Dodd-Frank whistleblowing

On June 25, 2018, President Trump signed into law the Whistleblower Protection Coordination Act (the “Act”), permanently reinstating the Whistleblower Ombudsman Program, which was created in 2012 to encourage employees of federal government administrative agencies to report wrongdoing but expired on November 27, 2017 due to a five-year sunset clause.

The Act, which Congress passed with bipartisan support, reauthorizes a “Whistleblower Protection Coordinator” at each administrative agency’s Office of Inspector General (“OIG”) to educate agency employees about their rights to blow the whistle on suspected wrongdoing and the remedies available to them should their employers retaliate against them for doing so. Additionally, the Coordinator is tasked with ensuring that the OIG handles such whistleblower complaints promptly and thoroughly and coordinates with the U.S. Office of Special Counsel, Congress, and other agencies to address the allegations appropriately.

While the Act is specific to federal government employees and has no impact on the anti-whistleblower retaliation protections of the Sarbanes-Oxley and Dodd-Frank Wall Street Reform and Consumer Protection Acts, it is notable that the Trump administration passed the Act rather than letting the Whistleblower Ombudsman Program remain expired. This executive action suggests that the Trump administration does not currently appear to be intent upon rolling back legislative efforts to encourage employees to report suspected legal violations and to protect those that do from retaliation by their employers.

This post was written with assistance from Cynthia Joo, a 2018 Summer Associate at Epstein Becker Green.

Featured on Employment Law This Week:  The Securities and Exchange Commission (“SEC”) recently issued the largest whistleblower awards under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in history.

Affirming the payout of over $49 million to two whistleblowers and over $33 million to a third for information that led to successful securities law prosecutions. Dodd-Frank established the whistleblower “bounty” program in 2010, and the SEC reports that it has awarded more than $262 million so far, to 53 whistleblowers.

Watch the segment below and read our recent post.

On March 19, 2018, the SEC issued an Order jointly awarding two whistleblowers more than $49 million, and awarding a third whistleblower more than $33 million, for reporting information to the SEC that led to its successful prosecution of an enforcement action against the perpetrators of securities violations.

In 2010, the Dodd-Frank Act amended the Securities Exchange Act of 1934 to include Section 21F, entitled “Securities Whistleblower Incentives and Protection.” Among other things, Section 21F established a whistleblower “bounty” program that entitles individuals who voluntarily provide the SEC with original information that leads to a successful SEC enforcement action resulting in monetary sanctions greater than $1 million to receive an award of between 10 and 30 percent of the total sanctions collected.

The awards announced earlier this week are the largest awards issued to whistleblowers since the inception of the whistleblower “bounty” program. The previous record was set by a $30 million award in 2014. To date, the SEC has awarded more than $262 million to whistleblowers.

These recent awards are a good reminder that employers must be more diligent and cautious than ever when it comes to securities compliance and investigating internal complaints by would-be whistleblowers, as the awards available to tipsters under the “bounty” program are a tremendous incentive to report to the SEC. This is likely the reason why the program has been steadily gaining traction, with the number of whistleblower tips submitted to the SEC increasing every year since its inception. Indeed, in its last Annual Report to Congress on the Whistleblower Program, the SEC’s Office of the Whistleblower reported that from FY 2012 to FY 2017, the number of whistleblower tips received by the SEC had grown by almost 50 percent.

Featured on Employment Law This Week: Supreme Court: Dodd-Frank Protections Are Limited

Dodd-Frank whistleblower protections are limited – The Supreme Court has ruled that whistleblower protections under the Dodd-Frank Act apply only to those who report violations to the SEC. The Act protects whistleblowers from termination, demotion, and harassment. People who report to the SEC, other regulatory or law enforcement agencies, or to company management are still protected under the 2002 Sarbanes-Oxley Act. Dodd-Frank’s anti-retaliation provision permits whistleblowers to recover double back pay damages – Sarbanes Oxley does not.

Watch the segment below and read our recent post.

On February 21, 2018, the U.S. Supreme Court resolved a circuit split and ruled in Digital Realty Trust, Inc. v. Somers that Dodd-Frank’s anti-whistleblower retaliation provision (15 U.S.C. § 78u–6(h)) does not protect employees who report alleged securities violations only to their employers, and not to the SEC.

Paul Somers (“Somers”), a former Vice President of Portfolio Management for Digital Realty Trust, claimed that his employer violated the whistleblower protections of Dodd-Frank by terminating him in retaliation for complaining to management about suspected securities violations, including the elimination of required internal controls and financial misconduct by his supervisor. Somers never reported the alleged violations to the SEC. Digital Realty Trust therefore moved to dismiss the claim on the ground that Somers was not a “whistleblower” under Dodd-Frank because the statute’s definition of “whistleblower” only covers individuals “who provide . . . information . . . to the [SEC].”

