Board Directors Liable for Whistleblower Retaliation and other SEC News

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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