SEC Whistleblowers May Not Receive Jury Trial in Retaliation Cases

0

 

A recent decision in a Georgia federal court presents serious implications for SEC whistleblowers subject to retaliatory employment actions.  In an apparent case of first impression, on Nov. 12, U.S. District Judge J. Owen Forrester of the United States District Court for the Northern District of Georgia rendered a decision holding an SEC whistleblower is not entitled to a jury trial in a retaliation action.  The whistleblower in the matter was a former compliance manager for BlueLinx Holdings, Inc. who brought his concerns that the company violated securities laws to the SEC and the company’s internal ethics committee.

The Dodd-Frank Wall Street Reform and Consumer Protection Act enacted a series of sweeping regulatory reforms, designed to prevent the abuses and risky Wall Street behavior, which in large part led to our nation’s latest economic calamity, dubbed the “Great Recession.”  In addition to financial reforms, Dodd-Frank mandated the creation of the Securities and Exchange Commission’s Office of the Whistleblower.  This office is tasked with processing and overseeing complaints of securities violations brought forth by knowledgeable whistleblowers.

Critically important to the program’s success, Dodd-Frank also created significant anti-retaliation protections for whistleblowers, which mirror those of the False Claims Act.  Pursuant to Dodd-Frank, it is unlawful for an employer to take retaliatory actions, including but not limited to termination, against employees attempting to report securities violations.  Dodd-Frank expressly grants whistleblowers, subject to retaliatory action, the right to file a civil lawsuit in federal court, seeking doubled back-pay, reinstatement, and attorney fees and costs.

In his decision, Judge Forester determined that these individuals are not entitled to a jury trial, as required by the Seventh Amendment to the U.S. Constitution.  Judge Forester determined that the remedies available to SEC whistleblowers in retaliation actions are inherently equitable in nature.  Plaintiff’s seeking equitable remedies, such as injunctive relief, are not entitled to a jury trial.  The Court was not persuaded by the plaintiff’s argument that the statutory relief of double back-pay was akin to compensatory or punitive damages, prayers for relief which generally entitle a litigant to a jury trial.  Finally, the Court found legislative silence on the issue favored the defendant’s position.

While the implications of this case outside the Northern District of Georgia are not yet known, if the rationale employed by Judge Forester is widely adopted the ramifications for SEC whistleblowers could be significant.  Generally speaking, a jury trial in an action claiming that a whistleblower was subject to retaliation is certainly preferable to a bench trial.  Many trial lawyers will attest that the juries are more receptive than judges to the emotional drama presented by the facts of such cases.

The case is Pruett v. BlueLinx Holdings, Inc., case number 1:13-cv-02607, in the U.S. District Court for the Northern District of Georgia.

McEldrew Young Purtell Merritt is a nationwide leader in whistleblower representation and has successfully represented numerous clients in some of the nation’s largest qui tam cases for over a decade.  For a free confidential consultation with one of our SEC whistleblower attorneys concerning whistleblower protections from retaliation, please call Eric L. Young, Esquire at (800) 590-4116 or complete the online form here.

 

The High Price of Attempted Whistleblower Retaliation

0
The High Price of Attempted Whistleblower Retaliation

Barclays fined $15 Million for CEO’s Attempt to Identify Whistleblowers

The New York Department of Financial Services (DFS) issued a press release this past December  announcing a $15 million penalty against Barclays Bank PLC for violations of New York state banking laws. The sanctioned conduct involved Barclays CEO, James E. Staley, who attempted to discover the identity of an anonymous whistleblower or whistleblowers.  The saga began in 2016 when an anonymous person or persons sent two letters to a senior member of Barclays’ management.

How 700 Bank Whistleblowers Get Ignored

0
wells fargo

Like much of America, we have been following the story of Wells Fargo’s sales tactics and the government response to it. We haven’t discussed this matter in depth yet here on our blog (just a brief comment about its implications for whistleblower retaliation), so I thought we would discuss it following the media reports that the Feds knew of 700 whistleblower complaints at the bank in 2010 regarding its sales practices.

Our whistleblower attorneys speaks regularly with employees and ex-employees of corporations of all sizes after the individual has internally reported suspected wrongdoing and the business has failed to adequately address their concerns. It is not surprising at all to us that tips would be ignored by a company. If large corporations corrected violations of the law after learning about them from their employees, we would not be in the practice of whistleblower law because there would be no need for us.

We also understand how these tips could be packaged together, explained away by the company and dismissed upon Government review. But we will discuss that more below.

