Whistleblower Protection: Dodd-Frank and SOX

by John Jacob Tollefsen1The author practices law in Oregon, Washington, California, Texas, D.C., and New York. He has been lead counsel on several SOx § 806 cases including Tides v. The Boeing Co., 644 F.3d 809 (C.A.9, Wash. 2011), cert. den. 132 S.Ct. 518 (2011) and Reid v The Boeing Company, 2009-SOX-27 (ARB Mar. 30, 2012). 

Overview of Whistle Blower Protection under Dodd-Frank and SOX including the SEC Bounty Program

The Sarbanes Oxley Act of 2002 (“SOx”) § 8062SOx § 806 is codified as 18 U.S.C. § 1514A(a)(1). was designed to protect certain employees who reasonably believe they are reporting a violation of a law, rules, or regulation listed in § 806. Due to drafting issues and the hostility of courts and administrative judges, few whistleblowers prevailed. The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 add additional protections designed to increase the whistleblowers chances of success. This article provides a brief overview of federal whistleblower protection under Sox and Dodd-Frank including the Securities and Exchange Commission bounty program.3There are numerous other whistleblowing protection provisions in federal law that may be helpful in a particular case including aircraft safety and environmental issues that are not covered by this article.

Prepare to have your career ruined

As a practical matter, whistleblowing protection has not been favored by judges. This is to be expected. For many people, a “whistleblower” is a “snitch”.4The English language is rife with pejorative terms for whistleblower like informer, fink, stoolpigeon, stoolie, sneak, blabbermouth, tattler, tattletale, squealer, mole, betrayer, rat, and rat fink. Even lawyers fight rules (like ABA proposed ethical rules) making reporting of other lawyer’s ethical violation mandatory. Corporations work hard on “team building” and have a culture that often resists informing on the “team”. The advice the author gives to would-be whistleblowers who seek his advice is to avoid whistleblowing unless the employee wishes to risk ending her career. It is safer to ignore the fraud and find another job than to engage in whistleblowing. Only those who desire to be persecuted for righteousness’ sake.5Matthew 5:10. should become whistleblowers. It is not uncommon for employers that have discovered a “snitch” to target the whistleblower and release her name to fellow employees. The environment at the workplace then becomes insufferable. The whistleblower will likely be persecuted until she quits or is fired on pretext. Then there will be years of expensive litigation only to go to trial before courts that tend to go out of their way to find for employers. 6Perhaps the “termination at will” doctrine brought into American law during the 19th century industrial revolution (in derogation of common law which provided one year contracts) is too deeply embedded in the mind of judges. If the employee is reinstated, she will be attempting to climb the corporate ladder at a company that despises her.7The author believes that only a seachange in attitude regarding business ethics in American culture or rigid enforcement of whistleblowing protection laws by the courts will make any difference. It is hard to understand the resistance to exposing the truth at many corporations until you experience it firsthand.

The triers-of-fact often find a way to find the employee did not engage in protected activity. There are many examples. The dishonesty reported may be seen as “immaterial”, the employee was not definite enough in her complaint, or countless other excuses will be used to favor the employer. One corporate defendant claimed that it was so large only fraud exceeding $100 million was “material”. It has been held that a “mere suspicion” is not a reasonable belief8E.g., Riedell v. Verizon Communications, 2005-SOX-00077 (ALJ Aug. 14, 2006), an employee reported favoritism in procurement, a major breach of the mainframe network, and employee use of fake identities to access a large number of bank and credit agency records. The ALJ granted summary judgment in favor of the respondent, finding the complainant did not have sufficient facts to support his claims. The ALJ found that the complainant was suspicious but “a suspicion is simply speculation and cannot logically be regarded as a reasonable belief”. and warning of possible violations is not protected activity.9E.g., Joy v. Robbins & Myers, Inc., 2007-SOX-74 (ALJ Jan. 30, 2008), the ALJ found that reporting (1) lack of export compliance procedure; (2) company’s failure to ensure compliance with Year II SOX certification; and (3) and possible premature revenue recognition by the employer was merely warning of possible violations not actual violations. In addition, the report must be sufficiently detailed that a reasonable person with the similar education, training, and experience as the whistleblower would believe there was a violation.10E.g., Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 2007), the ALJ stated it “would not be unreasonable for a person with [the whistleblower’s] relatively low level of expertise and knowledge to believe that use of a new formula, . . . , presented potential advisors with a materially misleading picture of [target’s] financial condition.” In Allen v. Administrative Review Bd., 514 F.3d 468, 479 (C.A.5, 2008) the court analyzed whether the claim was objectively reasonable from the perspective of an accounting expert because the whistleblower was a CPA. This objective standard has been praised for its avoidance of uncertainties and discrepancies even though it is designed to favor the employer.11“We agree that an employee’s reasonable belief must be scrutinized under both a subjective and objective standard. See Welch, 2007 WL 1578493, at 7; see also Burlington [Northern & Santa Fe Railway Co. v. White, 548 U.S. 53, 126 S.Ct. 2405 (2006)] at [68,] 2415 (“An objective standard is judicially administrable. It avoids the uncertainties and unfair discrepancies that can plague a judicial effort to determine a plaintiff’s unusual subjective feelings.”).” Allen v. Administrative Review Bd., 514 F.3d 468, 477 (C.A.5, 2008). When the cases are studied, it is remarkable how rarely the trier of fact applies the statute as written; there does not need to be a rule or regulation that covered the employer’s behavior; there only needs to be a reasonable belief that there is a rule or regulation.12See ruling on motion in Kramer v Trans–Lux Corp., 2012 WL 4444820 (D.Conn., 2012).The employee’s belief that pension irregularities violated SEC rules was reasonable even though SEC has no jurisdiction over pension plans. The complainant did not attempt to argue failure to disclose in violation of Regulation S-K.