The District Court denied the motion. It held that whether an employee who reports an alleged violation internally, but not to the SEC, qualifies as a whistleblower is ambiguous under Dodd-Frank. Given the apparent ambiguity, the Court deferred to the SEC’s interpretation of the statute set forth in SEC Rule 21F-2, which provides that an individual is a Dodd-Frank “whistleblower” even if he or she only reports internally. The Ninth Circuit Court of Appeals affirmed, joining the Second Circuit’s position on the issue (previously discussed here) and adding to a split with the Fifth Circuit, which had reached the opposite conclusion and held that Dodd-Frank does not protect employees who only report suspected violations internally.

The Supreme Court reversed the Ninth Circuit, however, and finally resolved the split in authority, holding that “Dodd-Frank’s text and purpose leave no doubt that the term ‘whistleblower’ . . . carries the meaning set forth in the section’s definitional provision.” The Supreme Court ruled that because Somers did not provide information to the SEC before his termination, he did not qualify as a “whis­tleblower” at the time of the alleged retaliation and is ineligible to seek relief under Dodd-Frank’s anti-retaliation provision.

The impact of this ruling on the whistleblower landscape remains to be seen. It may reduce the number of frivolous whistleblowers and whistleblower lawsuits since employees might be reluctant to pursue baseless allegations of securities violations if they have to first report them to the SEC before they can invoke Dodd-Frank’s protections against retaliation. Further, employers should take note that the Supreme Court made clear in its decision that an employee who reports misconduct both to the SEC and internally is a protected whistleblower, and can recover under Dodd-Frank’s anti-retaliation provision by proving that the retaliation was the result of the internal whistleblowing, without demonstrating that the retaliation was motivated by the SEC disclosure.

Last August, we reported on two significant cease-and-desist orders issued by the SEC that, for the first time, found certain language in the confidentiality and release provisions of separation agreements to violate the SEC’s Rule 21F-17(a), which precludes anyone from impeding any individual (i.e., a whistleblower) from communicating directly with the agency.[1] Since then, the SEC has continued its aggressive oversight of separation and confidentiality agreements, with substantial repercussions for some employers. These orders, a select number of which we summarize here, have companies engaging in a serious review and rethinking of their confidentiality restrictions and other relevant provisions in their agreements and handbooks, and considering whether and what remedial steps to take proactively to cure any issues with the language in these key documents.

In Anheuser-Busch InBev SA/NV (Sept. 28, 2016), the company entered into a separation agreement in late 2012 with a specific employee after his termination and subsequent mediation of various alleged employment law claims. The separation agreement contained provisions (i) prohibiting the employee from disclosing confidential or proprietary company information, with no carve-out for reporting to government agencies; (ii) prohibiting the employee from disclosing the substance of the separation agreement; and (iii) imposing a $250,000 liquidated damages provision in the event that the employee breached the confidentiality provisions. After signing the agreement, the employee, who had been voluntarily communicating with SEC in connection with an ongoing investigation, ceased doing so.

The cease-and-desist order—which is a negotiated resolution of the matter once the SEC determines that a company has violated its rules or regulations—did not require the company to make any additional changes to its separation agreements because, in September 2015, the company had amended separation agreements to state:

I understand and acknowledge that notwithstanding any other provision of this Agreement, I am not prohibited or in any way restricted from reporting possible violations of law to a governmental agency of entity, and I am not required to inform the Company if I make such reports.

The order required the company to contact only certain former employees identified by the SEC to inform them that they were not prohibited from providing information to the SEC, rather than all employees who had signed separation agreements since the rule was implemented in August 2011, as has been required in other cases. In addition, unlike other cases, it appears that there was no separate monetary penalty against the company for violating Rule 21F-17(a).

In NeuStar, Inc. (Dec. 19, 2016), the company’s severance agreements included a non-disparagement clause with the following language:

Except as specifically authorized in writing by NeuStar or as may be required by law or legal process, I agree not to engage in any communication that disparages, denigrates, maligns or impugns NeuStar . . . including but not limited to communication with . . . regulators (including but not limited to the Securities and Exchange Commission . . .) [emphasis added].

Any breach of this clause by the employee resulted in the required forfeiture of all but $100 of the severance paid under the agreement. The SEC found that “at least one” former employee was impeded by this clause from communicating with the agency—although the SEC does not hesitate to find violations of Rule 21F-17(a) even where there is no evidence that anyone has actually been impeded.

