Retaliation against whistleblowers by their employer is a problem that touches us very personally as whistleblower attorneys. We see the impact first hand through the employees contacting us, both in our clients and potential clients. It is a very unfortunate aspect of modern whistleblowing. Although we attempt to minimize the potential for it where possible, many individuals have faced retaliation before they contact us and some will face it after reporting.
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.
Ever since the 5th Circuit held that Dodd-Frank whistleblower retaliation protections do not extend to internal reporters within a company, the SEC has been filing amicus briefs in internal retaliation cases arguing in favor of its position that the SEC whistleblower program rules against retaliation by employers cover internal whistleblowers as well as those filing a Form TCR with the securities regulator.
Today, the Second Circuit agreed with the SEC’s position, overturning a decision to dismiss the lawsuit of a whistleblower reporting accounting irregularities within Neo@Ogilvy. The media has raised the possibility that the Supreme Court may need to step in to address this issue if the circuit split continues.
The dispute arises from the potential ambiguity within the Dodd-Frank’s meaning of the term whistleblower. Corporations have argued that the term is defined by the statute and applies only to individuals filing a Form TCR pursuant to the SEC procedures. The SEC argues that the meaning is ambiguous in the context of the anti-retaliation protections. Previously, the 5th Circuit ruled that internal reports were not sufficient to gain the protections of the law. The Second Circuit was asked to decide the issue in Liu last year but dismissed the case on other grounds, reaching only the extraterritoriality issue.
The CFTC whistleblower rules, however, do not go as far as the protections offered by the SEC, limiting employee protections to adverse employment actions after the filing of a Form TCR.
A few different updates regarding whistleblower legislation around the country:
Idaho’s Ag Gag Law was Ruled Unconstitutional
A U.S. District Court Judge invalidated Idaho’s anti-whistleblower law on First Amendment grounds. Idaho State Senator Jim Patrick, the Republican who sponsored the bill, believes the decision will likely be appealed.
The “ag-gag” law passed in 2014 and was signed by the Idaho Governor. The law banned covert filming of animal abuse on farms. Seven other states have passed similar laws recently. The Idaho law is the first to be ruled unconstitutional.
CAARA Passes Senate
A few weeks after Senator Grassley and Patrick Leahy reintroduced the Criminal Antitrust Anti-Retaliation Act into the Senate, it was approved by unanimous consent after a few minor changes. The legislation will now go to the House.
The bill protects covered individuals against employer retaliation for lawfully providing information to the federal government that the individual reasonably believes is a violation of the antitrust laws.
It does not offer incentives like the Dodd-Frank whistleblower programs. The U.S. Government has previously expressed concern that it will have a difficult time meeting the higher burden of proof in a criminal trial if the defendant can argue that the informant is biased by monetary incentives. The U.S. already has an immunity program in order to incentivize members of cartels to come forward and report their activity in violation of antitrust law.
It is the second whistleblower law to be passed by the Senate and waiting for action by the House of Representatives. Previously, the Senate unanimously passed the Thune-Nelson Motor Vehicle Safety Whistleblower Act which provides incentives to whistleblowers working in the auto industry.
Houses Passes VA Accountability Act
The U.S. House of Representatives passed a bill last week that would give additional protections to whistleblowers within the Department of Veterans Affairs in the wake of the scandal about patient scheduling that came to light last year. We haven’t talked about this here on the blog before because we generally don’t represent government whistleblowers unless they are reporting corporate misconduct.
However, it is worth noting the potential new protections. The bill would require disclosures of wrongdoing to be passed up the chain of command as well as impose mandatory discipline on any employee who retaliates against a whistleblower. The bill still faces opposition in the Senate and President Obama has threatened to veto it because of the impact it would have on the due process rights of federal employees.
Senators Chuck Grassley and Patrick Leahy reintroduced the Criminal Antitrust Anti-Retaliation Act into the Senate. CAARA prohibits employer retaliation against employees providing information to the Department of Justice about conduct violating criminal antitrust law.
The legislation as currently written does not provide for rewards for antitrust whistleblowers. The Government has expressed concern that it will be more difficult to make their case under the criminal law with a higher burden of proof than civil cases if their star witness of the conspiracy will receive a reward. The United States already provides limited immunity to certain individuals or companies that come forward first with evidence of their participation in an antitrust conspiracy.
Internationally, several countries do provide monetary awards in this area. The United Kingdom, South Korea, Hungary and Pakistan all pay for information about price fixing cartels. A Government Acountability Office report in July 2011 found support for rewards in the United States mixed.
The bill is one of a number under consideration by Congress and the States. The Motor Vehicle Safety Whistleblower Act sponsored by Senators Thune and Nelson to incentivize auto whistleblowers has already passed the Senate. New York’s Attorney General Eric Schneiderman has also announced a proposal for the Financial Frauds Whistleblower Act to compensate whistleblowers in the banking, insurance and financial services industries.
The Supreme Court reversed the Tenth Circuit decision in E.E.O.C. v. Abercrombie & Fitch Stores, Inc. this week and allowed the employment discrimination action against Abercrombie to proceed.
The case involved a claim of intentional discrimination under Title VII. Abercrombie was accused of failing to hire an applicant because of her religion. During the applicant’s interview, she wore a headscarf. Abercrombie has a policy that “caps” are not permitted to be worn by its employees. Because of this policy, Abercrombie did not hire the applicant.
Justice Alito’s opinion focuses largely on the words “because of” in Title VII. His analysis separates the defendant’s motive and knowledge, concluding that certain motives for employment decisions are prohibited “regardless of the state of the actor’s knowledge.” “[Title VII’s] disparate-treatment provision prohibits actions taken with the motive of avoiding the need for accommodating a religious practice. A request for accommodation, or the employer’s certainty that the practice exists, may make it easier to infer motive, but is not a necessary condition of liability.”
