Insider Trading: Personal Benefit Standard Under Supreme Court Review

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Last year, we speculated about the likelihood that the Supreme Court would accept a significant insider trading case at the urging of the Justice Department. Although the Supreme Court denied cert in United States v. Newman from the Second Circuit, the subject of the DOJ request a few months ago, it will now review an insider trading conviction from the Ninth Circuit: United States v. Salman.

Supreme Court to Decide Implied Certification in False Claims Act Case

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The Supreme Court has granted certiorari in the case of U.S. ex rel. Escobar v. Universal Health Services, Inc. The case could have important implications for the implied certification theory of liability under the False Claims Act.

Did the Supreme Court Help Whistleblowers in EEOC v. Abercrombie?

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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.

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Will Congress, Supreme Court Define Insider Trading?

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The Second Circuit has denied the U.S. Government’s reconsideration request on a key December ruling limiting the definition of insider trading.  The Supreme Court and/or Congress are up next for the U.S. Government to undo the decision the U.S. Attorney’s office in the Southern District of New York has said would “dramatically limit” the prosecution of some of the most common cases of misconduct.

The opinion in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), reh’g denied, Nos. 13-1837, 13-1917 (2d Cir. Apr. 3, 2015) requires insiders leaking information to receive a personal benefit, something of some consequence, in order to convict them for insider trading.  In the case, the information passed through several hedge funds before the traders the government prosecuted received the information.  The Second Circuit also concluded that they didn’t have the requisite intent to violate the law because they weren’t aware of any benefit provided to the insiders for the information.  The Second Circuit also said that it was insufficient to prove a violation of the law for an insider passing on confidential information to receive an intangible “friendship.”

There are now three options open to the government.

The Government can appeal the decision to the Supreme Court.  There has been speculation that the Court would not agree to take the appeal at this juncture.  The Supreme Court takes a very low percentage of the cases where it is petitioned to review.  There’s also been speculation that a Supreme Court appeal could lead to a more unfavorable ruling, making it difficult to prosecute insider trading in scenarios not touched by the Second Circuit decision.

The Obama administration could also take the case to Congress.  There is currently no federal law defining insider trading. There have already been three bills introduced into the legislative branch to remedy the problem since the Second Circuit announced its decision.  However, the Republican-controlled Congress would probably be hostile to the request at a time when it is already seeking to overturn key aspects of the Wall Street regulations imposed by Dodd-Frank.

The third strategy involves a wait-and-see approach.  The SEC and Justice Department could continue to bring cases and watch how the doctrine develops in the judicial system.  An opinion by U.S. District Judge Rakoff applying the ruling suggests that there may not have been a monumental change in the application of the law.  See Securities and Exchange Commission v. Payton et al, No. 1:2014-cv-04644 (S.D.N.Y. April 6, 2015).

The courts seem to be increasingly hoping to put the ball back in Congress’ arena, however.  In his opinion, Judge Rakoff suggests that Congress is the appropriate body to adequately define insider trading and that the case-by-case approach caused by criminal and civil enforcement of insider trading laws has created tensions.

Supreme Court Justice Antonin Scalia has also implied that it is time for Congress to act to clarify the ambiguity of the prohibition on insider trading.  In the Supreme Court’s denial of an appeal by Douglas Whitman last year, Justice Scalia indicated he would be open to considering an appeal of a criminal conviction for insider trading based on the issue of whether ambiguous criminal legislation can be clarified by an administrative agency or the courts.

The SEC had made insider trading enforcement a priority since 2009.  Before recent losses, U.S. Attorney Preet Brahara had an impressive record of 79-0 in these cases.  Defendants in some of those cases are now preparing to challenge their convictions based on the Second Circuit decision.

It remains to be seen how aggressively the SEC will pursue insider trading cases following the decision, and it could have an effect on some whistleblowers.  There have been more than 400 tips concerning insider trading since Dodd-Frank created the SEC whistleblower program.  Prior to the Dodd-Frank whistleblower program, the SEC had a discretionary program for incentivizing securities whistleblowers in insider trading.

Thoughts on the Oral Argument in US ex. rel. Carter v. KBR


The U.S. Supreme Court took up the appeal of Kellogg Brown Root today with oral arguments over the meaning of the word “offense” in the Wartime Statute of Limitations Act and “pending” in the first to file requirement of the False Claims Act.  The transcript can be found here.

The relator accuses KBR of time card fraud during the provision of water testing and purification services to troops in Iraq in 2005.  The first part of the oral argument dealt with whether the WSLA, historically limited to tolling the statute of limitations in criminal offenses, also extends the statute of limitations for civil violations pursued under the False Claims Act.  The Government and the relator contend that the law was changed in the 1940s when Congress amended the law to delete “now indictable” from the statute.  The Fourth Circuit agreed with this position.