To settle the matter, the company agreed to pay a civil penalty of $180,000 and to contact 246 former employees to inform them that the severance agreements they signed between August 12, 2011, and May 21, 2015, did not prevent them from communicating concerns about potential violations of law or regulation to the SEC. No remedial revisions to the company’s template severance agreement were required because the company had voluntarily, after commencement of the investigation, removed the reference to “regulators” from the non-disparagement clause and included a more common provision that stated, “In addition, nothing herein prohibits me from communicating, without notice to or approval by NeuStar, with any federal government agency about a potential violation of a federal law or regulation.”

Most recently, in HomeStreet, Inc. (Jan. 19, 2017), certain severance agreements used by the company had contained common waiver language used, in form and substance, by many employers:

This release shall not prohibit Employee from filing a charge with the Equal Employment Opportunity Commission or discussing any matter relevant to Employee’s employment with any government agency with jurisdiction over the Company but shall be considered a waiver of any damages or monetary recovery therefrom [emphasis added].

The SEC previously found that employees might interpret such waivers as applying to the agency’s whistleblower monetary incentive award program and, therefore, would unlawfully impede employees from coming forward to the SEC or reporting potential violations of the securities laws. The SEC reached the same conclusion in this case.

Prior to the investigation, however, the company had voluntarily revised its standard severance agreement to substitute the following:

Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with any federal, state or local government agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be commenced by any Government Agency including providing documents or other information without notice to the Company. This Agreement does not limit the Employee’s right to receive an award for information provided to any Government Agencies [emphasis added].

Thus, the cease-and-desist order did not require further revisions to the severance agreement because the foregoing language largely tracks revised language that the SEC had required in one of the previous orders issued last summer. Notwithstanding its proactive revisions to its agreements, the company still had to agree to a $500,000 civil penalty and to contact certain former employees who had signed the agreement to provide a link to the order and inform them that severance agreements did not prevent them from reporting information to the SEC or seeking and obtaining a whistleblower award from the SEC.

The NeuStar and HomeStreet orders serve to highlight that, even when a company has revised its agreements voluntarily to comply with Rule 21F-17(a), the SEC may still impose monetary penalties and potentially burdensome and undesirable obligations to contact former employees who have signed problematic separation agreements to inform them that, notwithstanding the money they were paid in conjunction with their separation agreements, they remain free to report any company wrongdoing—real or perceived—to the SEC.

What Employers Should Do Now

Companies wishing to avoid SEC scrutiny should do the following:

  • Review current separation and severance agreement templates to determine whether they are in compliance with Rule 21F-17, which would include a review of provisions such as, among others,
    • future monetary waivers,
    • non-disclosure of confidential information, and
    • non-disparagement clauses.
  • If necessary, work with legal counsel to determine appropriate revisions or “carve-outs” to bring those agreement templates into compliance.
  • Discuss with legal counsel whether to take affirmative steps to remedy past uses of confidentiality or waiver provisions that would be unlawful under the SEC orders.
  • Review other types of confidentiality and waiver agreements with employees, in whatever form they are used, to ensure that those agreements do not similarly violate Rule 21F-17.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

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[1] See the Epstein Becker Green Act Now Advisory titled “SEC Finds Certain Separation Agreement Provisions Unlawful Under Dodd-Frank Whistleblower Rule” (Aug. 18, 2016).

On the campaign trail, President Trump vowed to “dismantle” Dodd-Frank. Dodd-Frank was enacted in the wake of the 2008 financial crisis to curtail risky investment activities and stop financial fraud through increased oversight and regulation of the banking and securities industries. Among other things, it amended the Sarbanes-Oxley Act, Securities Exchange Act, and Commodity Exchange Act to include monetary incentives for individuals to blow the whistle on suspected financial fraud and stronger protections for whistleblowers against retaliation by their employers. President Trump has criticized Dodd-Frank, arguing that it is overbroad and inhibits economic growth. Now that he is in office, President Trump has the statute squarely in his crosshairs, and he is poised to impact its whistleblower protections on the legislative, administrative, and judicial fronts.

From a legislative standpoint, President Trump has wasted no time in seeking to roll back Dodd-Frank’s statutory framework. Only two weeks after his inauguration, he issued an EO titled “Core Principles for Regulating the United States Financial System,” which directs the Treasury Secretary to consult with the heads of financial agencies, including the Commodity Futures Trading Commission and the Securities and Exchange Commission (“SEC”), to find ways to conform U.S. financial regulations, including Dodd-Frank, to the Trump administration’s “Core Principles.” These “Core Principles” (detailed in the second article of this Take 5) are broad-sweeping and include, among other things, requiring “more rigorous regulatory impact analysis” for new laws and “mak[ing] regulation efficient, effective, and appropriately tailored.” While the precise scope of these principles is undefined (perhaps intentionally so), they appear to demonstrate a clear first step toward deregulation in the financial sector and may be a shot across the bow signaling the President’s intent to scale back—or at least halt any expansion of—Dodd-Frank, including its whistleblower protections.