SOx § 806’s short statute of limitations of 180 days (formerly 90 days) has proved troublesome to whistleblowers. Usually they believe the company wants to fix the problem13No lulling-by-employer cases were found and equitable tolling has been very narrowly construed. See e.g., Reid v The Boeing Company, 2009-SOX-27 (ARB Mar. 30, 2012). and they report the discrimination internally using the procedure in the employee manual. The investigation typically takes months. The whistleblower does not want to risk his career by filing with OSHA prematurely. Often Human Resources and Ethics departments reassure the whistleblower that if he is patient, they will fix the problem.14The 180 days run from the last discrimination event. If the harassment is ongoing, the 180 days limitation period is not a problem for whistleblowers. Whistleblowers typically believe the internal investigation will vindicate him and may wait more than 180 days for resolution of the investigation.

A 2007 study found only 3.6% of SOx § 806 whistleblowers won relief through the initial administrative process that adjudicates such claims, and only 6.5% of whistleblowers won appeals through the process.15Richard E. Moberly, Unfulfilled Expectations: An Empirical Analysis of Why Sarbanes-Oxley Whistleblowers Rarely Win, 49 Wm. & Mary L. Rev. 65, 65 (2007). See Katie Maxwell, Blowing The Whistle Falls On Deaf Ears: Revamping Texas’s Whistleblower Jurisprudence By Applying The Lessons Of Garcetti And Sarbanes-Oxley, 43 Tex. Tech L. Rev. 647 (2011); and Megan E. Mowrey, L. Stephen Cash, Thomas L. Dickens, Does Sarbanes-Oxley Protect Whistleblowers? The Recent Experience Of Companies And Whistleblowing Workers Under Sox, 1 Wm. & Mary Bus. L. Rev. 431 (2010).

The author concluded:

“The results of this detailed analysis demonstrate that administrative decision makers strictly construed, and in some cases misapplied, Sarbanes-Oxley’s substantive protections to the significant disadvantage of employees. These data-based findings assist in identifying the provisions and procedures of the Act that do not work as Congress intended and suggest potential remedies for these statutory and administrative deficiencies”.16Moberly at 65, quoted in Beverley H. Earle & Gerald A. Madek, The Mirage of Whistleblower Protection Under Sarbanes-Oxley: A Proposal for Change, 44 Am. Bus. L.J. 1, 6-7 (2007).

Overview of SOx § 806

President Bush signed SOx into law in 2002 after the country was enraged by large financial scandals like Enron and WorldCom. 17Pub. L. 107-204, 116 Stat. 802 (July 30, 2002). SOx was intended to restore investor confidence in the nation’s financial markets by increasing management responsibility and reducing fraud through changes in corporate governance and accounting practices. Whistleblowing was seen as essential for bringing the scandals to light. Increased whistleblower protection was provided to employees who report corporate fraud and certain enumerated violations of law. Protection was limited to employees of publicly traded companies excluding government employees, contractors of public companies among others. SOx § 806 (a) (1) protected efforts of whistleblowers:

to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by . . . .

SOx § 806 provides six categories of protected activity 1) mail fraud; 2) wire fraud; 3) bank fraud; 4) securities fraud; 5) “any rule or regulation of the Securities and Exchange Commission” and 6) any provision of Federal law relating to fraud against shareholders (the “catchall” provision).18The six categories are referred to as “SOx § 806(1)” through “SOx § 806(6)” in this paper.

SOx § 806(6) has become a minefield for whistleblowers because claimants have been poorly prepared to point out the type of fraud they identified and therefore their cases have been decided under the “catchall” provision of the sixth category SOx § 806 (6). Unfriendly courts then required whistleblowers to prove reasonable belief of all the elements of securities fraud including scienter (intent).

Enforcement of SOx’s civil whistleblower protection provision is initially the exclusive jurisdiction of the Secretary of the Department of Labor (“DOL”). If the Secretary has not issued a final decision within 180 days of the filing of a complaint, and there has been no showing that the delay was due to the bad faith of the claimant, the claimant may bring a de novo action in federal district court. If the claimant stays in the DOL system, an administrative decision is given by an administrative law judge (“ALJ”) after a trial. Initial appeals are heard by the Department of Labor Administrative Review Board (“ARB”) in Washington, D.C. The United States Courts of Appeals have jurisdiction to review ARB final decision.1918 U.S.C. § 1514A(b)(2).

