Year of the Whistleblower
When Martin L. Grass, the former Rite Aid Corp. (RAD ) chairman and CEO, was indicted in late June along with three other company managers, prosecutors tipped their hats to Joe Speaker--a little-known executive at the drugstore chain. Soon after becoming acting chief financial officer at Rite Aid in 1999, Speaker uncovered numerous errors in the company's accounts. He told Grass that the problems were serious enough to require a major restatement but feared the CEO would brush them aside. At the time, the Camp Hill (Pa.) company desperately needed to raise capital to pay debt from an acquisition spree. Grass was pleading with banks to extend a line of credit while trying to persuade the Securities & Exchange Commission to stop holding up a share offering.
What the then 40-year-old Speaker did next went beyond the call of duty. He contacted and personally hired Ralph C. Ferrara, a former SEC general counsel recommended by his brother Pete, a lawyer. Ferrara arranged a private meeting with Rite Aid's audit committee, led by Loews Corp. (LTR ) Co-Chairman Preston R. Tisch. Days later, the brothers drove to a secret Manhattan meeting.
Over the next several hours, the acting CFO nervously relayed an incredible story of accounting chicanery. Inventories had been overvalued, bills were being paid out of reserves set aside to close stores, and millions in expenses had not been properly booked. According to one person present, he warned: "I'm in over my head." Stunned, Tisch and other board members, including former Primerica Corp. Chairman Gerald Tsai Jr. and Hartz Group Inc. Chairman Leonard N. Stern, authorized him to hire whatever help he needed to dig into Rite Aid's books. In the end, $541 million in earnings over the previous nine quarters became $1.6 billion in losses.
Speaker will be a main government witness when Grass and three lieutenants go on trial early next year. All four have pleaded not guilty. A Rite Aid spokeswoman declines to comment. Speaker, son of a former Pennsylvania attorney general, also won't discuss his role in stopping what prosecutors say was one of the most audacious capers in corporate history. "Joe is an ordinary man who was put in an extraordinary position," says his lawyer, Philip S. Khinda. "And he responded in just the way we all hope we would."
This year, dozens of ordinary people have been put in extraordinary positions throughout Corporate America, and like Joe Speaker, they blew the whistle. Some are now familiar names, such as Enron Corp.'s Sherron S. Watkins (page 110) and WorldCom Inc.'s Cynthia Cooper. But most are middle managers who want to avoid the limelight. Behind the scenes, they have all played a critical role in providing enforcers with virtual road maps around complex accounting maneuvers. "Whistleblowers give us an insider's perspective," says Linda Chatman Thomsen, the SEC's deputy director for enforcement, "and have advanced our investigations immeasurably."
It would not be too glib to call 2002 the Year of the Whistleblower. The spectacular blowups at Enron and WorldCom have sensitized employees to the devastation caused by corporate crime. That has helped create a "do the right thing" culture in which employees believe they have little choice but to ring the alarm when they suspect misconduct, despite potentially high personal costs. Watkins and Cooper have helped recast whistleblowers from crackpots to national champions, says Stephen Meagher, a former federal prosecutor who represents whistleblowers. "The business of whistleblowing is booming," he says.
More important, the landmark Sarbanes-Oxley Act of 2002 gives those who report corporate misconduct sweeping new legal protection. An executive who retaliates against a corporate whistleblower can be held criminally liable and imprisoned for up to 10 years. That's the same maximum sentence a mafia don gets for threatening a witness. The Labor Dept. can order a company to rehire an employee without going to court. And fired workers who feel their cases are moving too slowly can request a federal jury trial after six months. "This is a revolution in corporate free speech," says Louis A. Clark, executive director of the Government Accountability Project, a Washington watchdog group that helped write the law. "It's hard to overestimate its impact."
Companies must rethink how they deal with whistleblowers and revisit a wide range of policies. They need to rewrite nondisclosure pacts, meant to keep company secrets inviolate, to differentiate whistleblowing from leaking. And they may no longer be able to enforce rules requiring employees to get permission to speak to the media or lawmakers. Even layoffs must be planned so they are not seen as retaliatory.
Corporate lawyers also have special responsibilities under the new law. If they come across evidence of misconduct, they must report it to top management. If there is no response, the lawyer must report higher up the line, to the board. The aim is to prevent lawyers from sitting idle--and claiming attorney-client privilege--when they see laws broken.
As a result, many executives will have to be coached on the whole phenomenon of whistleblowing, not unlike the sexual harassment training of a decade ago. "You're going to see [corporate] policy changes that set the stage for cultural changes," says John D. McMickle, a lawyer who represents whistleblowers at Chicago's Winston & Strawn.
But these changes aren't going to come quickly--and they certainly aren't going to turn whistleblowing into a fast route to fame and fortune. In the movies, corporate truth-tellers are rewarded for their agonies with vindication. Jeffrey Wigand, the tobacco researcher who revealed that Brown & Williamson Tobacco Corp. knew tobacco was addictive (played by Russell Crowe in The Insider), got to see the industry brought to its knees. The heroes of Silkwood and The China Syndrome pay with their lives, but their dire warnings of the dangers of nuclear power turn out to be justified.
Movies, however, are made only about the precious few with appealing stories. For many, whistleblowers, tattling on the boss still means career suicide--with no applause. Indeed, half of the 200 respondents to an August survey by the National Whistleblower Center in Washington said they were fired after reporting misconduct. Those not canned often face retaliation, such as being demoted to a lesser job. If they leave, they are often blackballed in their industry. "Whistleblowers are like a skunk at a picnic," says Senator Charles E. Grassley (R-Iowa), a long-time advocate of their cause in Congress. "There's great peer pressure to get along in any organization."
