Whistleblower Protection

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.

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.

A featured story on Employment Law This Week is the new legislation proposed in Congress that aims to clarify whistleblower policies.

The Whistleblower Augmented Reward and Non-Retaliation Act would expand protections for those who blow the whistle on financial crimes. The bill would also resolve a circuit court split on the definition of “whistleblower,” expanding the scope of the term to specifically include employees who only report violations internally, without filing with the SEC or CFTC. The WARN Act aims to broaden monetary incentives for whistleblowers, and increase the scope of protected activities and prohibited retaliation. Whether or not this bill moves forward, we’re likely to see some movement soon on the circuit conflict it addresses, either by legislation or by the courts.

View the episode below or read more about this legislation in an earlier post on this blog.

On September 10, 2015, the Second Circuit Court of Appeals ruled in Berman v. Neo@Ogilvy LLC that an employee who reports an alleged securities violation only to his or her employer, and not to the SEC, is nevertheless covered by the anti-retaliation protections afforded by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).

Berman, a former finance director of Neo@Ogilvy, claimed that his employer and its corporate parent, WPP Group USA, Inc., violated the whistleblower protections of Dodd-Frank by wrongfully terminating him for raising concerns internally about business practices that allegedly constituted accounting fraud.  The companies moved to dismiss the claim, arguing that Berman was not a whistleblower subject to protection under Dodd-Frank because he did not report the alleged violations to the SEC.  The District Court agreed.

In a 2-1 decision, the Second Circuit reversed the District Court’s decision on appeal.  The Court found that the provisions of Dodd-Frank are ambiguous as to whether an employee who reports an alleged violation internally, but not to the SEC, qualifies as a whistleblower.  On the one hand, Section 21F(a)(6) of Dodd-Frank limits the definition of “whistleblower” to include only those individuals who provide information relating to an alleged securities violation to the SEC.  Yet, on the other hand, Section 21F(h)(1)(A) of Dodd-Frank’s retaliation protection provision prohibits retaliation against individuals who make disclosures that are, inter alia, required or protected under the Sarbanes-Oxley Act of 2002 (“SOX”), and SOX protects employees who make internal complaints of suspected securities laws violations without reporting them to outside agencies.

Finding that these were conflicting statutory provisions, the Court deferred to the SEC’s interpretation of the statute, under which an individual is a “whistleblower” if he or she provides information pursuant to Section 21F(h)(1)(A) of Dodd-Frank, which, as explained above, prohibits retaliation against employees for making internal complaints that would be protected by SOX.  Accordingly, the Court held that under SEC Rule 21F-2, “Berman is entitled to pursue Dodd-Frank remedies for alleged retaliation after his report of wrongdoing to his employer, despite not having reported to the Commission before his termination.”

Judge Dennis Jacobs, dissenting, opined that Dodd-Frank is “unambiguous”:  Section 21F(a)(6) is controlling because it defines who is a “whistleblower” under the relevant section of the statute and expressly provides that only those who report to the SEC can qualify.   Judge Jacobs pointed out that Dodd-Frank Section 21F(h)(1)(A), which the majority found creates ambiguity by incorporating protections provided by SOX, does not expand the statutory definition of whistleblower under Dodd-Frank, but instead identifies which acts done by whistleblowers are protected by Dodd-Frank.  In other words, according to Judge Jacobs, Section 21F(h)(1)(A) does not apply to protect a person unless he or she qualifies as a “whistleblower,” as the term is defined by Section 21F(a)(6).  Judge Jacobs criticized the majority for disregarding the plain text of Dodd-Frank’s definition of whistleblower and creating an ambiguity in the statute that does not exist solely to expand the reach of the anti-retaliation provisions of Dodd-Frank.