Proceedings under SOx § 806 are governed by the rules and procedures and by the burdens of proof of the aviation safety whistleblower provisions contained in the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (“AIR21”).2049 U.S.C. 42121 (1991). See 18 U.S.C. § 1514A(b)(2)(A) and (C). As with AIR21, the Secretary of Labor has assigned responsibility for administering SOx § 806 to the Assistant Secretary for Occupational Safety and Health Administration (“OSHA”). 21Secretary’s Order 5-2002, 67 Fed. Reg. 65008 (Oct. 22, 2002). This is the same pattern as used for several other whistleblowing statutes and at least 14 whistleblowing statutes have been assigned to OSHA by the Secretary.

OSHA has issued a final rule establishing procedures and time frames for the handling of retaliation complaints under SOx § 806.22See 29 C.F.R. Part 1980, 69 Fed Reg. 52104 (Aug. 24, 2004) (“Final Rule”). The rule addresses complaints to OSHA, investigations by OSHA, appeals of OSHA determinations to a U.S. DOL administrative law judge (“ALJ”) for a de novo hearing, hearings by ALJs, and review of ALJ decisions by DOL’s ARB, to which the Secretary has delegated authority to issue final agency decisions under SOx.23Secretary’s Order 1-2002, 67 Fed. Reg. 64272 (Oct. 17, 2002).

Regulations promulgated by DOL set forth four required elements of a prima facie case under SOx § 806: (1) “[t]he employee engaged in a protected activity or conduct”; (2) “[t]he named person knew or suspected, actually or constructively, that the employee engaged in the protected activity”; (3) “[t]he employee suffered an unfavorable personnel action”; and (4) “[t]he circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action”.2429 C.F.R. § 1980.104(b)(1)(i)-(iv). See Van Asdale v. International Game Technology, 577 F.3d 989, 996-997 (C.A.9 (Nev.), 2009). This paper does not cover all issues relevant to a SOx § 806 case but focuses on the reporting of SEC rule violations as protected activity. Practitioners new to SOx § 806 should consult other sources.

In interpreting SOx § 806’s substantive requirements and burdens of proof, the DOL and the courts have looked to agency and judicial decisions under AIR21, as well as other OSHA-enforced whistleblower statutes, such as the Energy Reorganization Act (“ERA”),2542 U.S.C. § 5851 (1974). which provides protection to employees who report nuclear safety violations. As has happened with the other whistleblower statutes enforced by OSHA, the DOL and the courts borrow heavily from case law developed under Title VII and other discrimination statutes.

Their belief must be subjectively and objectively reasonable.26E.g., Tuttle v. Johnson Controls Battery Div., 2004-SOX-76 (ALJ Jan. 3, 2005), an ALJ explained: “Protected activity is defined under SOX as reporting an employer’s conduct which the employee reasonably believes constitutes a violation of the laws and regulations related to fraud against shareholders. While the employee is not required to show the reported conduct actually caused a violation of the law, he must show that he reasonably believed the employer violated one of the laws or regulations enumerated in the Act. Thus, the employee’s belief ‘must be scrutinized under both subjective and objective standards.’ Melendez v. Exxon Chemicals Americas, 1993-ERA-6 (ARB July 14, 2000)”. The employee must sincerely believe in good faith that there is a violation. The objective standard requires that the potential violation must be such that a reasonable person would believe there is a violation. The whistleblower does not need to have all the facts or understand the law correctly.

In practice, the subjective standard is almost always present. The whistleblower adamantly insists there is impropriety.

The objective standard is a barrier for the whistleblower in many cases. The employer can provide an expert witness that testifies the evidence discovered by the whistleblower is not a real violation of the laws listed in SOx § 806. For example, an internal auditor may complain to the audit committee that the internal control of two signatures on a check is being thwarted by a manager who is forging the second signature. The manager is angered and arranges for the internal auditor to be fired. The employer defends by claiming there is no violation because the checks were issued to the proper payee and it suffered no harm. Therefore is no way for an objective person to believe there was fraud on shareholders or any other violation of SOx § 806. The result is that internal auditors reporting thwarting of internal controls are often unprotected by SOx § 806.

There is a new civil cause of action under SOx § 806 in the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”)27Pub. L. 111-203, H.R. 4173. which is covered in the next section. This statutory action provides additional protections for whistleblowers and extends the statute of limitations.

 

Whistleblower Protection under Dodd Frank

SOx § 806 provides that an employee subject to retaliation is “entitled to all relief necessary to make the employee whole.”2818 U.S.C. § 1514A(c)(1) This allows the employee to ask for relief like reinstatement, mental stress damages, loss of the employee’s future career earnings, and reputational damage.29 E.g., Hanna v. WCI Communities, Inc., 348 F. Supp. 2d 1332 (S.D. Fla. 2004) held that a successful plaintiff cannot be made whole without being compensated for reputational injury that diminishes the plaintiff’s future earning capacity but denied punitive damages under SOx § 806. In contrast, Dodd-Frank provides limited remedies. Monetary damages are limited to 2 times the amount of back pay owed plus interest. The whistleblower is entitled to reinstatement with the same seniority status that would have existed but for the discrimination. Litigation costs, expert witness fees, and reasonable attorney fees are awarded to the successful whistleblower.30 15 U.S.C.A. § 78u-6 (h)(1)(C).

