Board Directors Liable for Whistleblower Retaliation and other SEC News

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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.

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OSHA Publicizes Guidelines for Employers to Avoid Retaliation Against Whistleblowers

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Last week, the Occupational Safety and Health Administration offered a set of recommendations for employers to create retaliation-free workplaces. The guidance is directed at employers with employees covered by the 22 whistleblower protection statutes enforced by OSHA.

Supreme Court Extends SOX Whistleblower Protections to Employees of Contractors


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.

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Third Circuit Allows Enforcement of Arbitration Agreement Against SEC Whistleblower


The Dodd-Frank Act prohibits the enforcement of predispute arbitration agreements for SOX and CFTC whistleblowers. However, whistleblowers to the Securities and Exchange Commission must arbitrate their retaliation claims instead, according to the Third Circuit in Khazin v. TD Ameritrade Holding Corp., No. 14-1689 (3rd. Cir. Dec. 08, 2014).

The plaintiff, Boris Khazin, signed an employment agreement to arbitrate all disputes arising out of his employment. Subsequently, he brought to the attention of his supervisor a mispriced financial product and recommended a correction that would cost the company more than $1 million in lost revenue. He was told to ignore the issue. Following termination because of a purported billing irregularity, he eventually filed a Dodd-Frank retaliation lawsuit in Federal Court in New Jersey. He appealed the decision to the Third Circuit.

The lower court required him to arbitrate his claim. It held that Dodd-Frank did not alter the enforcement of arbitration agreements signed prior to Dodd-Frank’s adoption by the U.S. Government. It concluded that the presumption against retroactivity did not warrant altering existing contractual rights agreed to prior to the law. On appeal, the Third Circuit affirmed the decision on a different line of reasoning.

The Third Circuit found that the text of the Dodd-Frank Act did not bar employers from requiring SEC whistleblowers to arbitrate there claims. The prohibitions on predispute arbitration agreements in Dodd-Frank applied only to whistleblower protection lawsuits filed under the Sarbanes-Oxley Act and the Commodity Exchange Act.

The SEC was confronted with this omission in the text of the law prior to issuing its final rules for implementing the whistleblower program. However, the securities regulator concluded that no rule was necessary. In Release No. 34-64545, the SEC declared that Section 29(a) of the Exchange Act prohibited employees from limiting their right to file anti-retaliation litigation under Section 21F in an appropriate District Court.

The Third Circuit disagreed. In footnote 5, it dismissed the SEC’s argument that Section 29(a) prohibits enforcement of the arbitration agreement. The Supreme Court has unequivocally held that “Congress did not intend for § 29(a) to bar enforcement of all predispute arbitration agreements.” Khazin, slip op. at *14n.5 (quoting Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 238 (1987)).

The Third Circuit opinion leaves no room for the SEC to issue rules in this area to bar arbitration of retaliation disputes, either. It declares it unambiguously clear that Congress intended for arbitration of retaliation claims brought by SEC whistleblowers under the rules of statutory construction. By explicitly barring predispute arbitration contracts for the CFTC and SOX whistleblowers, the court concluded that Congress deemed arbitration permissible for SEC claims.

The conclusion that Congress wanted to allow arbitration of SEC claims while prohibiting enforcement for CFTC retaliation claims seems odd. The opinion offers no policy justification for this distinction and I am struggling to come up with one.

The SEC has routinely declared that protecting whistleblowers from retaliation is crucial to a successful incentive program. Concerns about arbitrator bias, low awards and the desire for whistleblower lawsuits to be litigated in a public forum all weigh against arbitrating retaliation claims.

The Third Circuit is the first appellate court to weigh in on this important question regarding the SEC program. While there is still the potential for another Circuit to answer the question against arbitration, it is a disappointing initial loss for whistleblowers. We will be revising our section on arbitration of retaliation claims soon to account for this decision.  In the meantime, please contact one of our SEC whistleblower lawyers for additional information about the state of the law.

How 700 Bank Whistleblowers Get Ignored

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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.

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CFTC Proposes Whistleblower Program Changes

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The U.S. Commodity Futures Trading Commission has published a notice of proposed rulemaking in the Federal Register related to the CFTC whistleblower awards process. The proposed amendments to the regulations on first glance are pro-whistleblower and would be a welcome improvement and clarification to the program’s current regulations.

SEC Whistleblowers May Not Receive Jury Trial in Retaliation Cases



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.


Protecting Corporate Whistleblowers


A corporate whistleblower faces a very real risk of retaliation by her employer, commonly in the form of termination. Certain provisions of the Sarbanes-Oxley Act (SOX) provide protections for whistleblowers, and new whistleblower protections could potentially come through the proposed financial reform bill.

