United States: SEC Whistleblower Program May Be Facing Congressional Cutback

According to a memo circulating amongst Republican-party leaders as of February 13th, Republicans in the House of Representatives are planning to propose a significant curtailment of the U.S. Securities and Exchange Commission's (SEC) whistleblower program in legislation intended to rewrite Dodd-Frank. These revisions, which will be proposed as edits to Representative Jeb Hensarling's Financial CHOICE Act, mainly pertain to rolling back financial regulations and provisions that would curb the power of the Consumer Financial Protection Bureau. The memo also indicates that House Republicans are considering editing the proposed legislation to prohibit "any SEC rulemaking by enforcement," and further requiring the SEC to reevaluate its current enforcement program by establishing a committee that would notify individuals and firms of potential enforcement actions, and giving them an opportunity to respond in advance.

A significant change that stands to impact the SEC's whistleblower program is a proposed prohibition on making whistleblower awards to "co-conspirators" for successful tips. The whistleblower program, in its current form, already prohibits the SEC from making awards to whistleblowers who were criminally convicted of the same or similar conduct underlying their tip(s), but it does allow the SEC to make awards to whistleblowers who were involved in wrongdoing but not criminally charged for it, even if he or she faced civil action for the conduct. Currently, it is unclear how many of the 39 whistleblowers who have received awards were involved in the misconduct that they reported, as the agency keeps the identity of whistleblowers extremely confidential, and publishes few details about cases and enforcement actions.

We will provide further updates as additional information about revisions to Dodd-Frank become available.

General Counsel Whistleblower Wins $10 million Jury Verdict on Retaliation Claims

On February 10, 2017, a California jury awarded Sanford Wadler, the former general counsel of Bio-Rad Laboratories, Inc. (Bio-Rad), over $10 million in damages (including $5 million in punitive damages) on his claims under the Sarbanes-Oxley Act that the company fired him for investigating suspected Foreign Corrupt Practices Act (FCPA) violations by the company in China, and because he reported his concerns to the company's Audit Committee.

This verdict came on the heels of a pre-trial ruling that, in effect, allows in-house counsel for corporations to proceed to trial on their whistleblower claims, even when proving such claims would require the presentation of privileged information obtained during his or her employment with and representation of the company. This ruling came in the face of California's robust privilege laws, which are substantially more favorable to the privilege holder than to the attorney, and require that an attorney "maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client." Despite the strictures of attorney-client privilege law in California, the district court in this case found that the federal Sarbanes-Oxley Act preempted California law to the extent that California's disclosure rules were more protective of otherwise privileged information. The district court also found that, by vigorously and frequently referring to the subject matter of privileged communications in its defense of the case, among other things, Bio-Rad had effectively and broadly waived its claims of attorney-client privilege over those communications.

As this case illustrates, whistleblower retaliation claims, by in-house counsel, can be particularly difficult for a company to defend against, especially without using or referring to privileged communications. Therefore, companies facing potential whistleblower claims, by in-house counsel, should consistently and affirmatively assert their privilege as to such communications from the first hint of a dispute. Moreover, whether to assert any defenses, based on the advice of outside counsel, should be carefully considered early in the litigation process. In this case, one of the company's main defenses was that it obtained advice from outside counsel that contradicted the former general counsel's concerns about potential FCPA violations. In response to whistleblower retaliation claims from in-house counsel, companies should proactively consider whether defenses, based on the advice of outside counsel, can and should be asserted in the case in a manner that will preserve privilege - and if not - whether to waive privilege at all. Companies and their counsel should also consider whether even the fact that the company sought outside counsel's advice about an in-house attorney's concern should be introduced into the litigation.