Since we haven’t posted on this topic before, let’s briefly recap what has happened. Wells Fargo was fined $185 million, including a $100 million penalty by the Consumer Financial Protection Bureau, last September for fraudulently opening customer accounts. The practice involved as many as 1.5 million bank accounts and 565,000 credit card applications opened without the customer’s consent over a period dating back to at least 2011. Recently revealed evidence suggests it may have been going on since at least 2004 or 2005. It also agreed to settle a class action by consumers regarding the practices for $110 million.

After the practice became public, several ex-employees came forward to discuss their whistleblowing. Between 2009 and 2014, at least five former Wells Fargo employees notified OSHA that they were fired due to concerns about the opening of unauthorized accounts and credit cards. OSHA has recently ordered Wells Fargo to rehire one former manager and pay $5.4 million for its whistleblower retaliation, the largest award ever issued by the agency for an individual whistleblower.

There have been a great deal of investigations concerning the practices at Wells Fargo, both from government agencies and Wells Fargo. Two reports, one from Wells Fargo and one from the government regarding how to improve its regulatory oversite, have been released recently.

A few weeks ago, the Independent Directors of the Board of Wells Fargo put out a 113 page investigation report on sales practices. It examines in substantial detail the roles of numerous individuals and entities within Wells Fargo.

Unfortunately, there is so much evidence in the report that everyone knew Wells Fargo had a problem (at least as early as the December 2013 Los Angeles Times report), that it doesn’t spend much time on the issue of how it could improve its handling of whistleblower tips. Indeed, the most substantial examination of a whistleblower matter is on page 75 concerning a 2011 letter by a group of terminated bankers and tellers from a California branch to then CEO John Stumpf claiming they were unjustly terminated for practices condoned by branch management and happening across the bank.

The report does announce a few organizational changes which may impact how whistleblower issues are treated. It highlights the creation of a new Office of Ethics, Oversight and Integrity (with oversight by the Board’s Risk Committee). It also notes on page 17 that the Board’s Human Resources Committee will increase its oversight of terminations and the EthicsLine implementation.

This may not be the only report put out by Wells Fargo so it is possible one will follow later about changes to its handling of whistleblower tips. Wells Fargo has undertaken efforts to review non-anonymous calls to its confidential ethics line over the past five years to determine whether the employees were terminated within a year of the call. It is not yet known whether it will release publicly the details of that investigation.

The report that triggered the media focus on 700 whistleblowers was issued by the Office of the Comptroller of the Currency (OCC). The OCC is the primary regulator of banks chartered under the National Bank Act and Wells Fargo falls within its Large Bank Supervision operating unit. The Office of Enterprise Governance and the Ombudsman at the OCC completed its internal report two days ago and provided its lessons learned in the aftermath of the revelations about sales practices at Wells Fargo. Much of that report focused on what went wrong with the handling of tips from whistleblowers. It was a shorter document however (13 pages if memory serves).

The OCC report found Wells Fargo had issues with the handling of both consumer complaints and whistleblower cases. Among other things, Wells Fargo failed to document resolution of whistleblower cases and failed to follow up on significant complaint management and sales practices issues. When asked in 2010 about a high number of complaints by the Government, a Wells Fargo Senior Executive Vice President said that company culture generated a high volume of complaints and then they are investigated and addressed.

The OCC itself received 14 whistleblower tips about sales practices from mid-March 2012 to early September 2016. Just over 50% had no documentation in the regulator’s system. Both whistleblower tips and consumer complaints at the OCC are taken in by the Customer Assistance Group (CAG).

The report made numerous suggestions to improve the OCC and prevent a similar situation from happening again. Among the suggestions were for periodic review and analysis of complaints and whistleblower cases, as well as greater efforts to inform the public how to communicate whistleblower information to the OCC.

After this somewhat long review, we are back at the central issue here: how and why whistleblowers get ignored.

1. They don’t consider it a material issue for the company.

Wells Fargo reported $88.26 billion in revenue in 2016. To resolve the allegations concerning what was a massive multi-year violation of the law cost roughly $300 million. At some point, perhaps it should be said (like at many Wall Street investment banks) that government fines like these are just a cost of doing business. Wells Fargo saw 1% of its staff was being dismissed every year for bad sales practices and thought that number was great because 99% were acting ethically.

2. Lack of focus.

We speak to a great number of people that feel every violation of the law, no matter how small, is a vital national issue. As a result, they lump together both important and unimportant matters when they blow the whistle. When highly speculative matters of minor importance get tossed out in the same breath as serious violations of the law, it makes everything less credible.

