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News February 21, 2011 Issue

SEC Taps Enforcement Veteran To Lead Whistleblower Office

Sean McKessy, a veteran of the Division of Enforcement and the corporate legal teams for companies such as AOL, Altria and Caterpillar, was named last week to oversee the new Whistleblower Office in the Division of Enforcement. That office, said the SEC’s February 18 press release, will consolidate "existing resources" to administer the whistleblower provisions called for by The Dodd-Frank Wall Street Reform and Consumer Protection Act.

Among those existing resources is the SEC’s "Enforcement Cooperation Initiative." The year-old program is designed to help Enforcement staff develop early, initial, and credible evidence supporting the strongest possible cases. The initiative is targeted more toward participating wrongdoers than classic whistleblowers however, and does not involve payment of bounties. Even so, Division of Enforcement director Robert Khuzami called it a "potential game-changer," saying "[t]here is no substitute for the insiders’ view into fraud and misconduct that only cooperating witnesses can provide."

McKessy will lead a program charged with working with whistleblowers, handling their tips and complaints, and helping the Commission determine the awards for individuals who provide the agency with information that leads to successful enforcement actions.

As a corporate attorney, McKessy has been a compliance officer, handled whistleblower complaints, and understands the workings of internal corporate compliance programs, said Khuzami.

McKessy has a big job ahead of him. SEC resources are tight, and if Congress gets its way, may become even tighter. The SEC has not yet finalized the rules it proposed in November to implement Dodd-Frank’s whistleblower provisions, which should allow McKessy some involvement in that process.

SEC General Counsel David Becker (who is leaving the staff at the end of this month) recently indicated that whistleblowers should be able to approach the SEC directly, without first giving a corporation the chance to do the right thing. That would be appropriate he said, for compliance programs that exist only on paper – even though "elaborately conceived and extensively documented" – that are "shams."

SEC commissioners such as Elise Walter and Kathleen Casey might agree. Expressing sentiments shared by Casey when the rules were proposed, Walter said that any whistleblower program that is established should not "undercut existing and effective company compliance and other internal processes for responding to violations of the federal securities laws."

How the SEC will mark the path between "effective" company compliance and "sham" programs remains to be seen.