Dodd-Frank added additional provision to assist whistleblowers31“Whistleblower” is a defined term that is more expansive than violation of SOx § 806 (17 CFR § 240.21F-2(a) ). Courts have found that reporting to the SEC can be protected even if there is no claim under SOx § 806. See Nollner v. S. Baptist Convention, Inc., 2012 WL 1108923 (M.D.Tenn. Apr. 3, 2012); Egan v. Trading Screen, Inc., 2011 WL 1672066 (S.D.N.Y. May 4, 2011); and Kramer v Trans–Lux Corp., 2012 WL 4444820 (D.Conn., 2012). The SEC rule is in accord (17 CFR § 240.21F-2). by amending SOx § 806. Jury trials are now available in both SOx § 806 and Dodd-Frank cases. It also added this new civil action:

No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower–

(i) in providing information to the Commission in accordance with this section;

(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or

(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), including section 10A(m) of such Act (15 U.S.C. 78f(m)), section 1513(e) of Title 18,32 “Whistleblower” is a defined term that is more expansive than violation of SOx § 806 (17 CFR § 240.21F-2(a. Courts have found that reporting to the SEC can be protected even if there is no claim under SOx § 806.33See Nollner v. S. Baptist Convention, Inc., 2012 WL 1108923 (M.D.Tenn. Apr. 3, 2012); Egan v. Trading Screen, Inc., 2011 WL 1672066 (S.D.N.Y. May 4, 2011); and Kramer v Trans–Lux Corp., 2012 WL 4444820 (D.Conn., 2012). The SEC rule is in accord (17 CFR § 240.21F-2). and any other law, rule, or regulation subject to the jurisdiction of the Commission.3415 U.S.C.A. § 78u-6 (h)(1)(B)(i). “Subject to the jurisdiction” reaches rules of stock exchanges, FINRA, and other entities that need SEC approval. This is arguably broader than the language in SOx § 806.

Sadly, Congressional drafters left a loophole. Reporting to supervisors is not mentioned as grounds for protection. By the plain terms of the statute, a loyal employee who blows the whistle to her supervisor can be fired. The Fifth Circuit has so ruled.35 Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013). The SEC attempted to fix the statute by rule3617 C.F.R. § 240.21F-2(b)(1). See Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34300-01, at *34304, 2011 WL 2293084 (June 13, 2011). in order to protect the internal reporting system set up under Sarbanes Oxley. Outside the Fifth Circuit some courts have deferred to the SEC rule.37 See Berman v. Neo@Ogilvy LLC, 2014 U.S. Dist. LEXIS 115078, 15 (S.D.N.Y. Aug. 15, 2014)

Actions for violations of this provision may be brought in United States’ district courts.38 15 U.S.C.A. § 78u-6 (h)(1)(B)(i).Presumably the action can also be brought in state court since it was not preempted. Tafflin v. Levitt, 493 U.S. 455 (1990) (States have concurrent sovereignty with the Federal Government, limited only by the Supremacy Clause). The statute of limitations is 6 years after the date on which the violation of occurred or 3 years after the date when facts material to the right of action are known or reasonably should have been known by the employee alleging a violation. The discovery rule is restricted to 10 years after the date on which the violation occurs.39 15 U.S.C.A. § 78u-6 (h)(1)(B)(iii).

The whistleblower to the SEC is entitled to confidentiality4015 U.S.C.A. § 78u-6 (h)(2)(A). except for public proceedings or disclosures allowed under federal law.41 5 U.S.C.A. § 552a. The rights afforded whistleblowers cannot be waived4218 U.S.C.A. § 1514(e)(1). and no predispute arbitration clause is enforceable.4318 U.S.C.A. § 1514(e)(2). Dodd-Frank authorized jury trials under SOx § 8064418 U.S.C.A. § 1514(b)(2)(E). but no specific provision was made for a jury trial for this new cause of action.

 

SEC Whistleblower Bounty Program

After the embarrassing revelations by CFE whistleblower Harry Markoplos45Harry Markoplos, No One Would Listen: A True Financial Thriller (Hoboken, New Jersey: John Wiley & Sons, Inc., 2010); See OIG’s Report of Investigation, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, Report No. 509, August 31, 2009 in the Bernie Madoff case, the Securities and Exchange Commission helped Congress passed a new whistleblowing bounty provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The bounty program previously administered by the SEC was an embarrassment. It was authorized by Section 21A(e) of the Exchange Act was added by the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSEA). Between 1989 and 2010, the SEC paid out a total of $159,537 to five whistleblowers.46See OIG Office of Audits: Assessment of the SEC’s Bounty Program, Report 474, March 29, 2010. It suffered from lack of rules and leadership. It was limited to insider trading.