3. Poor articulation of the details.

The law is complex. So are the factual scenarios that can arise. When non-lawyers try to explain violations of the law, they often oversimplify the facts and the law. If it is not articulated properly, it can be unconvincing. There may be various shades of grey obscuring a black and white violation of the law.

4. No documentation.

In the electronic age, documents matter. If there is no evidence presented, it is harder to disprove witness statements to the contrary.

5. Aggregation of reports.

It sounds like the government was working from a company summary of the EthicsLine complaints. If there was a detailed accounting and investigation of each incident, it would not have been so easy to dismiss. Aggregation hides the severity and specificity of events where the details matter.

6. Many don’t have lawyers.

Would you take an anonymous call from a random employee as seriously as you would a complaint from a high powered attorney seeking money on behalf of a specific client? There is a reason that the EthicsLine is handled by HR and not the Legal Department. Those that do get lawyers are dismissed as disgruntled employees.

7. The tone at the top is wrong.

When the focus is always on meeting advancing sales targets, compliance takes a back seat. This includes investigations of high performers accused of wrongdoing.

8. There’s no fear of the consequences.

“Everyone is doing it.” This isn’t a big deal.

9. Too many excuses.

The report details how Wells Fargo was overrun by individual wrongdoers to the point where it became a systemic and widespread problem. It failed to change the underlying causes of this behavior or the systems that allowed it to happen. Instead, they ended up firing more than 5,000 bad apples before the Government stepped in to say enough is enough.

A Proposed Solution

There is a way to get rid of the excuses and put more power in the hands of whistleblowers. It is not mentioned by the OCC report. But it is what happened at the SEC. Congress passed the Dodd-Frank Act to reward whistleblowers that come forward. It created a department within the SEC to ensure that whistleblowers had advocates. This program has been a success, paying out more than $100 million in rewards in the first six years.

This was the result of the ponzi scheme by Bernie Madoff. Despite a whistleblower tip, the SEC missed it. So, Congress gave whistleblowers a monetary incentive to come forward. Now, investment banks are well aware of the SEC whistleblower program. If they are not taking internal employee whistleblower tips seriously, they do so at their peril.

There has been much discussion about rewarding bank whistleblowers. Former NY Attorney General Eric Schneiderman even proposed legislation in New York State to protect and reward banking, insurance and financial service whistleblowers in 2015.

FIRREA would be one mechanism for the federal government to do so. FIRREA is the Financial Institutions Reform, Recovery and Enforcement Act. It currently provides rewards of up to $1.6 million for whistleblowers providing information about fraud against federally insured financial institutions. Before leaving office, former Attorney General Eric Holder told an audience at New York University School of Law that lifting the cap would significantly improve the Justice Department’s ability to gather evidence of wrongdoing in complex financial crimes. FIRREA has been getting increasing usage both as a tool against mortgage fraud and even cases of consumer fraud involving auto loans. It makes sense to expand it.

It should come as no surprise that we would support this solution. When Congress wanted to put a stop to delayed product recalls, it gave the Transportation Secretary the power to pay auto whistleblower rewards and increased potential fines from the NHTSA. Doing the same for bank whistleblowers would give the OCC a substantial incentive to take control of its whistleblower process and employees to gather the evidence needed to put a stop to Wells Fargo type practices earlier.

Photo Credit.

Why It’s Worth It To Be a Whistleblower

0

Many question the worth of being a whistleblower.  “Is it worth the time and effort?”  “Will I lose my job?”  “What good will it bring me?”  Overall, “is it worth it?” Being a whistleblower is a tedious process—cases can take years, to hire lawyers you need to have money, and many people seem to think that it may even make you lose your job.  Let’s go through each of these pieces to the whistleblowing process: time, money, and risk.

Whistleblowing is a time commitment.  It requires gathering first-hand specific information about fraudulent activity, working with lawyers, spending time in negotiations or court, etc.  Many qui tam cases take years to settle.

Whistleblowing also requires money as hiring lawyers is necessary.  However, the money used to pay lawyers may be reimbursed to you after winning a case.  In our recent article on quitamteam.com, “Jury: College & Faculty Member Committed Fraud,” the whistleblower in the case, Dr. Daniel Feldman, is likely to be reimbursed.  Dr. Feldman filed the case in 2003, and it has taken 7 years for the final ruling to be issued.  Dr. Feldman’s fees and costs to his lawyers cost several hundred thousand dollars, which may be reimbursed to him in full!