Although the case has had a complicated procedural history to date, the facts provide for a surprisingly good framework to answer the issue raised regarding the WSLA, which has remained an open question speculated about by practitioners for several years.  Why?  Because there has been an open question whether the war tolled the statute of limitations for all fraud cases or only cases related to the war.  In KBR, the Supreme Court can decide the matter without tackling the issue of how broadly the tolling applies.  For example, the relator in the Lance Armstrong case made the argument that the WSLA tolled the statute of limitations in a case involving fraud against the U.S. Postal Service involving their sponsorship of a popular cycling team.

The petitioner’s argument focused on the use of the word “offense” in the WSLA, arguing that it only applied criminal prosecutions.  This position appeared to receive support, with only Justices Breyer and Kagan defending the relator and government’s argument that the WSLA applies to civil violations also.

The Supreme Court’s decision to grant cert on the petition in this case absent a circuit split suggests that it may be getting ready to reverse the Fourth Circuit’s decision.  Interestingly, after a question by Justice Sotomayer, the petitioner asked the court to reach the second question presented on the scope of the first-to-file provision even if it sides with the defendant on the length of the WSLA because of a potential argument about equitable tolling on remand.

On the first to file question, the Justices seemed to agree with the relator and Government’s interpretation of the word pending. Justices Kennedy and Scalia both questioned the odd choice of the word pending if Congress had intended for the statute to be read as the defendant/petitioner asked. Justices Ginsburg, Sotomayer, Kennedy and Scalia then proceeded to craft hypotheticals struggling with the limitations on filing a qui tam lawsuit after the dismissal of the first-to-file lawsuit.

If the Justices decide to extend their opinion past the initial question of the statute of limitations, it looks like the U.S. Government and relators will get a common sense interpretation of the word pending that could help a few relators beaten to the courtroom but nevertheless able to navigate the potential pitfalls of claim/issue preclusion and public disclosure.

Supreme Court to Hear Appeal of KBR over False Claims Act Lawsuit


Last week, the Supreme Court granted certiorari in the case of Kellogg Brown & Root Services v. U.S. ex rel. Carter, adding another appeal involving a whistleblower to its schedule in the fall. The petition initiated by KBR asked the Court to review the appropriate statute of limitations and the application of the first to file bar in False Claims Act litigation.

The history of the case is a bit unusual. Benjamin Carter, the relator who worked for the defendant in Iraq, filed a qui tam complaint in 2006. The complaint was amended in 2008 to include allegations of false billing for labor costs. This complaint was dismissed by the district court because of similar allegations in a pending relator complaint filed prior to Carter’s allegations.

As those familiar with the False Claims Act are aware, the statute bars a person from bringing a “related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). This is commonly known as the “first to file” bar.

While on appeal, the complaint by the other relator was dismissed. Carter filed a new complaint in 2010. However, since his 2008 appeal was still pending, the new complaint was dismissed because of his own pending appeal. Strategically, Carter dismissed the appeal of the 2008 complaint.

By the time Carter refiled his complaint, another relator had filed against the company with similar allegations. The district court held that this pending complaint barred Carter’s latest complaint. Because a significant amount of time had passed since the events underlying this litigation, the district court also held that most of the allegations were now barred by the statute of limitations of the False Claims Act, set forth in § 3731(b).

Carter appealed successfully to the Court of Appeals. The Fourth Circuit held that the statute of limitations in the case was tolled by the Wartime Suspension of Limitations Act (WSLA). It also authorized him to refile his complaint because there were no other pending actions.

The defendant now contests those issues on appeal.

It contends that the WSLA applies solely to criminal cases brought by the government. It makes three key arguments:

1. The WSLA does not apply to civil fraud cases where the U.S. government is not a party;

2. The WSLA does not apply when the government has not formally declared war; and

3. The WSLA does not modify the ten year statute of repose in the False Claims Act. In other words, the WSLA does not indefinitely toll the statute of limitations.

The Supreme Court will also review whether a previous lawsuit, not dismissed on the merits, bars a subsequent relator from filing a qui tam lawsuit because of the “first to file” requirement of the False Claims Act. The defendant contends dismissal is appropriate because the government has already been put on notice of the fraud.

KBR is the second case involving a whistleblower to be scheduled by the Supreme Court. In May, it agreed to hear the appeal of Homeland Security in the case of TSA air marshall Robert MacLean, Department of Homeland Security v. MacLean. MacLean informed the media that the TSA had discontinued posting air marshals on certain overnight flights because of budget concerns despite an alert about a plot to hijack airlines. He was terminated when the TSA learned of his role blowing the whistle. The Federal Circuit Court of Appeals sided with MacLean in his retaliation claim under the Whistleblower Protection Act.

The Supreme Court has already weighed in on two cases involving whistleblowers this year.

A few weeks ago in June, the Supreme Court decided Lane v. Franks. Lane, in his capacity as director of a statewide program for underprivileged youth, terminated an individual on the payroll that had not been reporting to her office. Subsequently, Lane was compelled to testify in the ex-employee’s criminal trial. He alleged that he was terminated in retaliation for the testimony. In a 9-0 opinion written by Justice Sotomayor, the Court held that the First Amendment protects a public employee providing truthful sworn testimony, compelled by subpoena, outside the course of the employee’s ordinary job duties.