18 U.S.C. sec. 1514A of SOX protects corporate whistleblowers by providing them with the remedy of a civil action in the event of retaliation by their employer.  Publicly traded companies, as well as their contractors, subcontractors, and agents, are prohibited from retaliating against a whistleblower who participates in an investigation or participates in an action stemming from violations of Federal law relating to fraud against shareholders.

If a whistleblower does suffer some sort of retaliation, she has two options depending on the amount of time that has elapsed. She could file a complaint with the Secretary of Labor, or, in the event that the Secretary of Labor has not issued a decision within 180 days of the filing of the complaint and the whistleblower has not done anything in bad faith to cause the delay, the whistleblower can go ahead and file a lawsuit in federal district court. As a side note, there is a special loophole created for whistleblower plaintiffs here. Normally, in order to get into federal district court the amount in controversy must be $75,000 or more. For whistleblowers alleging discrimination, this requirement is waived.

The proposed financial reform legislation, which may be headed to the Senate floor this week, could significantly expand whistleblower protections. Under both the House version of the bill as well as that proposed by Senator Chris Dodd, the SEC would be authorized to reward whistleblowers for any insider trading violations (not just those related to securities, as the law currently stands). In addition, the whistleblower’s share of the SEC sanction would be increased to 30% from its current 10%. This is a significant jump, putting it in line with the maximum recoveries available to qui tam relators and IRS whistleblowers.

Blowing the whistle is by no means without risk. The whistleblower should take some comfort, however, in the fact that there are several protections available, and stronger protections likely are on the way. Recent events in the financial world, such as the Goldman Sachs short selling debacle, are sure to provide an impetus to Congress to reinforce whistleblower protections in this area.

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.

SEC Encourages Third Circuit to Back Internal Whistleblower Protections


The U.S. Securities and Exchange Commission (SEC) will take another crack this year at defending its regulation protecting internal whistleblowers against retaliation. In mid-December, it filed an amicus brief (available here) with the Third Circuit in Safarian v. American DG Energy, Inc., Civ. No. 10-6082, 2014 WL 1744989 (D.N.J. Apr. 29, 2014) to argue for its interpretation of the Dodd-Frank Act.

Congress defined a whistleblower to be “any individual who provides … information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. § 78u-6(a)(6). Businesses have argued that this definition is clear that only an individual reporting to the Commission can be a whistleblower protected against retaliation.

The SEC disagrees. It contends that Section 78u–6(h)(1)(A), which establishes the activities protected, includes certain internal reporting required or protected by the Sarbanes-Oxley Act. In order to resolve this ambiguity between Section 78u–6(h)(1)(A)(iii) and the definition of a whistleblower, it created Exchange Act Rule 21F-2(b)(1). Rule 21F-2(b)(1) defines a whistleblower for the purpose of the anti-retaliation section and does not include a requirement that the individual report to the SEC.

In Safarian, which is on appeal from the U.S. District Court for the District of New Jersey, the lower court skipped the debate over the definition of a whistleblower and determined that the employee was not engaged in protected activity within Section 78u–6(h)(1)(A)(iii). If, on appeal, it is determined that Safarian did engage in protected activity, the issue of whether a report to the SEC is required will once again be front and center in the motion to dismiss.

This has been one of the most frequently litigated issues to arise under the whistleblower programs created by the Dodd-Frank Act. The Third Circuit is the third appeals court to face the issue in the past two years.

The Fifth Circuit, the first appellate court to take up this issue, held that the Dodd-Frank whistleblower protections do not apply to employees making only internal reports in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013). The Fifth Circuit found the statutory text unambiguous and thought that the SEC interpretation rendered text superfluous.

The SEC also filed an amicus brief (available here) in the second appeal, Liu v. Siemens AG, 763 F. 3d 175 (2d. Cir. 2014). The Second Circuit ultimately did not address the issue in its opinion as it decided the case on other grounds. Liu involved an international whistleblower and the case was dismissed because of the doctrine of extraterritoriality.

The CFTC took the opposite approach from the SEC. According to CFTC regulations, an individual is protected against retaliation only after filing the initial tip with the government on Form TCR.

The SEC, on the other hand, did not want to disrupt the internal compliance procedures of businesses by creating a rule that only protects employees when they report to the government. The agency worried that more individuals would forgo corporate reporting options, requiring additional expenditure of government resources and perpetuating harm to investors.

The most recent lower court to decide the issue declared that the employee was not a whistleblower when he did not report to the SEC. Verfuerth v. Orion Energy Systems, Inc., No. 14-C-352, — F.Supp.3d —-, 2014 WL 5682514 (E.D. Wis. Nov. 4, 2014). However, several cases, including one argued by attorneys of our firm, have held otherwise.