Ask Judy Collins, who was recently terminated from her job as a regional director of marketing for homebuilder Beazer Homes USA Inc. Just six weeks after joining the company in March, she alleges she came across financial irregularities as well as efforts to intimidate employees who raised questions. Two weeks after laying out her complaints in an e-mail to the company president, she was fired, she says, for a "personality conflict." Beazer spokesman Ron Warren says the company will not comment on her charges.
Collins says she is now unemployable since her accusations have gotten around. By going public, she may have gone from a gadfly at one company to a perceived troublemaker the entire home-building industry now shuns. "I've gone in for four and five interviews in some cases," she says, "but I never get the job." The Labor Dept. is investigating her claims--not to pass judgment on their validity but to determine if they were the reason for her termination.
Other whistleblowers have endured campaigns of public humiliation. Consider Roy L. Olofson, a former finance vice-president at Global Crossing Ltd. In August, 2001, five months before the company went bankrupt, he sent a letter to its top ethics official alleging that the telecom swapped fiber-optic capacity with other carriers to artificially boost revenues. He was laid off three months later. The SEC and the Justice Dept. are investigating his charges, but that hasn't stopped Global's attack on Olofson's credibility. It claims he sought a large payment in exchange for his silence. Olofson refuses to comment, but on Sept. 24, he gave the House Energy & Commerce Committee a peek into the tortured life of a whistleblower: "Television crews lurk at our front doorGlobal Crossing and its PR machine have accused me of being a disgruntled employeeand Chairman of the Board Gary Winnick [stood] up in front of the entire office and [called] me an extortionist." Global says his job cut was part of a companywide reduction.
So if blowing the whistle is akin to hara-kiri, why do so many do it? There are almost as many reasons as there are whistleblowers. Some, like Richard D. Parks, an engineer from Grass Valley, Calif., are by-the-bookers. These are people highly steeped in a particular discipline, from engineering to accounting to medicine, who take an almost personal offense when professional standards are compromised.
In the 1980s, Parks became something of a cause cél&egrace;bre in the fledgling whistleblowing movement. With two colleagues, he alleged that Bechtel Group Inc.'s cleanup after the Three Mile Island nuclear-power-plant disaster was faulty. He was suspended by Bechtel, then reinstated once multiple federal agencies exonerated him. But he was given a new job about as far from civilization as you can get--a natural-gas plant on the edge of Death Valley. After six months, his job was eliminated. The whole experience, he says, was "hell." Bechtel says Parks's charges were without merit.
Now, he has done it again. In March, Parks filed suit against L.S. Starrett Co. (SCX ), maker of devices that test parts for planes and other complex machines. Parks charges that Starrett, for whom he worked as a subcontractor, tried to conceal from customers such woes as defects in operating software. His charges were bolstered by a Pentagon investigator in an affidavit unsealed on Nov. 6 in U.S. District Court in Greensboro, N.C. A Starrett spokesman denies the charges as "untested hearsay allegations." What makes Parks go to all the trouble? "I've asked myself that many times," Parks says.
Another type, the self-protectors, know about problems that could lead to an investigation. They might even be responsible for some of them. By coming clean, they clear their consciences--and lessen the likelihood of going to jail. That may explain the actions of Rite Aid President Timothy J. Noonan, who wore a wire and recorded Grass allegedly plotting to foil the grand jury investigation. On one recording, Grass is quoted as saying that investigators would never get hold of a computer containing evidence that he backdated letters "unless they use a Trident submarine." On July 10, Noonan pleaded guilty to withholding information from investigators. In exchange for his cooperation, prosecutors are expected to seek probation. Noonan, through his lawyer, would not comment.
Then there are the corporate outliers, people who just don't fit into the culture of the company. Many women working in an environment dominated by men are in this category. Watkins and Cooper, for instance, both worked in macho cultures.
Whatever category they fall into, whistleblowers are going to find life a bit easier. Under the Sarbanes-Oxley law, they need only make a disclosure--to a supervisor, law-enforcement agency, or congressional investigator--that could have a "material impact" on the value of a company's shares. The Labor Dept. is responsible for investigating claims of whistleblowers who say they have been terminated, demoted, or harassed. So far, 16 people have filed complaints.
Sarbanes-Oxley could also rescue some complaints that used to fall by the wayside. Christine Casey, for instance, claims she left her financial-analyst job at Mattel Inc. (MAT ) in 2000 after being pushed aside by supervisors as punishment for pointing out what she believed to be intentionally inflated sales forecasts. Her wrongful-termination suit, filed under a California whistleblower law, was thrown out of Los Angeles County Superior Court in September because, the judge said, Mattel did not fire her. Under the new law, though, the mere allegation of retaliation would have triggered a review. Mattel says it has nothing to add beyond the judge's decision. Casey, who is appealing, says her fast-track career may have been permanently stalled by her choice to speak up.
There are critics who say the law doesn't go far enough. Their main beef: Unlike those who expose government fraud, there are no financial incentives for corporate whistleblowing in the new law. Nor does the act cover private companies. But while the law isn't perfect, Congress for the first time has erected a protective shield around employees who ring the alarm. Corporate managers had better brace themselves.
By Paula Dwyer and Dan Carney, with Amy Borrus and Lorraine Woellert in Washington and Christopher Palmeri in Los Angeles