Dodd-Frank placed the new program in a separate office within the SEC’s Enforcement Department and the results have been amazing. The program started in August of 2011. In its annual report to Congress in 2014, the Office of the Whistleblower (OWB) reported that $1,932,863.92 was paid to whistleblowers in fiscal 2014. On September 22, 2014, the Commission authorized an award of more than $30 million to a whistleblower who provided key information in a successful enforcement action. In Fiscal Year 2014, OWB received 3,620 whistleblower tips, a more than 20% increase over the previous two years.

Section 21F of Dodd-Frank provides a share of SEC sanctions to eligible whistleblowers who voluntarily provide original information that leads to successful Commission enforcement actions resulting in monetary sanctions over $1,000,000, and successful related actions. The SEC is required to award 10 to 30% of the sanctions.

 

Retaliation Protection

The Dodd-Frank Act and SEC regulations prohibit retaliation against whistleblowers who report possible wrongdoing based on a reasonable belief that a possible securities violation has occurred, is in progress or is about to occur. Section 21F(h)(1) of the Exchange Act prohibits employers from retaliating against individuals in the terms and conditions of their employment when they engage in whistleblowing activities. Rule 21F-2(b)(2) provides that Section 21F(h)(1) is enforceable in an action or proceeding brought by the Commission.

The SEC’s first use of its anti-retaliation authority occurred onn June 16, 2014. It charged hedge fund advisory firm Paradigm Capital Management, Inc. with retaliating against an employee for reporting prohibited transactions to the Commission. Paradigm and the firm’s owner, Candace King Weir, agreed to pay $2.2 million to settle the SEC’s charges.

According to the Commission’s order, Paradigm engaged in prohibited principal transactions with an affiliated broker-dealer without providing effective disclosure or consent from a hedge fund client advised by Paradigm. When Ms. Weir learned of the report to the SEC by the head trader, Paradigm began retaliating. The whistleblower was removed from the head trader position and tasked with investigating the conduct that had been reported to the SEC without access to any meaningful resources to do the investigation. The whistleblower’s job function was changed from head trader to a full-time compliance assistant. The whistleblower lost all supervisory responsibilities. The whistleblower’s resigned.

Under Section 21F(h)(1), unlawful retaliation does not require that the whistleblower be terminated. Any retaliatory action, including demoting, suspending, threatening, or harassing the employee for engaging in protected whistleblowing activity may be actionable.

 

Anonymity

If represented by counsel, a whistleblower may choose to submit his or her tip anonymously to the Commission. However, only one of the fourteen award recipients to date submitted the information anonymously. Whistleblowers must subsequently identify themselves when they apply for an award to allow OWB to assess whether they satisfy the criteria for receiving an award under the whistleblower rules. Even at the time of an award, however, their identity is not made available to the public.

 

“Voluntary”

The information cannot be the result of an investigation or subpoena. For example, Rule 21F-4(a)(1)(ii) under the Exchange Act provides that a whistleblower’s submission to the Commission will not be treated as “voluntary” if the whistleblower received a previous request relating to the same subject matter in connection with an a self-regulatory organization (“SRO” like FINRA) investigation.
On July 31, 2014, the Commission awarded more than $400,000 to a whistleblower who reported securities fraud to the SEC after the company failed to address the issue internally. The whistleblower aggressively worked internally to bring the securities law violation to the attention of appropriate personnel in an effort to obtain corrective action. The SRO investigated the matter and closed the investigation finding no violation. The whistleblower then reported the information to the Commission. On the unique facts of this case, the Commission found it in the public interest and consistent with the protection of investors to invoke its general exemptive authority under Section 36(a) of the Exchange Act and waive the “voluntary” requirement in order to make an award to the whistleblower.

What Are the Basic Rules?

The “original information” must be provided by an “eligible whistleblower” that “leads to” a successful SEC action that results in more than $1 million in sanctions. “Original information” is information from independent knowledge (facts that are not derived from publicly available sources) or independent analysis (evaluation of publicly available information which reveals information that is not known by the SEC). The first whistleblower wins unless a later whistleblower was the original source of the information that the first whistleblower submitted.47See Rule 21F-4(b)(1) An eligible whistleblower” is one who provides the information voluntarily and is not a company or organization and is not otherwise disqualified.48See 240.21F-4 Other definitions (b)(4) The most common disqualifications are if the information was obtained because the whistleblower was:

 (A) An officer, director, trustee, or partner of an entity and another person informed you of allegations of misconduct, or you learned the information in connection with the entity’s processes for identifying, reporting, and addressing possible violations of law;
(B) An employee whose principal duties involve compliance or internal audit responsibilities, or you were employed by or otherwise associated with a firm retained to perform compliance or internal audit functions for an entity;
(C) Employed by or otherwise associated with a firm retained to conduct an inquiry or investigation into possible violations of law; or
(D) An employee of, or other person associated with, a public accounting firm, if you obtained the information through the performance of an engagement required of an independent public accountant under the federal securities laws (other than an audit subject to §240.21F-8(c)(4) of this chapter), and that information related to a violation by the engagement client or the client’s directors, officers or other employees.