Many think whistleblowing is a risky business.  But, contrary to popular belief, the risks are not very high as whistleblowers are protected by law.  For instance, many people think that whistleblowing involves the risk of losing your job, but under the False Claims Act (FCA), the Occupational Safety and Health Act (OSH Act), and other laws that protect whistleblowers, whistleblowers cannot be fired for whistleblowing.  According to the Department of Labor website, “Whistleblowers may not be transferred, denied a raise, have their hours reduced, or be fired or punished in any other way because they have exercised any right afforded to them under one of the laws that protect whistleblowers.”  So while whistleblowing may seem risky, the law is on the whistleblower’s side to protect him/her from any punishment as a result of whistleblowing.

So whistleblowing takes time, can take money, but is not very risky.  But still “why do it?”  “Is it worth it?” “What good will it bring you?”  The reward of being a whistleblower is not only self-satisfaction, but a heavy pay-off if you win the case.  In order to receive a reward for being a whistleblower, the government must recover at least $1 million in the case. Whistleblowers receive a mandatory minimum of 10 percent, to a maximum of 30 percent of what is recovered.  Therefore, if whistleblowers are awarded in cases recovering $1 million or more, a whistleblower will make between $100,000 and $300,000 at least.  For larger cases, a whistleblower must still receive at least 10 percent of the claim, and can make more than $100,000 to $300,000.  In the HCA case in 2003, the numerous whistleblowers received $151,591,500.  The largest Healthcare fraud settlement in U.S. history, against Pfizer Inc., paid six whistleblowers more than $102 million.  So while whistleblowing may take time, it is worth it. Overall, you can be reimbursed for payments to attorneys, you will not incur much risk, and you will make at least $100,000 if your case wins.

Dr. Feldman sums up why it’s worth being a whistleblower.  He stated that, “being a whistleblower is not something you undertake without tremendous sacrifice,” because of the time and risk involved.  However, he agreed that “In the end, prevailing certainty feels great and worth the cost to do the right thing” (Source: Salmanson Goldshaw).

Sources:
Henning, Peter J. “Come Blow Your Horn for the S.E.C.” The New York Times DealBook Blog. 26 July 2010. http://dealbook.blogs.nytimes.com/2010/07/26/come-blow-your-horn-to-the-s-e-c/.
Montopoli, Brian. “Obama Signs Sweeping Financial Reform Into Law.” CBSNews. 21 July 2010. http://www.cbsnews.com/8301-503544_162-20011201-503544.html Salmanson Goldshaw, P.C. as per PR Newswire. PR Newswire. “Federal Jury Finds Cornell University’s Medical College Committed Fraud.” 29 July 2010. http://www.prnewswire.com/news-releases/federal-jury-finds-cornell-universitys-medical-college-committed-fraud-99538899.html.
Savage, David. “Financial reform law includes big cash incentives for whistle-blowers.” Los Angeles Times. 23 July 2010.http://www.latimes.com/business/la-fi-reform-whistleblower-20100723,0,6099636.story.
United States Department of Health & Human Services. News Release. “Justice Department Announces Largest Health Care Fraud Settlement in its History.” 2 September 2009. http://www.hhs.gov/news/press/2009pres/09/20090902a.html.
United States Department of Justice. “Largest Health Care Fraud Case In U.S. History Settled HCA Investigation News Record Total of $1.7 Billion.” 26 June 2003. http://www.justice.gov/opa/pr/2003/June/03_civ_386.htm.
United States Department of Labor. “Whistleblower Protections.” http://www.dol.gov/compliance/laws/comp-whistleblower.htm.

This article is brought to you by the QTT, the epicenter for whistleblowers and people interested in the False Claims Act, Qui Tam Provisions, and Medicare and Medicaid fraud. To discuss a potential case, please call Eric Young at 1 (800) 590-4116.

Pharma Whistleblowers Under Stress

0

New findings from a New England Journal of Medicine (NEJM)  study entitled “Whistle-blowers’ experiences in fraud litigation against pharmaceutical companies” confirm what most whistleblowers already know: whistleblowers who report health care fraud experience substantial stress and receive little support. This appears to be in line with other recently released studies which confirm that, in the words of Rodney Dangerfield, the majority of whistleblowers “just don’t get no respect.”

The NEJM study examined the experiences of 42 pharmaceutical whistleblowers, and an interesting profile of the whistleblowers emerged.  All but six of the relators in the study did not specifically intend to use the qui tam mechanism when they decided to seek legal redress for the frauds they observed. Rather than being motivated by collecting a monetary reward, the main motivations of the whistleblowers were integrity, altruism  or public safety, justice, and self-preservation.

The whistleblowers shared certain common experiences in bringing frauds to light. Most of the whistleblowers became active participants in the investigation, such as by wearing a wire.  The whistleblowers also reported spending inordinate amounts of time working on the investigation, sometimes meeting with FBI agents in risky locations or being forced to devise hasty covers for agents visiting the whistleblower’s workplace on short notice. Many relators were frustrated with the government at various points during the investigation.

