In 2002, Congress passed the Sarbanes-Oxley Act
("SOX"), which extends whistleblower protections to
certain individuals who report conduct they reasonably believe
constitutes a violation of federal mail, wire or bank fraud laws;
any rule or regulation of the Securities and Exchange Commission
("SEC"); or any provision of federal law relating to
shareholder fraud. In 2010, President Obama signed into law the
Dodd-Frank Wall Street Reform and Consumer Protection Act
("Dodd-Frank"). Dodd-Frank prohibits employers from
retaliating against employees for disclosing information as
required or protected under SOX; the Securities Exchange Act of
1934; and any other law, rule or regulation subject to the
jurisdiction of the SEC. Dodd-Frank also required the SEC to
implement a new whistleblower program — the so-called bounty
program — that pays to whistleblowers cash awards of between
10% and 30% of amounts the SEC recovers based on the
whistleblower's report.
As described in more detail below, to date in 2016, the SEC has
awarded nine individuals a total of more than $28 million through
its bounty program, and its Office of the Whistleblower has
published its annual report for fiscal year 2015, which
reveals that whistleblower tips continue to rise, as they have each
year since the commencement of the program. In addition, a number
of notable recent federal court decisions, including one issued by
a circuit court, have provided helpful guidance regarding the
standard for establishing causation under SOX.
SEC Issues More Bounty Awards in Early 2016
Thus far this year, the SEC has issued several bounty awards in
an aggregate amount exceeding $28 million. On January 15, 2016, the
SEC announced that it had awarded more than $700,000 to an
unidentified whistleblower — an "industry expert"
— who provided "detailed analysis" to the agency.
Andrew Ceresney, director of the SEC's Enforcement Division, explained that "[t]he voluntary
submission of high-quality analysis by industry experts can be
every bit as valuable as firsthand knowledge of wrongdoing by
company insiders."
Less than two months later, on March 8, 2016, the SEC awarded three
whistleblowers a bounty of almost $2 million. The bulk of the
award— $1.8 million— was issued to an individual for
providing original information that prompted the SEC to open an
investigation as well as providing valuable information to the
agency throughout the investigative process. The other two
whistleblowers were awarded more than $65,000 each for providing
information after the SEC's investigation had commenced. Sean
McKessy, chief of the SEC's Office of the Whistleblower, stated in an SEC press release,
"We're seeing a significant uptick in whistleblower tips
over prior years, and we believe that's attributable to
increased public awareness of our program and the tens of millions
of dollars we've paid to whistleblowers for information that
helped us bring successful enforcement actions."
In May 2016, the SEC made three announcements that it would make
bounty awards totaling nearly $10 million to four whistleblowers.
On May 13, 2016, the SEC awarded more than $3.5 million to a
company employee whose tip bolstered an ongoing investigation with
additional evidence that strengthened the case.
"Whistleblowers can receive an award not only when their tip
initiates an investigation, but also when they provide new
information or documentation that advances an existing
inquiry," said Andrew Ceresney. On May 17, 2016, the SEC
stated that it would award between $5 million and $6 million to a
former company insider whose detailed tip led the agency to uncover
securities violations that would have been nearly impossible for it
to detect but for the whistleblower's information. And on May
20, the SEC said it would jointly award more than $450,000 to two
individuals for a tip that led the agency to open a corporate
accounting investigation and for their assistance once the
investigation was underway. "The recent flurry of awards
reflects the high-quality nature of the tips the SEC is receiving
as public awareness of the whistleblower program grows," said Sean McKessy.
Most recently, on June 9, 2016, the SEC announced a whistleblower
award of more than $17 million to a former company employee whose
detailed tip substantially advanced the agency's investigation
and ultimate enforcement action. The award is the second-largest
issued by the SEC since its whistleblower program began nearly five
years ago. "Company insiders are uniquely positioned to
protect investors and blow the whistle on a company's
wrongdoing by providing key information to the SEC so we can
investigate the full extent of the violations," said Andrew Ceresney.
The SEC's whistleblower program has now awarded more than $85
million to 32 whistleblowers since the program's inception in
2011.
Important Takeaways From the SEC's 2015 Annual Whistleblower Report
On November 16, 2015, the SEC's Office of the Whistleblower
released its annual report for fiscal year 2015, reporting that it
received nearly 4,000 whistleblower tips in the year ended
September 30, 2015, a 30% increase from fiscal year 2012. The
report states that for each full year that the SEC's
whistleblower program has been in operation, the SEC has received
an increasing number of whistleblower tips.