In March, it extended SOX protections against retaliation to whistleblowers who work at private contractors to public companies in Lawson v. FMR LLC. The decision reversed the First Circuit decision denying protection to two employees of a privately held financial institution providing services to mutual fund clients.

Fraud and Whistleblower News for Monday, March 31


The Supreme Court denied the cert petition in Nathan v. Takeda today. The petition questioned the Court of Appeals decision with regard to the Rule 9(b) heightened pleading requirement for fraud.

False Claims Act Against Bankrupt Companies – WSJ:Judge Gives $2.3 Billion Hawker Whistleblower Suit New Life
Whistleblowers can pursue their False Claims Act lawsuit against Hawker Beechcraft despite its bankruptcy, according to a ruling in federal court in New York. The whistleblowers alleged that the U.S. Navy and Air Force purchased more than 300 aircraft with defective parts from the company. They argued that the lawsuit was an intentional fraud and a debt to a domestic government unit that should not have been discharged. Last year, a bankruptcy judge ruled that liability from the lawsuit was extinguished by the Chapter 11 bankruptcy plan. Beechcraft was purchased by Textron following bankruptcy.

Currency Manipulation – Bloomberg: Swiss Antitrust Regulator Probes Eight Banks Over Alleged FX-Rigging
The Swiss Competition Commission, known as Weko, says it is investigating foreign exchange rate manipulation at UBS, Credit Suisse, JPMorgan Chase, Citibank, Barclays and a few other banks. At least a dozen regulators are now investigating collusion in currency trading.

Securities Fraud – CNBC: Years later, SEC fraud trial over Texas tycoons to start:
The Securities and Exchange Commission will start jury selection in New York today for the $550 million fraud trial of Samuel Wyly and the estate of his late brother, Charles Wyly. They are accused of committing securities fraud and insider trading. The SEC started investigating the Wyly brothers in 2005.

Medicaid Fraud – New York Times: Settlement in Medicaid Fraud Case Worries Health Providers
A New York Times article expresses concern that increased enforcement efforts against Medicaid providers might cause more doctors and medical practices to stop accepting Medicaid patients. The article cites a recent enforcement action against Carousel Pediatrics by the Office of Inspector General in the Texas Health and Human Services Commission. The percentage of physicians in Texas accepting Medicaid have declined substantially in the past ten years because of Medicaid rate cuts.

IRS Whistleblower Program – Pittsburgh Post-Gazette: Telling for Dollars: Tipsters get few payments in IRS program
The Pittsburgh Post-Gazette reported on the lack of rewards coming out of the IRS Whistleblower program. There have only been 38 recoveries from the 33,000 whistleblower tips the IRS received in the past five years. The IRS paid out $50 million in Fiscal Year 2013 according to the head of the IRS Whistleblower Office, although the majority of the payout went one whistleblower receiving a $38 million dollar award.

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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New Restrictions on Whistleblower Suits a la the Supreme Court


If you’re thinking about blowing the whistle on your corrupt little local government after you heard about their having misspent funds from a state audit, think again. The Supreme Court has just handed down a decision which holds that the provision of the False Claims Act prohibiting whistleblower lawsuits when the information was obtained through an administrative report or audit applies to reports prepared by all governments—not just the feds. Whistleblower suits based on public disclosure of fraud through news reports, court hearings, and congressional/administrative audits were already prohibited against the federal government, but the law regarding local/state governments was murky.

The case is Graham County Soil and Water Conservation District v. U.S ex rel. Wilson, 08-304.

A variety of interested parties filed amicus briefs in the case, and it would have been quite a scene if all of them had ended up in the same room, considering some of them are usually fighting each other. Parties filing amicus briefs in support of the Petitioner (Graham County Soil and Water Conservation District) included good ol’ boys (State of Alabama), Green Mountain Boys (State of Vermont), several other states, the U.S. Chamber of Commerce, the Pharmaceutical Research and Manufacturers of America, and the American Hospital Association. Hopefully the states got to share some litigation pointers with each other before they went home to file their latest False Claims Act cases against the hospitals and drug makers! But seriously, we’re sure a good time was had by all.

Unfortunately for the amici brief writers (and certain fragile Supreme Court egos) the decision is not likely to remain law for very long. In the new health care reform legislation, an amendment to the FCA was included which clarifies that private lawsuits under the FCA are barred only if the public disclosure was federal in nature, i.e., from a proceeding in which the federal government is a party or from a federal report, etc. This amendment appears to overrule the decision in the Graham County case, and Justice Stevens acknowledged the law in a footnote. A fight may still loom over whether the new law is retroactive to pending cases or state reports/audits made publicly available prior to the health care bill’s passage.

The upshot of all this is that there is movement on the part of legislators to bar whistleblower lawsuits that are deemed “parasitic” and are based essentially on a relator’s luck of the draw in hearing about the misspending of funds. Until the issue of whether Graham County applies to pending cases involving state/local reports/audits, it may be wise to avoid getting entangled in this tricky area.

For assistance determining whether a reward would be barred under the False Claims Act, please contact one of our FCA whistleblower attorneys.

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