Another common theme among the relators was the personal toll of becoming a whistleblower. Most of the whistleblowers reported experiencing financial difficulties. Some experienced divorce or other family problems. In addition, whistleblowing took a physical toll, with several whistleblowers reporting health problems ranging from asthma to migraines.

When it was all over, most of the relators felt that what they did was important for ethical or psychological reasons, despite dissatisfaction with the financial reward. Notably, the advice offered to potential whistleblowers by some of these seasoned, war-weary whistleblowers? Hire an experienced attorney!

This article was sponsored by The Qui Tam Team, the epicenter for whistleblowers and people interested in the False Claims Act, Qui Tam Provisions, and Medicare and Medicaid fraud. To discuss a potential case, please call Eric Young at 1 (800) 590-4116.

Review of SEC Rule 21F-17 (Impeding Whistleblowers)

0
lawyers Philadelphia

Brandon Lauria will speak on SEC enforcement of Rule 21F-17 at a Knowledge Group live webcast on March 9, 2017. Rule 21F-17 prohibits confidentiality agreements and other measures which restrict access to the SEC whistleblower program. The one hour webcast at noon (EST) will cover the rule protecting whistleblower communications with the SEC and recent civil enforcement actions brought by the SEC against corporations for impeding communications with whistleblowers.

SEC and CFTC Gain, IRS Loses in FY 2015 Budget Bill

0

The Senate passed the $1.1 trillion budget bill on Saturday evening and President Obama has signalled that he will sign the budget for Fiscal Year 2015 later this week.  As Congress allocated resources in the Consolidated and Further Continuing Appropriations Act for 2015, both the CFTC and SEC got significant increases.  The IRS, on the other hand, lost 3 percent of its budget.

The bill is important because it provides funding for the agencies charged with enforcing the nation’s whistleblower laws. As only the False Claims Act allows qui tam lawsuits, whistleblowers to the Internal Revenue Service, Securities & Exchange Commission, and Commodity Futures Trading Commission are dependent upon enforcement actions brought by the government agencies. Their ability to have the resources to take on some cases may be dependent on their budget and personnel.

The  also repealed the swaps push out rule from the Dodd-Frank Act and prohibits federal payments to corporations which prohibit whistleblowers from reporting fraud, waste and abuse to the U.S. Government.

Here’s a more extensive discussion of each aspect mentioned above:

CFTC

The CFTC budget for Fiscal Year 2015 was increased to $250 million. It will receive $35 million more than the $215 million it got in FY 2014. The nation’s derivatives regulator sought an additional $30 million for a total budget request of $280 million. The request primarily called for more personnel at the Commission.

The CFTC has faced problems with declining employee morale due to its inadequate budget over the past few years. The percentage of people who would recommend the CFTC as a good place to work fell from 64 percent last year to 45 percent this year. Overall job satisfication at the agency has declined substantially from 2010, when Dodd-Frank was passed.

The CFTC budget has been constrained by certain legislators as they attempted to prevent implementation of parts of the Dodd-Frank Act. CFTC Chairman Timothy Massad essentially stated that the low budget put the agency in regulatory triage. Even at the higher levels for 2015, Senator Debbie Stabenow, Chairwoman of the Senate Committee on Agriculture, Nutrition and Forestry, called the budget inadequate to allow the CFTC to do its job. Derivatives trading has grown from a $500 billion business to a $700 trillion industry without a corresponding increase in CFTC funding.

SEC

The SEC received an increase of $250 million in its budget for FY 2015 from FY 2014 levels. Its total FY 2015 budget will be $1.5 billion, $200 million short of the agency request of $1.7 billion. The budget request for a total increase of $450 million sought to hire additional employees, invest in technology solutions and complete rulemaking required by the Dodd-Frank Act and the JOBS Act.

IRS

The budget deal cut IRS funding by three percent to $10.9 billion for 2015. The reduction in funding by $345.6 million will need to come from an agency that has already reduced spending by more than $1 billion because of budget cuts since 2010. The FY 2014 level was $11.29 billion.

President Obama asked for Congress to provide the agency with $12.477 billion. The IRS Oversight Board estimated that the President’s budget would allow the U.S. Government to collect an additional $2.1 billion in revenue and avoid the loss of $360 million a year due to identity theft. Every dollar decrease in IRS funding allows roughly $7 in taxes to go uncollected.  With implementation of FATCA proceeding, the budget decrease does not come at an opportune time.