SEC Announces Settlement of Charges that Financial Company Engaged in Acts of Improper Accounting and Impediment of Potential Whistleblowers

The SEC recently announced that HomeStreet Inc., a Seattle-based financial services provider, agreed to pay the agency $500,000 as a penalty to settle charges that it conducted improper hedge accounting and later took steps to impede potential whistleblowers from reporting the violations. Darrell van Amen, HomeStreet's treasurer, agreed to pay a separate $20,000 penalty to settle charges against him individually that he caused the accounting violations. According to the SEC, HomeStreet originated approximately 20 fixed rate commercial loans and entered into interest rate swaps to hedge the exposure. HomeStreet then designated the loans and the swaps in fair value hedging relationships, which can reduce income statement volatility that might exist absent hedge accounting treatment. Companies are required to periodically assess the hedging relationship, and to discontinue the use of hedge accounting if the effectiveness ratio falls outside a certain range. In certain instances from 2011 to 2014, van Amen implemented unsupported adjustments in HomeStreet's hedge effectiveness testing to ensure that HomeStreet could continue using the favorable accounting treatment. The test results with altered inputs to influence the effectiveness ratio were provided to HomeStreet's accounting department, which resulted in the creation of inaccurate accounting entries.

The SEC's order further finds that after HomeStreet employees reported concerns about accounting errors to management, HomeStreet concluded the adjustments to its hedge effectiveness tests were incorrect. When the SEC contacted HomeStreet in April of 2015 seeking documents related to hedge accounting, HomeStreet presumed it was in response to a whistleblower complaint and began taking actions to figure out the identity of the purported whistleblower. One individual, who was considered to be a potential whistleblower, was told that the terms of their indemnification agreement could allow HomeStreet to deny payment for legal costs during the SEC's investigation. HomeStreet also began requiring former employees to sign severance agreements waiving potential whistleblower awards, or the exiting employees would risk losing their severance payments and other post-employment benefits. Such waivers have been found to violate Rule 21F-17, which provides, inter alia, 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 ..."

SEC Ends 2016 with Parade of Substantial Whistleblower Awards

The SEC ended 2016 with a trifecta of substantial whistleblower awards. On November 14th, the SEC issued an award in excess of $20 million to a whistleblower who provided the agency with information that enabled it quickly initiate an enforcement action before the perpetrators could squander investors' funds. This award is the third-largest made since the SEC made its first whistleblower award in 2012.

Soon after, the SEC announced two awards totaling almost $4.5 million in one week on December 5th and December 9th to two separate whistleblowers. The December 5th award involved a single whistleblower who received $3.5 million for coming forward with information that led to an SEC enforcement action. The December 9th award was for $900,000, and made to a whistleblower whose tip enabled the SEC to bring multiple enforcement actions against wrongdoers. Neither announcement contained more specific details about the entities that were the subject of the SEC enforcement actions.

BlackRock, Inc. Pays Penalty for Using Whistleblower Payment Waivers in Employee Separation Agreements

On January 17, 2017, the SEC announced that BlackRock Inc., a New York-based asset manager, had agreed to pay a $340,000 penalty to settle charges that it improperly used separation agreements to force exiting employees to waive their ability to obtain whistleblower awards. According to the SEC, more than 1,000 departing BlackRock employees signed separation agreements that included language that they "waive[d] any right to recovery of incentives for reporting of misconduct," and did so in order to receive separation payments from the company. BlackRock added this language to its separation agreements in October of 2011, after the SEC adopted Rule 21F-17 which provides, inter alia, 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. . ." BlackRock did not remove the violating language in question from its separation agreements until March of 2016.

Ultimately, BlackRock consented to the SEC's order without admitting or denying the SEC's finding that it violated SEC Rule 21F-17. The SEC's order further noted that BlackRock voluntarily revised its form separation agreement, and took several other remedial actions, including implementing annual trainings to summarize employee rights under the SEC's whistleblower program.

Whistleblowers Receive Hefty Award for Tipping SEC Off to Investment Scheme

The SEC announced on January 23, 2017 that it had awarded over $7 million, its sixth highest whistleblower award ever, to three whistleblowers who helped with the successful prosecution of an investment scheme. The SEC's Office of the Whistleblower announced that three unidentified individuals would split the $7 million, with one of the whistleblowers receiving $4 million for providing the tip that started the SEC's investigation. The other two whistleblowers will split the remainder of the award, as they provided the SEC with additional information that ended in a successful enforcement action.

In addition to not identifying the individual whistleblowers, or the entity that was the subject of the investigation and enforcement action, the SEC order also did not explain what percentage of the enforcement action's sanctions were received by the whistleblowers as an award. Typically, SEC whistleblower awards range from 10 percent to 30 percent of the total sanctions imposed, which would mean that the enforcement action itself would have been between $23 million and $70 million. As of the date of that award, the SEC has awarded approximately $149 million through its whistleblower program. Enforcement actions using information provided by whistleblowers have reaped more than $935 million in payments to the SEC.