The disqualifiers are not applied in certain situations, the most common being 1) risk of substantial injury to investors; 2) an investigation is being impeded; or 3) more than 120 days have elapsed since the internal report was provided.49See 240.21F-4 Other definitions (b)(4)(v)

How to File a SEC Bounty Claim

The SEC accepts submissions online through the Commission’s tip or Referral Portal50https://denebleo.sec.gov/TCRExternal/disclaimer.xhtml or submission of Form TCR by fax or mail.51https://www.sec.gov/about/forms/formtcr.pdf Anonymous filings are allowed if an attorney for the filer is identified on the form.

Amount Awarded to Whistleblower

Dodd-Frank required the SEC to award a minimum of 10% to a maximum of 30% of resulting sanctions over $1 million to the whistleblower or whistleblowers.52 Sec 922 of Dodd Frank amended 15 U.S.C. 78a by adding a new Section 21F. See 21F(a)(6)(b)(1) If there is more than one person submitting the information to the SEC, the award is shared.

Rule 21F-6 provides the factors considered by the SEC when deciding what the award percentage will be. The factors used to increase the award are:

“1. The significance of the information you provided us to the success of any proceeding brought against wrongdoers.

2. The extent of the assistance you provide us in our investigation and any successful proceeding.

3. Our law enforcement interest in deterring violations of the securities laws by making awards to whistleblowers who provide information that leads to the successful enforcement of these laws.

4. Whether, and the extent to which, you participated in your company’s internal compliance systems, such as, for example, reporting the possible securities violations through internal whistleblower, legal or compliance procedures before, or at the same time, you reported them to us”.53from the FAQ page on the SEC website

The SEC received a number of comments when the bounty rule was proposed indicating the bounty program would reduce the effectiveness of internal controls and encourage whistleblowers to ignore internal reporting procedures. The need for external reporting occurs primarily in companies that are hostile to COSO and have the wrong “tone at the top”. In these companies, internal auditors are not given their independence and internal reporting only leads to harassment and termination. The SEC’s rule attempts to reach that issue by giving credit for assistance (factor 2 above) if the whistle blower suffers “unique hardships” as a result of reporting the fraud.54§ 240.21F-6(a)(2)(vi) “Any unique hardships experienced by the whistleblower as a result of his or her reporting and assisting in the enforcement action”.

The SEC may reduce the award after considering the following factors:

“1. If you were a participant in, or culpable for the securities law violation(s) you reported.

2. If you unreasonably delayed reporting the violation(s) to us.

3. If you interfered with your company’s internal compliance and reporting systems, such as, for example, making false statements to your compliance department that hindered its efforts to investigate possible wrongdoing”. 55from the FAQ page on the SEC website

Appealability

The amount of award is not appealable so long as the SEC follows the provisions of Dodd-Frank and awards at least 10% of the sanction amount over $1 million. Denial of any award is appealed to the United States Court of Appeals within 30 days of the Commission’s decision.

Confidentiality Agreements that Stifle Whistleblowers

SEC rule § 240.21F-17 “Staff communications with individuals reporting possible securities law violations” provides:

(a) 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 (other than agreements dealing with information covered by § 240.21F-4(b)(4)(i)  and § 240.21F-4(b)(4)(ii) of this chapter related to the legal representation of a client) (generally attorney client privileged information that is not permitted to be disclosed by any rule)  with respect to such communications.

(b) If you are a director, officer, member, agent, or employee of an entity that has counsel, and you have initiated communication with the Commission relating to a possible securities law violation, the staff is authorized to communicate directly with you regarding the possible securities law violation without seeking the consent of the entity’s counsel.

On April 1, 2015, the Securities and Exchange Commission brought its first enforcement action against a company for using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process. The SEC charged Houston-based global technology and engineering firm KBR Inc. with violating whistleblower protection Rule 21F-17 enacted under the Dodd-Frank Act.  KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department.  Since these investigations included allegations of possible securities law violations, the SEC found that these terms violated Rule 21F-17, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.

KBR agreed to pay a $130,000 penalty to settle the SEC’s charges and the company voluntarily amended its confidentiality statement by adding language making clear that employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation.