One aspect of the President’s budget proposal not in the final bill: The Treasury Department’s request for IRS whistleblower protections against retaliation. This section has been removed by Congress annually for the past few years.

Dodd-Frank Swaps Push Out

The SEC and CFTC budget increases can be attributed to a deal made to repeal section 716 of the Dodd-Frank Act. The section was commonly referred to as the swaps push out rule. It required banks to move derivatives trading out of their federally insured subsidiaries. The financial health of subsidiaries protected by federally insured deposits allows them significant advantages while trading and could put federal funds at risk. The measure was largely written by Citigroup in advance of the 2015 deadline for implementing the section of the law.

The reversal of the swaps push out rule was one of the most controversial aspects of the entire budget. Its addition to the law used the impending deadline for government shutdown. Senator Elizabeth Warren (D-Mass), who was involved in the creation of the U.S. Consumer Financial Protection Bureau, nevertheless marshalled a tremendous amount of opposition to it. A White House statement opposed the section but did not indicate that President Obama would veto the bill because of it.

Confidentiality Agreements

Employment agreements have proven to be a common tool used by employers to attempt to restrict whistleblowers. Congress took a step in the right direction with the bill by restricting payments to corporations which prohibit reporting waste, fraud or abuse to the Federal Government. Money from the FY 2015 budget can not be paid to corporations requiring employees to sign confidentiality agreements that prevent them from blowing the whistle.

The provision reads:

SEC. 743. (a) None of the funds appropriated or otherwise made available by this or any other Act may be available for a contract, grant, or cooperative agreement with an entity that requires employees or contractors of such entity seeking to report fraud, waste, or abuse to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contractors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a Federal department or agency authorized to receive such information.

It is great to see Congress take a step in the right direction with the insertion of this section into the budget. The section may create additional litigation under the False Claims Act as it operates as a condition for payment to federal contractors. Companies which violate the law by imposing one of these agreements on its employees could be subject to treble damages under the False Claims Act if they misrepresent the compliance of their employment contract with this rule in order to receive payment on their government contract. In addition to businesses fulfilling government contracts, it also implicates the health care industry because hospitals or other health organizations with these contracts would not be able to receive funds from Medicare.

The SEC has also already taken aim at this practice in the securities industry. According to the Washington Post in March, the SEC opened an investigation into confidentiality agreements created by KBR that potentially violate Rule 21F-17(a). The rule prohibits any action to impede an individual from communicating with the SEC about a possible securities law violation including enforcing, or threatening to enforce, a confidentiality agreement.

There has been several calls for changes to this employer practice. In October, eight U.S. Representatives on the House Committees on Financial Services and Oversight and Government Reform (OGR) urged the SEC to take additional enforcement actions against corporations using workplace secrecy agreements to chill whistleblowing.

Other Items of Interest to Employees

There were also small increases (less than $1 million) to the EEOC and OSHA budgets. The OSHA budget had sought an appx. $3 million increase in the amount of money for enforcement of whistleblower protections from retaliation and an appx. $30 million increase in the funding for the Wage and Hour Division to protect workers from FLSA violations related to worker misclassification, overtime and other pay rules. I haven’t independently verified it in the bill, but according to one report I have seen, wage and hour enforcement got an extra $3.2 million dollar increase and whistleblower protections had a small, less than $1 million increase.

Supreme Court Extends SOX Whistleblower Protections to Employees of Contractors

0

The Supreme Court issued a win for whistleblowers yesterday. In Lawson v. FMR LLC, 571 U.S. ____, slip op. (March 4, 2014), the Court held that the employees of privately held contractors and subcontractors reporting on a public company are protected by the whistleblower provisions of the Sarbanes-Oxley Act. At issue was 18 U.S.C. § 1514A, which protects “an employee” from adverse changes in the terms and conditions of their employment because they engaged in protected whistleblowing. A dispute had arisen about whether employees of third parties working for the public company, such as law firms and accounting companies, were also covered. Employees who work at a contractor or subcontractor of a public company can now be confident they are within the protected class when they report on misconduct at a public company which is within the scope of their employment. Justice Ginsburg’s majority opinion, however, leaves open the possibility that they will not be protected if they report on violations which are not within the scope of their contractor’s services for the public company.

The need for the Supreme Court decision arose from a difference of opinion between the Department of Labor’s Administrative Review Board in an unrelated case and the First Circuit’s decision in Lawson. On appeal, the First Circuit had held that the plaintiffs were not covered because SOX protections extended only to adverse employment actions against employees of the public company.