Sixth Circuit Affirms Dismissal of Whistleblower's Retaliatory Discharge Lawsuit Against Morgan Stanley Subsidiary

The whistleblower, John Verble, worked as a financial advisor for Morgan Stanley Smith Barney, LLC (Morgan Stanley LLC) from November 2006 until his termination in June of 2013. Verble alleged that he learned of illegal activity by Morgan Stanley LLC and certain of its clients, and that he also served as a confidential FBI informant in a separate investigation. Verble also initially alleged that he cooperated with the SEC, but did not provide any factual information about his cooperation with the SEC. Verble also claimed that he reported violations to other federal law-enforcement agencies, and internally to Morgan Stanley LLC. Neither Verble's complaint, nor subsequent filings in the case, provided any factual information regarding his alleged reports to other law-enforcement agencies or internally to the company. Verble further alleged that "as a direct result of [his] involvement in assisting the FBI," he "was retaliated against, discriminated against and illegally discharged from his position," in violation of the False Claims Act, the Dodd-Frank Act, and Tennessee state law.

The defendants, Morgan Stanley, Inc., and Morgan Stanley LLC, filed a motion to dismiss Verble's claims, arguing that Verble's complaint should be dismissed because he failed to allege specific facts to support his claim alleging that he was fired in retaliation for being a whistleblower. Verble's only argument in response to the defendants' motion to dismiss was that he could provide additional facts in sealed pleadings to the district court, although he never ultimately did so. Verble also did not request leave to amend his complaint to allege additional facts in support of his retaliation claims. The district court ultimately dismissed Verble's complaint in its entirety. Verble appealed this decision to the Sixth Circuit, which affirmed the district court's dismissal of his complaint.

The Sixth Circuit affirmed the dismissal of both Verble's False Claims Act retaliation claim and Dodd-Frank Act retaliation claim because Verble failed to allege sufficient, plausible facts to support that his termination was retaliatory in nature. Most notably, the Sixth Circuit did not reach or resolve the question ( as other federal courts have done) of whether an individual like Verble, who never directly reported to the SEC, qualifies as a whistleblower under the provisions of the Dodd-Frank Act. That question has divided federal courts, as its answer depends on whether a court reads the text of the Dodd-Frank Act to be ambiguous enough to warrant deference to the SEC's own interpretation of the statute. Specifically, the SEC issued a rule interpreting the Act's anti-retaliation provision to protect individuals who report violations internally or to other law-enforcement agencies, in addition to the SEC.

OSHA Recommends Practices for Anti-Retaliation Programs

In January 2017, the Occupational Safety and Health Administration (OSHA) published its Recommended Practices for Anti-Retaliation Programs, which provides valuable guidance to employers seeking to create "workplaces in which workers feel comfortable voicing their concerns without fear of retaliation." OSHA's recommendations apply to all public and private employers covered under the 22 whistleblower protection laws that OSHA enforces. OSHA's publication identifies five characteristics that it believes make for an effective anti-retaliation program:

  1. Management leadership, commitment, and accountability.
  2. A system for listening to and resolving employees' safety and compliance concerns.
  3. A system for receiving and responding to reports of retaliation.
  4. Anti-retaliation training for all employees and managers.
  5. Anti-retaliation program oversight.

OSHA's Recommended Practices for Anti-Retaliation Programs publication provides additional discussion as to its expectations for each of the five "key elements." For example, as to the first element, "Management leadership, commitment, and accountability," OSHA indicates this element can be achieved through leadership conferring with workers and worker representatives, if applicable, about creating and improving management's awareness and implementation of anti-retaliation policies and practices, and requiring management-level anti-retaliation training. The fifth element can be achieved by requiring program audits to be performed by auditors who are independent of the process being audited.

Employers that are regulated under any of the 22 federal whistleblower protection laws that OSHA enforces should review this guidance and consider implementation strategies, as OSHA inspectors will likely begin to include issues identified in the agency's Recommended Practices in their inspections.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.