others should first correct the foregoing deficiencies in the law before the proposed whistleblower program is put in place.

The main driver of my comment is the regime of class action litigation that prevails in the country.

I think the class action litigation regime has its own "number of important, and sometimes competing, public policy goals"and is deserving, even more so than the whistleblower rules because of the greater impact of the former, of assiduous "balancing" of "competing interests" and avoiding "unintended consequences;" however, In contrast to the meticulous balancing that commenters and the SEC are going through in the narrow niche of the whistleblower rules, I think there has been a gross absence of balancing, by lawmakers, judges, lawyers, public policy advocates and scholars, and others, of the "important, and sometimes competing, public policy goals" the civil law is supposed to serve. In my view, those persons have not been "mindful of the potential for harm that an unbalanced" class action litigation regime presents. The "risks include rewarding" plaintiffs' lawyers in a way that creates incentives for, and that has resulted in, (i) disregarding distinctions between intentional wrongdoers, negligent wrongdoers and innocent parties, especially in the context of corporations comprised of a conglomeration of officers, employees, shareholders and customers, (ii) irrational in terrorum levels of potential liability and legal cost that improperly coerce unjust settlement payments, particularly from inadequately represented innocent parties, (iii) avoidance of determinations of wrongdoing in cases at bar and a concomitant avoidance of putting the world on notice about what is wrongful and what is not wrongful, so that any action or decision going forward can be subject to extractomg a settlement payment ex post facto, (iv) disregard of rational cost/benefit principles, (v) impairment of deterrence by distracting attention from, and diverting available resources away from, imposing punishment on culpable officers and employees, and (vi) blindness to a "matrix" of societal mechanisms that should be working "in tandem" for achieving objectives of providing compensation to harmed parties and of deterrence (such mechanisms including, besides civil liability, private insurance, governmental and charitable welfare, natural disaster relief, the criminal law and criminal prosecutors, state attorneys general, and regulatory agencies).

While I commend your Committee, other commenters, and the SEC for their sensitivities to proper balancing being accomplished in the whistleblower rules, I fault many lawmakers, judges, lawyers, and policy advocates and scholars, for, in my view, a colossal failure to bring similar perspicacity to the establishment and maintenance of the class action litigation regime. As my January 3rd comment points out, I believe that failure is relevant to the whistleblower rules.

I hope, by means of my January 3rd comment, and other communications, such as this email, I am able to inform and persuade others about my advocacy.

Thank you for your attention.

Robert Shattuck

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