The plaintiffs in Lawson reported misconduct at a mutual fund. They did not work for the mutual fund, however. They were employees of a private company engaged by the mutual fund to provide it investment services. After they raised concerns, one was fired and the other suffered a series of adverse actions amounting to constructive discharge. Following the required filing with the Department of Labor, they brought a cause of action in federal court to seek remedies under § 1514A.

The Supreme Court looked initially to the language of the statute. Where Congress intended to limit protections in SOX to employees of the public company, it said so. The Court also struggled with how a contractor could take adverse actions and remedy discrimination against the public company employees before concluding the text was not limited to them.

Justice Ginsburg’s majority opinion also examined the legislative history. Congress recognized the role of outside professionals both in perpetrating shareholder fraud and in reporting it. Because of the importance of lawyers and accountants in Enron, the majority could not conclude Congress intended to exclude these professionals from protection against retaliation. As Congress investigated Enron, one of the things it found was retaliation by contractors against their own employees for flagging misconduct at Enron.

Justice Scalia, in an opinion concurring in principal part and concurring in the judgment, agreed with the reading of the text but rejected the use of the legislative history. Interestingly, Scalia, and presumably Justice Thomas, who joined in the concurrence, would not limit the protection of contractor and subcontractor employees to whistleblowing related to the role in which they were hired by the public company. The Solicitor General offered this contention as a limiting principle in oral argument and it was cited to in the majority opinion.

McEldrew Young Purtell Merritt helps whistleblowers report fraud and misconduct to the government through the SEC, CFTC and IRS whistleblower programs as well as the False Claims Act. If you would like to speak to Eric L. Young or another attorney at McEldrew Young Purtell Merritt about whistleblower protections from retaliation, please call 1-800-590-4116 or complete our contact form.

Photo Credit.

Disclosure of a Whistleblower’s Identity Constitutes Retaliation

0

The disclosure of a whistleblower’s identity to his work colleagues is an adverse action that can trigger liability under the SOX antiretaliation provision, according to the 5th Circuit in Halliburton, Inc. v. Admin. Review Bd., No. 13-cv-60323 (5th Cir. Nov. 12, 2014).

The decision turned on whether the disclosure was a materially adverse action under the standard set forth in Burlington Northern & Santa Fe Railway Co. v. White, 548 U.S. 53 (2006)(interpreting the antiretaliation provision of Title VII). The standard for material adversity is met if it is “an action harmful enough that it well might have dissuaded a reasonable worker from engaging in statutorily protected whistleblowing.” Halliburton, slip op. at 10.

According to the 5th Circuit, “[i]t is inevitable that such a disclosure would result in ostracism ….” Id. at 13. The Court also expressed concern that the disclosure from his supervisor was “granting his implied imprimatur on differential treatment of the employee, or otherwise expressing a sort of discontent from on high.” It further identified the unmeasurable effect it could have on his employment. “In an environment where insufficient collaboration constitutes deficient performance, the employer’s disclosure of the whistleblower’s identity and thus targeted creation of an environment in which the whistleblower is ostracized is not merely a matter of social concern, but is, in effect, a potential deprivation of opportunities for future advancement.” Id.

The amount of money at issue in the case was small, with only $30,000 at stake if Halliburton lost. They must have thought they could get a favorable precedent for employers in the future by appealing. Instead, it will require corporations to maintain the confidentiality of whistleblowers in the workplace and be quoted favorably by plaintiffs in the future.

The Risks of Internal Reporting Prior to Whistleblowing

Although not directly related to the opinion, the factual summary does contain an inference that the SEC investigation was caused by Menendez. This is an interesting and concerning area, as corporations have been attempting to deduce if there is a whistleblower once a government investigation begins.

Menendez first circulated a memorandum to his supervisor and colleagues about his concerns that corporate accounting was not according to Generally Accepted Accounting Principles in July. In November, shortly after the company concluded the accounting practices were proper in October, Menendez filed his tip with the SEC.

In February, the SEC contacted Halliburton’s General Counsel to investigate its accounting practices. Only four days prior, Menendez had emailed his concerns to the company’s Board of Directors, and a copy was forwarded to their General Counsel. In the General Counsel’s instruction to individuals to retain documents, it said that “the SEC has opened an inquiry into the allegations of Mr. Menendez.” This email was forwarded by Menendez’s supervisor to his colleagues.

While the identity of whistleblowers is protected by the SEC, an employee that makes an internal report prior to providing information to the U.S. Government risks their employer deducing that they are the origin of any government investigation. This is especially true if the two are closely correlated in time. The curious timing of a government investigation launched a few months after a report to the compliance department from an employee may not go unnoticed.

