United States: Whistleblower Claims Under SOX And Dodd-Frank: Recent Developments - November 2016

The Securities and Exchange Commission (the "SEC" or the "Commission") recently announced settlements with two employers whose use of severance agreements allegedly restricted former employees' rights to engage in whistleblowing activity. Moreover, the SEC has announced significant new bounty awards; to date in 2016, the SEC has awarded 10 individuals a total of more than $50 million through its bounty program. Finally, two notable recent federal court decisions have issued rulings pertaining to the Sarbanes-Oxley Act ("SOX") and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") that are favorable to employers.

SEC Settles With Two Employers Whose Severance Agreements Included Waivers of the Employees' Right to Monetary Awards for Providing Information to the SEC

The SEC recently announced settlements with two employers for their use of severance agreements that allegedly unlawfully restricted former employees' rights to engage in whistleblowing activity. According to the SEC, by requiring employees to waive their rights to receive incentive awards for providing information to the SEC, the companies, BlueLinx Holdings, Inc. ("BlueLinx") and Health Net, Inc. ("Health Net"), violated SEC Rule 21F-17. Rule 21F-17 provides that "[n]o person may take any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement." 

The BlueLinx settlement agreement, announced on August 10, 2016, alleged that BlueLinx impermissibly used severance agreements that required outgoing employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or other federal agencies. The SEC also found that BlueLinx violated Rule 21F-17 by requiring that employees provide notice to the company's legal department before providing confidential information to the government.

The SEC found that the inclusion of the waiver language "raised impediments to participation by its employees in the SEC's whistleblower program." The SEC also stated that "[b]y requiring departing employees to notify the company's Legal Department prior to disclosing any financial or business information to any third parties without expressly exempting the Commission from the scope of this restriction, BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits." 

BlueLinx settled the SEC's charges by paying a penalty in the amount of $265,000 and agreeing to a number of undertakings, including amending its severance agreements to include the following provision:

Employee understands that nothing contained in this Agreement limits Employee's ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission ("Government Agencies"). Employee further understands that this Agreement does not limit Employee's ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee's right to receive an award for information provided to any Government Agencies.

BlueLinx also agreed to make reasonable efforts to contact former employees who had signed the problematic severance agreements and provide them a link to the SEC's order and a statement that BlueLinx does not prohibit former employees from providing information to the SEC staff without notice to the company or from accepting SEC whistleblower awards.

Similarly, in the Health Net settlement agreement, announced on August 16, 2016, the SEC found that the company violated Rule 21F-17 when it used severance agreements that prohibited former employees from filing an application for, or accepting, a whistleblower award from the SEC. Health Net agreed to pay a $340,000 penalty to settle the charges. Like BlueLinx, Health Net also agreed to make "reasonable efforts" to contact all former employees who signed severance agreements with the problematic provision and inform them that the company does not prohibit them from seeking and obtaining whistleblower awards from the SEC.

SEC Issues More Bounty Awards

Thus far this year, the SEC has issued 10 bounty awards in an aggregate amount exceeding $50 million. As reported in a prior edition of our Employment Law Update, in January 2016 the SEC announced an award of more than $700,000 to an "industry expert" who provided "detailed analysis" to the agency. And on March 8, 2016, the SEC awarded three whistleblowers bounties totaling almost $2 million. The SEC has since announced that it has made substantial additional awards. 

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, Director of the SEC's Division of Enforcement.
On May 17, 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. See https://www.sec.gov/news/pressrelease/2016-91.html.

And, on May 20, the SEC said it would 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, then Chief of the SEC's Office of the Whistleblower. See https://www.sec.gov/news/pressrelease/2016-94.html.

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. "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 Ceresney. See https://www.sec.gov/news/pressrelease/2016-114.html.

Most recently, on August 30, 2016, the SEC stated that it had awarded more than $22 million to a whistleblower whose detailed tip and extensive assistance helped the agency halt an alleged fraud at the company where the whistleblower worked. The award is the second-highest amount the SEC has awarded to a whistleblower (the largest award, $30 million, was made in 2014). "Company employees are in unique positions behind the scenes to unravel complex or deeply buried wrongdoing. Without this whistleblower's courage, information and assistance, it would have been extremely difficult for law enforcement to discover this securities fraud on its own," said Jane Norberg, Acting Chief of the SEC's Office of the Whistleblower. See https://www.sec.gov/news/pressrelease/2016-172.html.

