United States: Whistleblower Retaliation Remains In The SEC's Crosshairs

Last Updated: May 2 2017
Article by R. Douglas Harmon

Whistleblower tips and awards for securities law violations have increased dramatically over the past year, according to the staff of the SEC Enforcement Division's Office of the Whistleblower. Also during that time, the Whistleblower Office has stepped up its vigilance over retaliation by companies against whistleblowers, imposing penalties against companies more frequently and expanding the scope of what constitutes illegal retaliation. Furthermore, there is so far no reason to think the new Trump Administration will seek to reverse this trend.

Direct retaliation can take many forms, most of which are recognizable by attentive management. Note, however, that certain less obvious behaviors may also be deemed retaliatory. For example, in one case an employee submitted a complaint about the company's accounting practices through its internal procedures and to the SEC. When the SEC notified the company of its decision to investigate that complaint, the company was able to determine the whistleblower's identity and revealed it in an internal email related to the investigation. The Fifth Circuit Court of Appeals in Halliburton, Inc. v. Administrative Review Board, United States Department of Labor concluded that illegal retaliation had occurred, stating that the "undesirable consequences" of being revealed to one's colleagues as having accused them of fraud were "obvious." (See this Doug's Note.)

The SEC has also focused recently on indirect forms of illegal retaliation embedded in company policies and agreements. Provisions in such documents may inadvertently violate Rule 21F-17(a) under the Securities Exchange Act, which provides that:

"No 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...."

Essentially, language that prohibits an employee from disclosing confidential information without an express carve-out for reports to a government agency or that prohibits the recovery of monetary damages or awards may violate Rule 21F-17(a).

In addition, the SEC continues to expand the scope of its retaliation oversight. Examples include recent enforcement actions for retaliation where the whistleblower only reported internally, rather than to the SEC, and where the SEC elected not to pursue the company's alleged securities law violation itself.

Penalties for violations are likely to include:

  • Hundreds of thousands of dollars of monetary fines,
  • Amending the relevant documents, and
  • Contacting all affected persons to inform them as to their revised rights.

Action Steps

Now more than ever, it is obvious that the SEC takes seriously its duty to protect whistleblowers from what it perceives to be illegal retaliation. This issue not only won't go away, but could become even more problematic over time.

Once the dust settles from proxy season, it would be a good time to consider the following:

  • Review all employment, severance, confidentiality and other such agreements (including interim agreements executed in connection with an internal investigation) to be sure they do not contain language that could dissuade an employee or former employee from filing a whistleblower claim. (See this Doug's Note.)
  • Review all codes of ethics, anti-bribery policies and other related policies (domestic and international) for the same reason.
  • Thoroughly and frequently train employees at all levels of the company to recognize and avoid the various direct and indirect forms of impermissible retaliation.
  • Consistently communicate and demonstrate the company's anti-retaliation culture in order to encourage internal whistleblower reporting (rather than external reporting to the SEC) and discourage illegal responses to such behavior.

All the best,

This Client Alert is intended to inform readers of recent developments in the field of (torts & insurance law, employment and employee benefits law, immigration law, etc.) It should not be considered as providing conclusive answers to specific legal problems.

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