Additionally, President Trump is well positioned to substantially affect the SEC’s administrative enforcement of Dodd-Frank’s whistleblower laws. Dodd-Frank created the SEC Office of the Whistleblower (“OWB”) to enforce its comprehensive whistleblower program. As reported in the 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program, since the OWB was established, the SEC has (i) awarded more than $100 million in bounty awards to whistleblowers who provided information leading to successful enforcement actions, (ii) independently sued employers for retaliating against employees for reporting alleged securities violations, and (iii) made it a top priority to find and prosecute employers that use confidentiality, severance, and other agreements that impede their employees from communicating with the SEC.

The SEC’s enforcement agenda could change significantly, however, under the Trump administration. Specifically, in 2017, President Trump will have the opportunity to appoint four out of the five SEC Commissioners (three seats are now vacant, and another will become vacant in June). He has nominated Jay Clayton—a corporate attorney who has spent his career representing financial services firms in business transactions and regulatory disputes—to fill one of those vacancies and serve as SEC Chair. New SEC leadership may result in the potential replacement of the sitting OWB Chief and alter the OWB’s current enforcement strategies. Thus, through his administrative appointments, President Trump may attempt to temper the SEC’s aggressiveness and focus when it comes to enforcement of Dodd-Frank’s whistleblower protections to more closely reflect his vision for less onerous regulation of the financial sector.

The President is also uniquely situated to influence the application of Dodd-Frank in the courtroom. Indeed, President Trump has inherited more than 100 federal court vacancies that he must fill, including one on the U.S. Supreme Court, giving him the opportunity to shape how Dodd-Frank’s whistleblower laws will be interpreted and applied by federal judges across the country. One of the most critical issues that hangs in the balance is whether an employee who reports an alleged securities violation only to his or her employer, and not to the SEC, is protected by Dodd-Frank’s anti-whistleblower retaliation provision. At present, there is a circuit court split on this issue. In 2013, the U.S. Court of Appeals for the Fifth Circuit held in Asadi v. G.E. Energy United States, LLC, that an employee who only reports a suspected violation internally is not a protected whistleblower for the purposes of Dodd-Frank’s anti-relation provision. In 2015, however, the Second Circuit Court of Appeals reached the opposite conclusion in Berman v. Neo@Ogilvy LLC. The question has since come before the Sixth Circuit Court of Appeals (which declined to rule on it) and is currently pending before the Courts of Appeals for the Ninth and Third Circuits, and it will almost certainly end up before the U.S. Supreme Court for resolution. Accordingly, President Trump’s federal judicial appointments—particularly his nomination of Judge Neil Gorsuch to the U.S. Supreme Court—may play a pivotal role in establishing exactly who is protected under Dodd-Frank’s proscription against whistleblower retaliation.

Ultimately, it is unlikely that President Trump will actually be in a position to completely “dismantle” Dodd-Frank. Yet, there is no question that he has at his disposal the power to greatly impact the statute at the legislative, administrative, and judicial levels, and there is little doubt that change is on the horizon.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

One of the featured stories on Employment Law This Week – Epstein Becker Green’s new video program – is the SEC reminder that their bounty program applies to external whistleblowers.

The U.S. Securities and Exchange Commission has awarded $700,000 to a whistleblower who was not employed by the company he exposed. The external whistleblower discovered the issue when he ran a detailed analysis on the company. The agency explained that analysis from “industry experts” is as valuable as insider information. The whistleblower program began after the Dodd-Frank Act was passed and has now yielded $55 million in awards. This latest award raises new questions, including how the SEC will define “industry experts.”

See below to view the episode or read more about this important decision in an earlier post on this blog.

As we mentioned before the holiday, I was recently interviewed on our firm’s new video program, Employment Law This Week.  The show has now released “bonus footage” from that episode – see below.

I elaborate on my recent post with Jason Kaufman, “2nd Circuit Expands Dodd-Frank Anti-Retaliation Protection to Cover Internal Whistleblowing.”

Employment Law This Week – Epstein Becker Green’s new video program – features an interview with attorney John Fullerton, a founding contributor to this blog.

Mr. Fullerton discusses the lack of clarity on what constitutes a whistleblower. Marketing firm Neo@Ogilvy has decided not to appeal to the U.S. Supreme Court in a case that would have tested the definition of a whistleblower under the Dodd-Frank Act. At issue is whether an employee can be eligible for anti-retaliation protection under the Dodd-Frank Act even if he or she does not provide information of corporate wrongdoing directly to the SEC. The U.S. Court of Appeals for the Fifth Circuit says “no,” but the Second Circuit disagrees.

Click below to view the episode and also see our earlier post “2nd Circuit Expands Dodd-Frank Anti-Retaliation Protection to Cover Internal Whistleblowing.”