Footnotes   [ + ]

1. The author practices law in Oregon, Washington, California, Texas, D.C., and New York. He has been lead counsel on several SOx § 806 cases including Tides v. The Boeing Co., 644 F.3d 809 (C.A.9, Wash. 2011), cert. den. 132 S.Ct. 518 (2011) and Reid v The Boeing Company, 2009-SOX-27 (ARB Mar. 30, 2012).
2. SOx § 806 is codified as 18 U.S.C. § 1514A(a)(1).
3. There are numerous other whistleblowing protection provisions in federal law that may be helpful in a particular case including aircraft safety and environmental issues that are not covered by this article.
4. The English language is rife with pejorative terms for whistleblower like informer, fink, stoolpigeon, stoolie, sneak, blabbermouth, tattler, tattletale, squealer, mole, betrayer, rat, and rat fink. Even lawyers fight rules (like ABA proposed ethical rules) making reporting of other lawyer’s ethical violation mandatory.
5. Matthew 5:10.
6. Perhaps the “termination at will” doctrine brought into American law during the 19th century industrial revolution (in derogation of common law which provided one year contracts) is too deeply embedded in the mind of judges.
7. The author believes that only a seachange in attitude regarding business ethics in American culture or rigid enforcement of whistleblowing protection laws by the courts will make any difference.
8. E.g., Riedell v. Verizon Communications, 2005-SOX-00077 (ALJ Aug. 14, 2006), an employee reported favoritism in procurement, a major breach of the mainframe network, and employee use of fake identities to access a large number of bank and credit agency records. The ALJ granted summary judgment in favor of the respondent, finding the complainant did not have sufficient facts to support his claims. The ALJ found that the complainant was suspicious but “a suspicion is simply speculation and cannot logically be regarded as a reasonable belief”.
9. E.g., Joy v. Robbins & Myers, Inc., 2007-SOX-74 (ALJ Jan. 30, 2008), the ALJ found that reporting (1) lack of export compliance procedure; (2) company’s failure to ensure compliance with Year II SOX certification; and (3) and possible premature revenue recognition by the employer was merely warning of possible violations not actual violations.
10. E.g., Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 2007), the ALJ stated it “would not be unreasonable for a person with [the whistleblower’s] relatively low level of expertise and knowledge to believe that use of a new formula, . . . , presented potential advisors with a materially misleading picture of [target’s] financial condition.” In Allen v. Administrative Review Bd., 514 F.3d 468, 479 (C.A.5, 2008) the court analyzed whether the claim was objectively reasonable from the perspective of an accounting expert because the whistleblower was a CPA.
11. “We agree that an employee’s reasonable belief must be scrutinized under both a subjective and objective standard. See Welch, 2007 WL 1578493, at 7; see also Burlington [Northern & Santa Fe Railway Co. v. White, 548 U.S. 53, 126 S.Ct. 2405 (2006)] at [68,] 2415 (“An objective standard is judicially administrable. It avoids the uncertainties and unfair discrepancies that can plague a judicial effort to determine a plaintiff’s unusual subjective feelings.”).” Allen v. Administrative Review Bd., 514 F.3d 468, 477 (C.A.5, 2008).
12. See ruling on motion in Kramer v Trans–Lux Corp., 2012 WL 4444820 (D.Conn., 2012).The employee’s belief that pension irregularities violated SEC rules was reasonable even though SEC has no jurisdiction over pension plans. The complainant did not attempt to argue failure to disclose in violation of Regulation S-K.
13. No lulling-by-employer cases were found and equitable tolling has been very narrowly construed. See e.g., Reid v The Boeing Company, 2009-SOX-27 (ARB Mar. 30, 2012).
14. The 180 days run from the last discrimination event. If the harassment is ongoing, the 180 days limitation period is not a problem for whistleblowers.
15. Richard E. Moberly, Unfulfilled Expectations: An Empirical Analysis of Why Sarbanes-Oxley Whistleblowers Rarely Win, 49 Wm. & Mary L. Rev. 65, 65 (2007). See Katie Maxwell, Blowing The Whistle Falls On Deaf Ears: Revamping Texas’s Whistleblower Jurisprudence By Applying The Lessons Of Garcetti And Sarbanes-Oxley, 43 Tex. Tech L. Rev. 647 (2011); and Megan E. Mowrey, L. Stephen Cash, Thomas L. Dickens, Does Sarbanes-Oxley Protect Whistleblowers? The Recent Experience Of Companies And Whistleblowing Workers Under Sox, 1 Wm. & Mary Bus. L. Rev. 431 (2010).
16. Moberly at 65, quoted in Beverley H. Earle & Gerald A. Madek, The Mirage of Whistleblower Protection Under Sarbanes-Oxley: A Proposal for Change, 44 Am. Bus. L.J. 1, 6-7 (2007).
