SEC Whistleblowers May Not Receive Jury Trial in Retaliation Cases

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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 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.

 

Key Stats and Figures on Whistleblowing

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It turns out that one of the top ranked websites for statistics concerning whistleblowers is a random business site pushing marketing services. It mentions the False Claims Act twice and doesn’t even mention the Internal Revenue Service or Securities and Exchange Commission. Published in 2015, it’s obvious that someone just went out there to research whistleblower data in order to become a potential source for reporters on the subject.

Key Whistleblower Changes in Bipartisan Budget Act

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The Bipartisan Budget Act of 2018, passed overnight and signed this morning by President Trump to end the second federal government shutdown of this year, includes two key provisions for whistleblowers previously introduced by Senator Charles Grassley but removed from the January budget deal.

Considering Rewards for Environmental Whistleblowers

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There have been suggestions that the federal government add incentives for whistleblowers in a number of areas since the passage of Dodd-Frank. One area where I have not seen as much support as I would expect is for the payment of incentives to environmental whistleblowers.

We’re on the verge of the largest fine in history for the violation of the Clean Water Act.  If there was a time to push for it, now would be the time.  BP is facing a potential fine of up to $13.7 billion for violations of the Clean Water Act for the Gulf of Mexico oil spill in 2010.  Transocean already paid $1.4 billion to settle civil and criminal charges related to its role in the spill.

Calls for reform of whistleblower procedures in the securities industry gained momentum because of the unsuccessful efforts of a hedge fund manager to expose the fraud on investors perpetuated by Bernie Madoff.  The BP disaster, similarly, might have been prevented if complaints about the testing of blowout preventers at BP had been encouraged and heeded.

The Potential BP Whistleblower

An industry veteran accused BP of falsifying reports of blowout preventers passing state performance tests in Alaska. The accusations led to his testimony in a 2003 lawsuit. Alaska investigated but did not take action against the company. It only prosecuted one individual, a low level employee.

The BP spill has been blamed in part on problems with the blowout preventer at the Gulf of Mexico rig.  Would additional government scrutiny have led to changes company-wide at BP?  Would the government inspection of this aspect of the oil rig been more stringent after receiving a whistleblower report?

It is impossible to know what would have happened in this case.  Still, there could easily be other looming environmental problems that could be prevented if the EPA gave employees of the company an incentive to come forward.

The Other Environmental Pollution Trial

BP may be garnering all of the headlines, but it isn’t the only environmental trial happening right now.  Dupont is currently facing a trial in a lawsuit under the False Claims Act for failure to report the release of cancer-causing gas at a plant in Louisiana.  The lawsuit, brought by a whistleblower, is based on the company’s failure to report the release under the Toxic Substances Control Act.

Environmental lawsuits are only a small part of the False Claims Act.  More typically, FCA lawsuits have been brought in cases where contractors are paid to cleanup environmental disasters and do not perform the work or overcharge for it.

As it is interpreted by the courts, though, it is no substitute for an EPA whistleblower program.

Why aren’t There Calls for Reform??

The government uses rewards in other areas to encourage insiders and other individuals to bring misconduct to light.  After large oil spills, the need for a government investigation is clear.  So it isn’t an area where the government necessarily needs someone to come forward in order to spur an investigation.  The government may be concerned that parasitic tips will be provided that don’t substantially aid the investigation.

On the other hand, EPA enforcement actions led to $163 million in fines and penalties last year and companies agreed to pay $9.7 billion to clean up contaminated sites and control pollution.  Would the opportunity to prevent billions in environmental damage not be worth the rewards paid to individuals who helped stop them from continuing?

The EPA and Whistleblowers Now

The environmental laws and the EPA don’t totally ignore whistleblowers now.  The EPA website already contains a page to allow for the reporting of environmental violations.  The Clean Air Act, Clean Water Act, CERCLA and RCRA contain protections for whistleblowers who experience retaliation.

The Clean Air Act even authorizes awards of up to $10,000 for information about violations of the law. Unfortunately, an investigation into this provision by Public Employees for Environmental Responsibility last year turned up no evidence it has been used.

Are these measures enough?  Have they been successful?  It would be interesting to see a Governmental Accountability Office report in this area similar to the one done concerning antitrust whistleblowers.

Could it Work?

Corporations are no doubt committing violations of the nation’s environmental laws on a daily basis. Incentivizing whistleblowers have proven to be a cost effective tool to help the United States learn about violations of the fraud and securities laws.  It could similarly help the EPA enforce U.S. laws against environmental pollution.  The SEC and CFTC programs could prove a model for the EPA to implement.

