Whistle-blower measure an outgrowth of corporate scandals

The San Francisco Chronicle

Sacramento — Despite warnings that California could become a land of snitches, the state Senate approved legislation Thursday requiring executives to tell the attorney general about accounting abuses and creating a government hot line for whistle-blowers.

Republicans and a few Democrats said the measure would chill relationships between co-workers and even friends. But supporters said corporate executives had a public duty to report lies and shell-game accounting that could devastate shareholders.

“We expect no less from people — honesty for ourselves and individuals and honesty in the marketplace,” said state Sen. Martha Escutia, D-Whittier, author of the measure, which was passed by the Senate 21-14 and now heads to the Assembly.

Escutia’s measure is the most significant state reform to emerge since the fall of Enron Corp. and its accounting firm, Arthur Andersen, amid financial- reporting abuses that cost investors billions of dollars. Congress has reacted with nearly 50 reform measures, none of which has passed yet.

The state Senate debate included ominous warnings about creating a world where neighbors inform on neighbors and where snitching to the government is rewarded.

Sen. Maurice Johannessen, R-Redding, who was born in Norway and lived as a young boy under the Nazi occupation of Oslo, said the measure would “reward people who fink” and instill fear in the workplace “because you don’t know if your neighbor is watching you.”

“You can’t fix everything in life, and you certainly can’t fix it by turning us into a police state,” said state Sen. Steve Peace, D-El Cajon, who said the bill “turns us all into snitches and consequently criminalizes everyday life.”

Peace openly sneered at “alleged” whistle-blowers at Enron who came forward,

he said, only when their stock options were in the tank. He noted that Enron Vice President Sharon Watkins, hailed as a whistle-blower hero, had never informed the public or government about alleged wrongdoing but simply wrote a skeptical memo to the company chairman.

The Escutia bill expands on California whistle-blower laws first enacted for employees of private companies in 1984 and expanded to state workers eight years later. Generally, the laws shield employees from retaliation.

Under the new measure, corporate executives must inform the attorney general within 15 days of any false statements they discover being made about the value of their company — or face $100,000 fines. If the misleading statements are corrected within the 15 days, no disclosure is required.

The measure, SB 1452, creates a whistle-blower hot line at the attorney general’s office so employees can report faulty corporate practices that may be propping up a company’s value.

The attorney general would then turn over these alleged abuses to regulators such as the state Department of Corporations or the federal Securities and Exchange Commission. Individual companies could be liable for up to $1 million in fines for passing misleading information to shareholders, government regulators or stock analysts.

Business groups dislike the measure because it allows ordinary citizens to act as a “private attorney general” and file civil lawsuits for alleged violations. That, they believe, could lead to a legal shakedown by unscrupulous lawyers looking to win fees with quick settlements.

The measure is sponsored by the Foundation for Taxpayer and Consumer Rights,

which has been funded in part by trial lawyers. The group hailed passage of the bill Thursday as creating “an early warning system to protect the public from the next corporate scandal.”

Other supporters said the debate over freedom and snitching was overwrought and masked a fairly simple bill that protects innocent people and demands corporate accountability. Escutia called the measure a small price to pay for the tax breaks and other government accommodations that businesses enjoy.

“We are not talking about snitching on your neighbor,” said Sen. Sheila Kuehl, D-Santa Monica. “We are talking about the officers of a corporation having a duty to report their knowledge of illegal activity. . . . What this really is about is coverups.”

The Escutia measure passed with the bare majority needed in the Democratic- dominated Senate. It likely faces a difficult battle in the more business- friendly Assembly, which has until the end of August to consider the measure.

The Assembly three weeks ago rejected another reform bill that emerged after the Enron-Andersen scandal. That measure would have prohibited accountants from simultaneously working as business consultants and auditing the same company’s books.

A spokeswoman for Gov. Gray Davis said the Democratic governor “supports whistle-blowers in general” but hadn’t analyzed the Escutia measure enough to take a position. Attorney General Bill Lockyer also has not stated his position.

Sandra Michioku, a spokeswoman for Lockyer, said that his office already took whistle-blower calls but that a provision in the Escutia bill requiring employers to post the hot line number in offices “would be useful in ferretting out wrongdoing.”

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E-mail Robert Salladay at [email protected].