The SEC received whistleblower tips and complaints from all 50
states, as well as the District of Columbia, Puerto Rico and the
U.S. Virgin Islands. In the U.S., the largest number of
whistleblower complaints and tips were from California (646), New
York (261), Florida (220) and Texas (220). The SEC also received
tips from individuals in 61 foreign countries, the majority of
which originated in the U.K. (72).
In fiscal year 2015, the SEC awarded more than $37 million to eight
whistleblowers, including one award for the maximum payment of 30%
of amounts collected in connection with the SEC's first
anti-retaliation case. That whistleblower received more than
$600,000. The SEC reported that in determining the award
percentage, it considered the "unique hardships" the
whistleblower suffered as a result of reporting, including being
removed from his or her position, tasked with investigating the
very conduct the whistleblower reported to the SEC and otherwise
marginalized at the company.
The annual report provided interesting facts about the
program's whistleblower award recipients, including the
following:
- Almost half of award recipients were
current or former employees of the company on which they reported
information of wrongdoing. Of those, approximately 80% raised their
concerns internally to their supervisors or compliance personnel,
or otherwise understood that the company knew of the violations
before they reported the violations to the SEC. The remaining award
recipients were investors who were victims of the alleged fraud,
professionals working in a related industry or individuals who had
a personal relationship with the alleged wrongdoer.
- Approximately 20% of award recipients
submitted their tips to the SEC anonymously through counsel.
- Roughly half of the whistleblowers who have received awards to date "caused [the SEC] to open an investigation." The other half received an award "because their original information significantly contributed to an existing investigation."
The SEC also reported that one of its areas of focus in 2015 was whether employers were using confidentiality, severanceor other types of agreements "to interfere with an individual's ability to report potential wrongdoing to the SEC." Exchange Act Rule 21F-17(a) provides that "[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement ... with respect to such communications." On April 1, 2015, the commission brought its first enforcement action regarding this issue. When KBR Inc. interviewed employees in connection with internal investigations, it required them to sign an agreement prohibiting them from discussing the substance of the interview without prior approval by KBR's legal department. The agreement indicated that an unauthorized disclosure could lead to disciplinary action, including termination of employment. The SEC found that this confidentiality agreement "impeded whistleblowers," in violation of Rule 21F-17(a). According to the report, the Office of the Whistleblower will continue to focus on confidentiality, severance and other agreements in 2016.
California District Court Confirms Internal Whistleblowers' Protection Under Dodd-Frank
On October 23, 2015, the United States District Court for the
Northern District of California ruled in Wadler v. Bio-Rad Labs.,
Inc. that the anti-retaliation provisions of Dodd-Frank apply to
whistleblowers who report information to the employer without the
requirement of also reporting to the SEC. The court found that a
conflict in the language of the statute rendered it ambiguous:
While the statute defines "whistleblower" to mean only
one who reports violations to the SEC, the substantive
anti-retaliation provision applies to all whistleblowers who
provide information as required or protected under SOX, which
extends protection to internal whistleblowers even if they do not
report alleged wrongdoing to the SEC. Based on this ambiguity, the
court afforded deference to the interpretation of the SEC's
Rule 21F-2(b)(1), which provides protection under Dodd-Frank for
individuals who provide information internally.
By the same decision, the district court held that directors may be
held individually liable for retaliating against whistleblowers
under both SOX and Dodd-Frank. Plaintiff Sanford Wadler, the former
general counsel of defendant Bio-Rad Laboratories Inc., filed suit
against the company and its individual board members after his
employment was terminated by the board, asserting a variety of
claims, including retaliation, under SOX and Dodd-Frank. The
district court ruled that (a) although the language of SOX is
ambiguous, the legislative intent and context of SOX suggest that
board members may be held individually liable as agents, and (b)
Congress intended that Dodd-Frank provide for such liability, and
therefore board members may be held individually liable for
retaliation against whistleblowers.