Given the support among environmental groups for protection of the environment and major prosecutions of Kerr-McGee and BP, it’s surprising that there haven’t been more calls for expanded use of whistleblowers in this area. Let’s hope that this is an area that gains additional support. The enforcement of our environmental laws for clean air, water and soil is a worthy place to encourage people to tip off the government to misconduct.

Collected Proceeds Clarification for IRS Whistleblowers Dropped from Tax Bill

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The Wall Street Journal reported yesterday that the reconciliation of the tax legislation has dropped the definition of collected proceeds for the IRS whistleblower program introduced into the Senate version that passed. The amendment was added by Senator Chuck Grassley, an advocate for whistleblowers and responsible for introducing the legislative provision in 2007 that created the IRS whistleblower program.

Switch from GAAP to IFRS could expose accounting fraud to whistleblowers.

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Last week, James Schnurr, the new chief accountant for the Securities and Exchange Commission, told reporters that he was reviewing prior agency work on the potential accounting switch from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). The transition, which the SEC has been considering since at least 2007, will be revisited again by Scnhurr, a partner at Deloitte LLP prior to starting at the SEC a month ago. No decision has been made on the ultimate course of action the agency will pursue, although it will have implications for the method of accounting used by public companies distributing financial statements to shareholders.

The Wall Street Journal identified computer software and wireless communications as two industries where this transition could lead to dramatic changes in corporate accounting. In areas where GAAP and IFRS differ, there is the possibility that the rule switch could potentially expose accounting irregularities at large corporations as historical treatments are re-examined or lead to new situations of accounting fraud if companies attempt to adopt more favorable treatments during the transition.

More than 100 countries including the European Union currently use IFRS. The United States still uses GAAP in company-issued financial statements. When measured by market capitalization, more than half of the world’s companies still use US GAAP.

DEVELOPMENT OF ACCOUNTING STANDARDS

GAAP has been used extensively in the United States since the 1930s. Development started during the Great Depression as the country needed a way to restore confidence in the financial statements of corporations. The SEC encouraged the private sector to develop the accounting standards in 1938.

The movement for development of a set of international accounting standards started to grow in the 1960s. In the 1970s, the Financial Accounting Standards Board was created and began developing the International Accounting Standards. In 2001, the International Accounting Standards Board took over development and the name change to IFRS happened.

In 2005, companies began using IFRS in the European Union. Canada replaced its GAAP with IFRS in 2011. Japan has been promoting greater use of IFRS on a voluntary basis.

The SEC began exploring convergence with the IFRS set by the IASB in 2007. The initial roadmap published in 2008 suggested the potential for use by US issuers as early as 2014. However, according to the Wall Street Journal, “concerns about cost, implementation and the burden on smaller companies” stalled momentum.

IMPLICATIONS FOR WHISTLEBLOWERS

If new rules are adopted, the transition may expose problematic accounting treatments currently on the books or lead to new cases of accounting fraud. If the transition happens, and accountants are asked to adopt questionable accounting practices, they should consider the appropriate response given available options at their employer, the company and the SEC. The SEC whistleblower program or even the IRS program are options.

The IESBA is still working on a new code of ethics for professional accountants but the proposed guidelines currently open the door for an accountant to follow their conscience and report suspected noncompliance with laws and regulations.

False Claims Act Whistleblowers Paid $392 Million in Fiscal Year 2017

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The Department of Justice recovered more then $3.7 billion in settlements and judgments in Fiscal Year 2017 from the False Claims Act according to the press release issued last week. The majority of the funds recovered were in lawsuits initiated by whistleblowers. Qui tam lawsuits led to $3.4 billion of the $3.7 billion in settlements and judgments.

DOJ Announces Largest Hospice Fraud Settlement Ever – $75 Million

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The Justice Department announced the resolution of a False Claims Act lawsuit with a $75 million settlement by Chemed Corporation and various wholly-owned subsidiaries, including Vitas Hospice Services. The settlement is the largest amount ever recovered under the False Claims Act from a provider of hospice services, according to Acting Assistant Attorney General of the Civil Division, Chad A. Readler.

The Largest Auto Fines in U.S. History

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Motor vehicle crashes are a leading cause of death in the United States. Although manufacturers have made significant strides in decreasing the number of fatalities since the late 1960s and early 1970s, there have been several significant instances of auto manufacturers delaying recalls and leaving potentially defective vehicles on the road after they knew or suspected problems.

IRS Clarifies 6103(n) Whistleblower Contracts

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Earlier this year, the IRS Whistleblower Office and its Director Lee Martin issued guidelines for the use of 6103(n) contracts with tax whistleblowers. This has been a somewhat controversial area in the past, since it requires balancing the privacy rights of the taxpayer.

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