This is not the only case of an employer inferring whistleblower status recently. A California Court of Appeals recently allowed an employee allegedly fired because of an erroneous belief that she was a whistleblower to proceed with her retaliation lawsuit. In Diego v. Pilgrim United Church of Christ, ___ Cal.App.4th ___ (November 21, 2014), the plaintiff brought a claim of wrongful termination based on a violation of public policy. The defendant claimed that there was “no constitutional or statutory authority extending whistleblower protections to employees merely believed to have engaged in protected activity. Relying on past precedent concluding that firing suspected whistleblowers can discourage the filing of information with the government, the Court concluded that the purpose of its whistleblower statute would be thwarted and the result would be against the public good.

These two instances aren’t traditional, classic cases of retaliation. But if employers continue to search for the identity of whistleblowers, we may see more of them in the future. California handled it by inferring a cause of action in their public policy. Will the False Claims Act and Dodd-Frank be able to provide a remedy for plaintiffs as other cases like these arise at the fringes of retaliation law? We will see.

Other issues discussed by the 5th Circuit in Halliburton include:

The determination of material adversity is not purely a factual determination.

The contributing factor to an adverse employment action does not require a wrongful or retaliatory motive.

SOX allows a remedy for noneconomic compensatory damages such as emotional distress or reputational harm.

Board Directors Liable for Whistleblower Retaliation and other SEC News

0
personal injury lawyers Philadelphia PA

There’s been a number of stories recently in the news that would be of interest to securities whistleblowers and potential whistleblowers.  We thought we would briefly recap the ones happening this week which we haven’t previously covered.

Individual Board of Directors Can Be Liable for Whistleblower Retaliation under Dodd-Frank

A decision in an anti-retaliation lawsuit by a FCPA whistleblower in the Northern District of California has held that Dodd-Frank’s SEC whistleblower protections can impose liability on individuals for their actions in contravention of the law. The Court concludes that Congress intended for Dodd-Frank’s protections to be at least as extensive the protections afforded by the Sarbanes-Oxley Act.

Earlier in the opinion, the Court determined that a whistleblower could hold individually liable a member of the corporation’s board of directors as an agent under Section 1514(a) of SOX.

The court opinion also reveals publicly the inner workings of the company’s internal FCPA investigation that led to the $55 million fine by the SEC and the Justice Department in November 2014. The General Counsel of the company identified China as an area of risk after the company began an investigation into potential bribery in other Southeast Asian Countries. However, two internal investigations by an external law firm led to reports that the company was not violating the law. According to the complaint, the General Counsel revealed problems with the internal investigations and was fired for concluding that management was turning a blind eye to the potential violations.

JPMorgan Settlement Looms for $200+ Million

JPMorgan has agreed to settle for more than $200 million the SEC investigation into insufficient disclosures to clients regarding its conflict of interest when selling its own bank products to private-banking clients. However, the settlement has been stalled for several weeks as the two sides argue over whether a waiver should be granted to allow the bank to sell stocks and bonds via private placements.

Certain bad actors are disqualified from underwriting private placements as a result of violations of the federal securities laws. In the past, the SEC has routinely grants waivers to the disqualification. However, over the past few months, the Commission has taken a harder stance and resisted granting such waivers.

IBM Accounting Fraud?

The SEC has opened an investigation into revenue recognition by IBM into certain deals in the United States, Britain and Ireland. IBM announced the investigation to shareholders yesterday after learning about it in August. The SEC previously investigated the company’s cloud computing business for revenue recognition issues in 2013. The securities regulator closed that investigation with recommending an enforcement action.

There may be more announcement of actions like this one in the future. The SEC has made tackling accounting fraud a significant priority. Additionally, the Financial Accounting Standards Board issued a new revenue recognition standard in May 2014. As that standard is fully implemented over the next few years, it is expected to have a significant impact on financial reporting and ambiguities in the law may further heighten the likelihood of enforcement actions against companies.

Another Credit Ratings Agency Settles

At the tail end of the financial crisis, a credit rating agency, DBRS, published its surveillance methodology. However, according to the settlement with the SEC, DBRS failed to conduct its credit rating analysis according to the terms of that methodology for the next three years and it failed to publish changes to the document pursuant to the methods contained therein.

DBRS is regulated by the Rating Agency Act as a nationally recognized statistical rating organization (NRSRO). The SEC order found violations of numerous provisions of the federal securities laws related to its NRSRO application, annual certification and resources/internal controls. The company agreed to pay a penalty of nearly $3 million and disgorge rating surveillance fees of nearly $3 million.

Photo Credit.

Call Now ButtonCall Now