Southern District of New York Court Dismisses SOX and Dodd-Frank Claims
The United States District Court for the Southern District of New York recently dismissed a plaintiff's SOX and Dodd-Frank whistleblower claims on the grounds that the plaintiff did not offer any evidence establishing that a protected complaint she made concerning the defendant's SEC proxy statements contributed to her termination. In Yang v. Navigators Group, Inc., plaintiff Jennifer Yang was employed with defendant Navigators Group Inc. as its chief risk officer. She alleged that, in fulfilling her responsibilities, she discovered a variety of risk assessment issues and claimed that the company's SEC filings inaccurately reflected its risk management. Yang alleged that shortly after she communicated her concerns to Navigators' leadership, the company terminated her employment, in violation of SOX and Dodd-Frank. Although Yang was terminated only two weeks after a protected complaint, the court held that "[t]emporal proximity does not ... compel a finding of causation, particularly when there is a legitimate intervening basis for the adverse action." The court concluded that a "purportedly terrible presentation" by Yang, which "occurred in the intervening time between her complaint and her termination," weakened any inference of retaliation that could be drawn from Yang's complaint.
Third Circuit Rejects SOX Whistleblower Claims, Finding Plaintiff Could Not Show Causation
The Third Circuit issued an important decision concerning
causation under SOX in Wiest v. Tyco Electronics Corp. The
plaintiff, Jeffrey Wiest, a 30-year employee who worked in
Tyco's accounts payable department, claimed that he was fired
because he raised concerns about requests to process certain
expenses submitted in connection with company events, including a
$350,000 event at a Bahamas resort with mermaid greeters and
costumed pirates and wenches. Tyco asserted that more than eight
months after Wiest engaged in what he contended was protected
activity, a professional within Tyco's human resources
department, who had no involvement with or knowledge of Wiest's
alleged protected activity, conducted an investigation after she
received multiple complaints that Wiest made inappropriate sexual
comments to several Tyco employees and had engaged in improper
sexual relationships with subordinates. Tyco contended that the
findings from this investigation led to the termination decision
and that the decision was unrelated to the accounting issues Wiest
had raised.
The Third Circuit affirmed the district court's grant of
summary judgment in favor of the company, concluding that the
plaintiff did not present evidence to establish a causal connection
between his protected activity and the termination decision. The
court noted that SOX requires a plaintiff to provide evidence
showing, among other things, that his protected activity was a
"contributing factor in the adverse action alleged in the
complaint." The court concluded that a reasonable jury could
not find that the alleged protected activity was a contributing
factor in the termination decision because (a) any inference of
causation due to temporal proximity was "minimal" because
of the 10-month gap in time, and (b) the record
"overwhelmingly demonstrate[d]" legitimate intervening
events between the protected activity and the termination decision.
Moreover, the court noted that the company praised the plaintiff
before and after his protected activity, the human resources
employee who investigated the sexual harassment complaints against
the plaintiff was unaware of his alleged protected activity, and
the plaintiff's colleagues who engaged in similar activity were
not subjected to negative treatment.
In addition, the court determined that Tyco presented ample
evidence showing that it would have terminated the plaintiff's
employment even in the absence of protected activity. Importantly,
the court stated that "it is not our role to second-guess a
human resources decision that followed a thorough
investigation," noting the absence of any evidence casting
doubt on the integrity of the investigation.
Implications for Employers
The Supreme Court may soon be asked to consider the question of
whether whistleblowers must report wrongdoing to the SEC in order
to be protected under Dodd-Frank. In the meantime, employers should
be aware that whistleblowers who report concerns only to their
employers may be covered by the anti-retaliation provisions of
Dodd-Frank within the Second Circuit and other jurisdictions.
Furthermore, board members and other decision-makers must consider
that they may be held individually liable for any actions that
could be perceived as retaliatory.
The statistics set out in the SEC's 2015 annual report confirm
that whistleblower tips continue to escalate and that the vast
majority of tipsters who are current or former employees of the
target company first report their concerns internally to
supervisors or compliance personnel or assume that the company has
knowledge of violations. In light of these facts, employers must
maintain strong compliance practices with the goal of preventing
misconduct. Training should be provided to those responsible for
receiving reports about improper conduct, and care should be taken
to prevent retaliation against employees who make a report. And
when employers learn of actual misconduct, appropriate disciplinary
and remedial action must be taken.
In addition, the statistics in the 2015 annual report, together
with the Yang and Wiest cases, underscore the value of documenting
the reasons for termination and conducting thorough investigations
when employees raise concerns relating to potential violations of
securities laws.
Finally, employers should review their employment agreements,
confidentiality and nondisclosure agreements, handbooks, and
separation agreements to ensure that the provisions in these
documents do not run afoul of the SEC's dictates.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.