Notably, the Second Circuit’s decision creates a split in authority with the Fifth Circuit Court of Appeals, which came down the opposite way when faced with the same issue in 2013.  As a result, this issue is almost surely headed to the Supreme Court for resolution. Further, in holding that Dodd-Frank provides a private right of action for those who report violations only internally, the Second Circuit’s decision may lead to significantly more whistleblower retaliation claims in the future because, in comparison to the SOX whistleblower protections, Dodd-Frank offers a much longer statute of limitations, double back pay damages, and no administrative exhaustion requirement.

By David Jacobs and Amy B. Messigian

We would like to call your attention to a significant change to the whistleblower statute in California that went into effect on January 1.  The statute, Cal. Lab. Code section 1102.5, has been substantially expanded beyond its prior form to now protect employees from retaliation for making internal complaints or even potential complaints about suspected violations of federal, state or local law.

California previously protected employees from retaliation for reporting reasonably suspected violations of state or federal laws to a government agency. The new law also extends whistleblower protections to employees who report behavior that they reasonably believe to be illegal to a supervisor or other employee with authority to “investigate, discover or correct,” or to a “public body conducting an investigation, hearing or inquiry.”   The new law also expands these protections to cover complaints about local laws.  Thus, it is possible that a complaint relating to the purported violation of an obscure ordinance could give rise to protection under the amended statute.

Therefore, under the new law any complaint made to human resources that relates to purportedly unlawful conduct may result in the protection of California’s whistleblower statute.  Moreover, these protections will apply regardless of whether the employee is required as a function of his or her job to disclose purported illegal activity.

Also of concern, under the revised provisions of Labor Code section 1102.5, it is unlawful for any person acting on behalf of the employer to retaliate against the employee based on a belief “the employee disclosed or may disclose” the information, either internally or to a government agency.  In effect, the revamped law protects employees who have not yet even complained against “anticipatory retaliation.”

Due to the expansive scope of the new provisions, it is possible that the changes in the law may lead to an increase in whistleblower claims and claims under the Private Attorney General Act brought on behalf of the public welfare.  As violations of Labor Code section 1102.5 may subject an employer to a variety of damages, including civil penalties of up to $10,000 per violation, California employers should consider training their supervisors and human resources personnel on the expansion of the new law in order to prevent against unwitting violations or becoming a test case on the scope of these new provisions. Particularly, supervisors should be reminded to document performance issues as they occur to avoid someone turning into a “whistleblower” to forestall disciplinary action.

We’re happy to announce that Epstein Becker Green’s Whistleblowing & Compliance Law Blog has joined our blog.  Readers of both blogs will benefit from our coverage of whistleblowing and compliance law, in addition to the financial services employment law topics our readers have come to expect.

This combination represents the addition of more than 40 posts dating back to April 2010, with a focus on Dodd-Frank, Sarbanes-Oxley, the False Claims Act, and whistleblowing-related topics.

In addition, we welcome Allen B. Roberts as a primary contributor to the Financial Services Employment Law Blog. Allen, a founding contributor and editor of the Whistleblowing & Compliance Law Blog, is a Member of Epstein Becker Green and Co-Chair of the firm’s Whistleblowing and Compliance Subpractice Group.  He represents public and privately held domestic and international businesses and not-for-profit organizations in developing and effectuating strategy and policies in employment law and labor relations matters, employment agreement formulation and enforcement, employment policy audits, employment due diligence for mergers and acquisitions, and union relations and maintaining union-free status. Allen leads the firm’s representation of several national and multinational clients, counseling on labor and employment compliance, litigation avoidance and strategy, and case management.

We are also pleased to add Lauren Malanga Casey as one of our primary contributors.  Lauren, a Member of the Firm in the New York office, is actively involved in Epstein Becker Green’s Financial Services Subpractice Group.

If you were a regular reader of the Whistleblowing & Compliance Law Blog, we welcome you to the Financial Services Employment Law Blog and encourage you to join its conversations and get to know the blog’s authors.  You can also follow us on Twitter: @fsemployer.

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