For whistleblowers, the result of the ambiguity is clear. In order to ensure that an employee is protected from retaliation by Dodd-Frank, there must be a report to the SEC. Otherwise, the claim will require a favorable judicial interpretation of the statute.

Hopefully, the SEC will prevail and the dispute over the text of the law will ultimately be resolved. However, until that time, reporting is the only clear way to ensure that an employee can qualify for the protection the SEC whistleblower program allows.  For additional information about the law’s anti-retaliation protections, please contact one of our SEC whistleblower attorneys.

Court Skirts FCA Issue of Past Whistleblower Terminated By Current Employer


A disappointing decision came out of the Southern District of Ohio last week regarding the scope of retaliation protections for a whistleblower under Section 3730(h) of the False Claims Act. In Kem v. Bering Straights Information Technology, Case No. 2:14-cv-263, 2014 WL 544842 (S.D. Ohio October 22, 2014), the Court denied protection from retaliation to a past whistleblower at his new place of employment.

The facts set forth in the opinion are relatively straight forward. The plaintiff’s job responsibilities included making sure that the company was not violating the False Claims Act. After an internal meeting revealed that the business was going to be inspected by the U.S. Department of Defense’s Defense Supply Center, the plaintiff volunteered to help prepare for the audit. He revealed to his supervisor that he previously blew the whistle on over charging at another defense contractor. The company revoked his security clearance and terminated his employment due to his lack of security clearance.

The decision examined whether the plaintiff engaged in protected activity when he volunteered to assist with the audit. According to the Court, the answer is no. His expressed desire to prevent fraud was not sufficient to receive protection under the False Claims Act.

However, the Court dismisses the § 3730(h) claim without examining the important issue of whether he is protected at his current employer for engaging in protected activity in the past. It questioned only whether his present activity was “in furtherance of” the False Claims Act. Apparently, the plaintiff did not argue that the protected activity happened at the previous employer. In footnote 2, the Court explicitly notes the absence of these arguments and refused to make the arguments for the plaintiff.

Nevertheless, the question of adverse employment actions by future employers is an important one to whistleblowers and one that will be litigated more in the future. If employees are unprotected against termination by employers who discover they were a whistleblower in the past, it will have a chilling effect on the number of people willing to come forward and report fraud.

After a quick search of the case law, I didn’t find any opinions expressing an issue on this subject. Are there any out there? Limiting a whistleblower to a remedy for retaliation against the company that he or she blew the whistle against seems like an unnecessarily restrictive reading of the text that is counter to the spirit of the False Claims Act.

The text of § 3730(h) contains no explicit requirement of a temporal connection between the protected activity and the discrimination. The text provides for compensation when an employee has been “discriminated against in the terms and conditions of employment because of lawful acts done by the employee … in furtherance of an action under this section or other efforts to stop 1 or more violations of this subchapter.” 31 U.S.C. § 3730(h)(1). It does not specify when the employee had to act in furtherance of the False Claims Act.

There appear to be several arguments a corporation could make against applying the section broadly to include activity of the type raised by these facts. A corporation could argue that the section is concerned with “retaliatory actions” and the employer does not have retaliatory intent when they were not the subject of their employee’s report. Or they could argue that the last reference to an “employee” in connection with action “in furtherance of” the False Claims Act justifies a requirement that the protected activity happen while at the company.

Neither seems particularly satisfying given the broad purpose of the False Claims Act and the subsection. Congress prohibited adverse employment actions by employers to protect and encourage whistleblowing. To allow corporations to terminate employees based on their belief an individual is more likely to report fraud to the U.S. Government could create a witch hunt for potential whistleblowers inside businesses. When the corporation’s basis is previous protected activity, the employee should be protected by the law.

As I was about to hit publish on this article, I figured I would take a look at the other major whistleblower programs to see whether they provided for protection from future adverse actions. The IRS still doesn’t protect its informants from retaliation, so there was no need to look there.

The Dodd-Frank Act appears to have the most favorable language for SEC whistleblowers. It allows “no employer” to discriminate against “a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower ….” 15 U.S.C. § 78u-6(h)(1)(A). Neither Dodd-Frank nor the SEC Rules define a whistleblower to be an employee, so this seems to be the most promising.

The Sarbanes-Oxley Act has already been under the microscope of the Supreme Court once for its interpretation of the term “employee” in the context of its retaliation protections. The term received a broad reading in Lawson v. FMR to allow employees of third-parties to bring a claim for protection when their employer has business ties to the company reported for misconduct. However, the text of the statute does not go so far as to say whether an employment applicant (potential employee) is considered an employee under the law.

We are going to keep an eye out for additional decisions in this area. If you are aware of any, please send them our way.

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