The SEC's whistleblower program has now awarded more than $107 million to 33 whistleblowers since the program's inception in 2011.

Wisconsin District Court Decides That Under Dodd-Frank Whistleblower Protection Extends Only to Those Who Make Reports to the SEC

On August 12, 2016, the U.S. District Court for the Eastern District of Wisconsin held that the Dodd-Frank whistleblower protection provision extends only to individuals who provide information to the SEC. Lamb v. Rockwell Automation Inc., No. 15-CV-1415-JPS, 2016 WL 4273210 (E.D. Wis. Aug. 12, 2016). In so ruling, the court adopted the Fifth Circuit's holding in Asadi v. F.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013) and rejected the Second Circuit's ruling in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).

The split in the Circuits reflects disagreement regarding eligibility to be considered a "whistleblower" under the statute. While the statute defines whistleblower to mean only those who report violations to the SEC, the substantive anti-retaliation provision in Dodd-Frank has been interpreted to apply to all whistleblowers who provide information protected under SOX, which extends protection to internal whistleblowers even if they do not report alleged wrongdoing to the SEC. 

The plaintiff in this case alleged that she was subject to "whistleblower retaliation" under both SOX and Dodd-Frank. She alleged that the company retaliated against her, including terminating her employment, because she complained internally that the firm's IT tools did not sufficiently track data related to SOX-reporting requirements. The plaintiff had not made any complaints to the SEC until after the termination of her employment.

The District Court granted the company's motion to dismiss the Dodd-Frank retaliation claim.  The court adopted the rationale of the Fifth Circuit, concluding that the language of Section 922 of Dodd-Frank was unambiguous because the statute contains "only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC." 

SDNY Rules That Complaints About Conflicts of Interest Are Not Protected Under SOX or Dodd-Frank

On June 22, 2016, Judge Daniels of the U.S. District Court for the Southern District of New York dismissed SOX and Dodd-Frank whistleblower claims on the grounds that the plaintiff's internal complaints did not constitute protected activity because they did not involve federal securities laws, mail fraud or wire fraud. Diaz v. Transatlantic Reinsurance Co., No. 16-cv-1355, 2016 WL 3568071 (S.D.N.Y. June 21, 2016).

Plaintiff, an assistant manager of the claims department for a reinsurance company, allegedly complained to the company's compliance department, human resources department and compliance hotline, that the executive vice president ("EVP") of her department engaged in conduct that posed conflicts of interest by giving favorable treatment to family members working under plaintiff's supervision and by approving legal bills for the company that were paid to the EVP's husband's law firm. She claimed that she was demoted, denied a salary increase and bonus, isolated from her colleagues and disciplined due to her complaints.

The company moved to dismiss the SOX and Dodd-Frank claims, arguing that the conduct plaintiff reported did not implicate federal securities law or mail or wire fraud. The court dismissed the SOX claim, holding that plaintiff "has not alleged any facts ... that could support an objectively reasonable belief that such conduct constitutes securities fraud." The court also dismissed the Dodd-Frank claim because it was premised upon alleged conflicts of interest, which are not covered by Dodd-Frank. In addition, the court rejected plaintiff's assertions that her reports constituted protected activity because she expressed concerns that the EVP's conduct could have affected shareholders and the company's reputation in the industry. Judge Daniels ruled that those allegations were conclusory and therefore did not support a SOX or Dodd-Frank whistleblower claim.

Practical Implications

The SEC's settlements with BlueLinx and Health Net are reminders that employers must ensure that their agreements with employees do not in any way suggest that employees are restricted from providing information to governmental authorities or participating in the government's whistleblower program. A broad range of documents may include potentially problematic provisions, including employment agreements, confidentiality and nondisclosure agreements, separation agreements, settlement agreements, employee handbooks, codes of conduct, and instructions provided to employees in connection with internal investigations.  Employers should undertake a comprehensive review of all such documents to ensure that such provisions do not run afoul of the dictates of the SEC. 

The SEC's focus on encouraging reports by whistleblowers is further illustrated by the awards it has made through its bounty program. The total amount awarded now exceeds $100 million. It is critical for employers to provide proper training to management and human resources professionals to ensure that potential whistleblower complaints that are raised internally are promptly and thoroughly investigated and assessed, and that appropriate action is taken to address the complaints.

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.

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