The False Claims Act has similar “because of” language in its anti-retaliation protections. It prohibits certain adverse employment actions “because of lawful acts done … in furtherance of an action under this section ….” 15 U.S.C. 3730(h)(1). This section has generally been interpreted to require the employer’s knowledge of protected activity by an employee. See, e.g., Eberhardt v. Integrated Design & Const., Inc., 167 F.3d 861, 868 (4th Cir. 1999); U.S. ex rel. Yesudian v. Howard Univ., 153 F.3d 731, 736 (D.C. Cir. 1998).
The knowledge requirement can pose problems for a whistleblower that has not explicitly told their employer that they have engaged in protected activity. If proof of employer knowledge was not required, the law might protect an employee from actions taken against potential or suspected whistleblowers where there was not otherwise enough evidence to meet the current law’s test for improper conduct.
Of course, because the Supreme Court’s decision was interpreting Title VII, it may ultimately have no effect on whistleblower retaliation law. It will be up to federal judges to decide the extent of the impact of this decision in the coming years.
The volume and quality of tips to the SEC whistleblower program is increasing. The frequency and size of rewards is expected to grow. And the SEC is concerned about severance agreements that require whistleblowers to forgo awards or represent that they have not previously reported misconduct.
These were among the remarks made by SEC Chair Mary Jo White in her introduction to the Corporate and Securities Law Institute at Northwestern University School of Law yesterday. Her complete remarks are available on the SEC website here.
The speech offers both an interesting history of incentives for securities whistleblowers – dating back to a Dutch law in 1610 prohibiting naked short selling that predates the Tulip bubble of 1636-1637 by more than 25 years – and insight into the Dodd-Frank whistleblower program, which White calls a “game changer.”
The speech primarily discusses four areas in relation to the SEC program:
The securities regulator has now received tips from all 50 states and sixty foreign countries. It has made 17 awards totaling approximately $50 million. White also gave us a quick look at the first quarter of FY2015. Apparently, the number of tips has increased by more than 20 percent over the first quarter in the last fiscal year. Even with the increase in tips, they have been of even higher quality and have helped put enforcement actions on a faster timetable.
Whistleblowers have alerted the government to highly technical fraudulent schemes, explained the meaning of documents to SEC staff, and testified at TRO or asset freeze proceedings to stop fraudulent schemes.
During the debate over the Dodd-Frank rules, the effect of the program on internal compliance programs was a key concern of many. White reports that internal compliance programs are vibrant and that most whistleblowers still report internally first. The program also incentivizes companies to investigate and self-report misconduct because of concerns that someone else will report them.
The SEC will continue to make enforcement of anti-retaliation protections a high priority, according to White. The speech recaps some of its efforts, including taking its first enforcement action against retaliation and intervening in several private cases to argue that individuals internally reporting violations are protected from retaliation in addition to those filing a Form TCR.
Open Channels of Communication
White spent a significant portion of her speech discussing the recent enforcement action against KBR under Rule 21F-17, without naming the company. She downplayed concerns regarding the use of confidentiality agreements to protect trade secrets or confidential information but indicated that it was not permissible for companies to prevent employees from reporting securities violations or take other actions (like the clause requiring pre-approval of government reporting) that might chill potential whistleblowing.
The SEC is also looking at employment agreements that require employees to forgo any whistleblower award as a condition of a severance payment. White hints that these contracts are looked upon unfavorably by the Enforcement Division. I would not be surprised if we see additional rules developed by the agency in order to cover this contingency, if it is not prohibited within the scope of the current rules.
Our SEC whistleblower attorneys can provide you with additional information about the program if you have evidence of a securities law violation or a question about an employment agreement. Please contact us or call 1-800-590-4116 to speak to a lawyer at McEldrew Young Purtell Merritt.
KBR agreed to pay the SEC $130,000 for language in its confidentiality agreements restricting whistleblowers from reporting suspected violations under the SEC whistleblower program. It is the first enforcement action of its kind by the U.S. Securities and Exchange Commission.
Rule 21F-17, enacted under the authority granted to it by Dodd-Frank, prohibits any person from impeding an individual from communicating with SEC staff about a possible securities law violation. The rule specifically addresses the enforcement, or threats to enforce, confidentiality agreements.
The Securities and Exchange Commission has adamantly warned companies about restrictive language against whistleblowing in their employment agreements over the last year. KBR’s restrictive language emerged in a court case last year and it has been the most high profile example to date.
According to the SEC, the confidentiality agreements KBR asked its employees to sign contained a pre-notification clause. Andrew J. Ceresney, the Director of the Division of Enforcement at the SEC, said in a press release that the clauses potentially discouraged employees from coming forward. The SEC order says there were no apparent instances of an employee prohibited from reporting a securities violation. KBR did not admit or deny the charges in the settlement.
KBR is awaiting a decision by the Supreme Court in a whistleblower lawsuit under the False Claims Act in U.S. ex rel. Carter v. KBR. The issue in the oral argument was two-fold. First, it relates to whether the Wartime Statute of Limitations Act extends the time period for filing a lawsuit under the False Claims Act. The defendant also sought to have the Supreme Court rule on the meaning of “pending” in the FCA’s first to file requirement. Our thoughts about the oral argument in KBR are here.
Last year, the SEC brought the first enforcement action against a corporation for retaliating against a whistleblower. If you have questions concerning whistleblower retaliation protections, please contact one of our SEC whistleblower attorneys by calling 1-800-590-4116 or filling out our contact form.
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.
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:
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.
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.
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.
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.