17. Pub. L. 107-204, 116 Stat. 802 (July 30, 2002).
18. The six categories are referred to as “SOx § 806(1)” through “SOx § 806(6)” in this paper.
19. 18 U.S.C. § 1514A(b)(2).
20. 49 U.S.C. 42121 (1991). See 18 U.S.C. § 1514A(b)(2)(A) and (C).
21. Secretary’s Order 5-2002, 67 Fed. Reg. 65008 (Oct. 22, 2002). This is the same pattern as used for several other whistleblowing statutes and at least 14 whistleblowing statutes have been assigned to OSHA by the Secretary.
22. See 29 C.F.R. Part 1980, 69 Fed Reg. 52104 (Aug. 24, 2004) (“Final Rule”).
23. Secretary’s Order 1-2002, 67 Fed. Reg. 64272 (Oct. 17, 2002).
24. 29 C.F.R. § 1980.104(b)(1)(i)-(iv). See Van Asdale v. International Game Technology, 577 F.3d 989, 996-997 (C.A.9 (Nev.), 2009). This paper does not cover all issues relevant to a SOx § 806 case but focuses on the reporting of SEC rule violations as protected activity. Practitioners new to SOx § 806 should consult other sources.
25. 42 U.S.C. § 5851 (1974).
26. E.g., Tuttle v. Johnson Controls Battery Div., 2004-SOX-76 (ALJ Jan. 3, 2005), an ALJ explained: “Protected activity is defined under SOX as reporting an employer’s conduct which the employee reasonably believes constitutes a violation of the laws and regulations related to fraud against shareholders. While the employee is not required to show the reported conduct actually caused a violation of the law, he must show that he reasonably believed the employer violated one of the laws or regulations enumerated in the Act. Thus, the employee’s belief ‘must be scrutinized under both subjective and objective standards.’ Melendez v. Exxon Chemicals Americas, 1993-ERA-6 (ARB July 14, 2000)”.
27. Pub. L. 111-203, H.R. 4173.
28. 18 U.S.C. § 1514A(c)(1)
29. E.g., Hanna v. WCI Communities, Inc., 348 F. Supp. 2d 1332 (S.D. Fla. 2004) held that a successful plaintiff cannot be made whole without being compensated for reputational injury that diminishes the plaintiff’s future earning capacity but denied punitive damages under SOx § 806.
30. 15 U.S.C.A. § 78u-6 (h)(1)(C).
31. “Whistleblower” is a defined term that is more expansive than violation of SOx § 806 (17 CFR § 240.21F-2(a) ). Courts have found that reporting to the SEC can be protected even if there is no claim under SOx § 806. See Nollner v. S. Baptist Convention, Inc., 2012 WL 1108923 (M.D.Tenn. Apr. 3, 2012); Egan v. Trading Screen, Inc., 2011 WL 1672066 (S.D.N.Y. May 4, 2011); and Kramer v Trans–Lux Corp., 2012 WL 4444820 (D.Conn., 2012). The SEC rule is in accord (17 CFR § 240.21F-2).
32. “Whistleblower” is a defined term that is more expansive than violation of SOx § 806 (17 CFR § 240.21F-2(a
33. See Nollner v. S. Baptist Convention, Inc., 2012 WL 1108923 (M.D.Tenn. Apr. 3, 2012); Egan v. Trading Screen, Inc., 2011 WL 1672066 (S.D.N.Y. May 4, 2011); and Kramer v Trans–Lux Corp., 2012 WL 4444820 (D.Conn., 2012). The SEC rule is in accord (17 CFR § 240.21F-2).
34. 15 U.S.C.A. § 78u-6 (h)(1)(B)(i). “Subject to the jurisdiction” reaches rules of stock exchanges, FINRA, and other entities that need SEC approval. This is arguably broader than the language in SOx § 806.
35. Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013).
36. 17 C.F.R. § 240.21F-2(b)(1). See Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34300-01, at *34304, 2011 WL 2293084 (June 13, 2011).
37. See Berman v. Neo@Ogilvy LLC, 2014 U.S. Dist. LEXIS 115078, 15 (S.D.N.Y. Aug. 15, 2014)
38. 15 U.S.C.A. § 78u-6 (h)(1)(B)(i).Presumably the action can also be brought in state court since it was not preempted. Tafflin v. Levitt, 493 U.S. 455 (1990) (States have concurrent sovereignty with the Federal Government, limited only by the Supremacy Clause).
39. 15 U.S.C.A. § 78u-6 (h)(1)(B)(iii).
40. 15 U.S.C.A. § 78u-6 (h)(2)(A).
41. 5 U.S.C.A. § 552a.
42. 18 U.S.C.A. § 1514(e)(1).
43. 18 U.S.C.A. § 1514(e)(2).
44. 18 U.S.C.A. § 1514(b)(2)(E).
45. Harry Markoplos, No One Would Listen: A True Financial Thriller (Hoboken, New Jersey: John Wiley & Sons, Inc., 2010); See OIG’s Report of Investigation, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, Report No. 509, August 31, 2009
46. See OIG Office of Audits: Assessment of the SEC’s Bounty Program, Report 474, March 29, 2010
47. See Rule 21F-4(b)(1)
48. See 240.21F-4 Other definitions (b)(4)
49. See 240.21F-4 Other definitions (b)(4)(v)
50. https://denebleo.sec.gov/TCRExternal/disclaimer.xhtml
51. https://www.sec.gov/about/forms/formtcr.pdf
52. Sec 922 of Dodd Frank amended 15 U.S.C. 78a by adding a new Section 21F. See 21F(a)(6)(b)(1)
53, 55. from the FAQ page on the SEC website
54. § 240.21F-6(a)(2)(vi) “Any unique hardships experienced by the whistleblower as a result of his or her reporting and assisting in the enforcement action”.

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