Review of the SEC Whistleblower Program: At the Crossroads of Securities Law and Whistleblower Protection

Fiscal year 2020 marked the ten-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act establishing the Securities and Exchange Commission’s whistleblower program.  Since its inception through the end of FY2020, the SEC has awarded approximately $562 million to 106 individuals.  Even a decade after it was created, the whistleblower program continues to break its own records; in 2020, the SEC issued several awards landing in the top 10 whistleblower awards of all time:

 Source: SEC’s 2020 Annual Report to Congress on the Dodd-Frank Whistleblower Program

We can already tell that FY2021 will be another record-breaking year.  In the first 8 months of FY2021, the SEC has granted an additional $339 million to 57 individuals.  This represents more than a third of the total $901 million awarded to 163 separate individuals since the SEC issued its first award pursuant to this program in 2012.  This includes an award of $114 million in October 2020, the largest single award in the program’s history, which was covered in this recent post.

It’s sometimes difficult to get a sense of what warrants these large awards.  Typically, publicly available orders relating to whistleblower awards are heavily redacted, especially the subject matter underlying the whistleblower tip and alleged misconduct.  However, at the end of each month, the SEC publishes Notices of Covered Action (“NoCA”) for every SEC enforcement action that results in monetary sanctions of over $1 million by a final judgment or order, by itself or together with other judgments or orders in the same action.  Individuals seeking a whistleblower award have 90 calendar days from the date that the NoCA is posted to apply.

Although a NoCA does not indicate whether a whistleblower tip, complaint, or referral led the SEC to open an investigation or file an action, a survey of the monthly NoCA postings will provide helpful insight into the types of actions and issues that have been the subject of recent SEC enforcement actions, some of which may be the basis for future whistleblower award.

In light of the ongoing growth of the SEC whistleblower program, Proskauer’s Whistleblower Defense and Corporate Dispute and Defense blogs will provide a periodic coverage of the program, including a monthly review of the NoCA postings.

 

 

SEC Awards Four Whistleblowers More Than $31 Million

On May 17, 2021, the SEC announced payment of more than $31 million to four whistleblowers who provided the SEC with information that resulted in the return of tens of millions of dollars to harmed investors.  The largest of the awards, totaling almost $27 million, was awarded to two joint whistleblowers who provided the SEC with new information and assisted with an existing investigation.  The second order included awards of approximately $3.75 million and $750,000 to two additional whistleblowers who independently provided information that assisted the SEC with an ongoing investigation.  (The orders granting the respective awards can be accessed here and here.)

Emily Pasquinelli, Acting Chief of the SEC’s Office of the Whistleblower, stated that “[w]histleblowers play a critical role in an investigation, whether at the outset or during the course of an investigation.”  She added that “[t]oday’s awards demonstrate that whistleblowers with specific, credible information who significantly contribute to the success of an existing investigation may be eligible for an award.”

Since the inception of the whistleblower program in 2011, the SEC has awarded approximately $873 million to 162 individuals, including over a quarter of a billion dollars in the first eight months of this fiscal year alone.

M.D. Pennsylvania Grants Summary Judgment on SOX Retaliation Claim

On April 12, 2021, the U.S. District Court for the Middle District of Pennsylvania granted a defendant-employer’s motion for summary judgment on a SOX whistleblower retaliation claim, holding that the company demonstrated that it would have terminated Plaintiff’s employment even in the absence of any alleged protected activity as part of a broad reduction-in-force (RIF).  Wickens v. Rite Aid Hdqtrs. Corp., No. 19-cv-02021.

Background

Plaintiff, a former in-house attorney at the company, allegedly learned in early 2017 that several vice presidents sold their stock in the company shortly before a merger with a competitor was publicly announced, and internally reported his concern that they had engaged in insider trading.  The company terminated Plaintiff’s employment in January 2018 and Plaintiff subsequently filed suit, alleging that his employment was terminated in retaliation for his report, in violation of Section 806 of SOX.

Ruling

The court granted the company’s motion for summary judgment and dismissed Plaintiff’s SOX claim.  Notably, the court did not consider whether Plaintiff had adequately established a prima facie case.  Instead, the court focused on its conclusion that the company had established that it would have terminated Plaintiff in the absence of any protected activity as part of a RIF that resulted in the elimination of over 80 positions.

Implications

This decision strengthens defendants’ ability to prevail on causation grounds where a purported whistleblower’s employment was terminated in connection with a RIF.

SEC Awards $22 Million to Two Whistleblowers

On May 10, 2021, the SEC’s Office of the Whistleblower announced multi-million dollar awards to two whistleblowers who provided the SEC with information that assisted the agency in bringing a successful enforcement action against a financial services firm.  (The order granting the awards can be accessed here.)  The larger of the two awards, $18 million, was awarded to the whistleblower who was the initial source of the information that prompted the SEC’s investigation.  The second award of $4 million was given to a second whistleblower who submitted additional information after the investigation was already underway.

Emily Pasquinelli, Acting Chief of the SEC’s Office of the Whistleblower, said in a press release that “[t]he reporting of credible information by these whistleblowers and their subsequent cooperation with the staff’s investigation allowed the Commission to better understand complex transactions related to the matters under investigation.”

Since the inception of the whistleblower program in 2011, the SEC has awarded approximately $838 million to 156 individuals.

Pennsylvania District Court Grants Employer Summary Judgment on SOX Claim

On March 29, 2021, the U.S. District Court for the Eastern District of Pennsylvania granted a defendant-employer’s motion for summary judgment on a SOX whistleblower retaliation claim, holding that the plaintiff lacked an objectively or subjectively reasonable belief that the company violated any law enumerated in Section 806 of SOX.  Ngai v. Urban Outfitters, Inc., No. 19-cv-1480.

Background

Plaintiff, a Director of Sourcing and Technical Design, was responsible for ensuring that overseas factories properly executed apparel designs while minimizing production expenses.  He was required to ensure that factories were limiting waste and competitively pricing material, labor, and other costs.

Plaintiff claimed that throughout his employment, he reported general allegations of corporate waste and improper conduct by some of the company’s outside vendors and manufacturers.  Specifically, he complained that outside contractors were being wasteful, overcharging, self-dealing, inflating production costs, creating conflicts of interest within the company’s supply chain, and paying kickbacks to executives to secure high volume orders in violation of the company’s policies and Code of Conduct.  Plaintiff initially voiced his concerns directly to his supervisors, and then in April 2018 hired a lawyer, who sent over 20 letters to the company outlining Plaintiff’s concerns.  The company terminated Plaintiff’s employment in September 2018 and Plaintiff subsequently filed suit alleging, among other claims, that his employment was terminated in retaliation for his complaints.

Ruling

The Court held that Plaintiff failed to establish that he had a subjectively or objectively reasonable belief that the company engaged in conduct covered by SOX.  Plaintiff failed to prove that he had a subjectively reasonable belief of a violation because the record showed that he personally believed he was reporting violations of company policies, as opposed to violations of the federal statutes covered by SOX.  The court said that while there is no need to “ring the bell” on each element of a law covered by SOX when making a complaint, a plaintiff needs to show more than a “veiled reference” to unspecified legal violations, especially where, as here, the plaintiff sent over 20 letters memorializing his allegations.

The court also held that Plaintiff failed to show an objectively reasonable belief that he was reporting violations covered by SOX.  Relying on the Third Circuit’s decision in Wiest v. Lynch (see our post on that case here), the court held that Plaintiff failed to show that his belief that the company was committing one of the enumerated forms of fraud was objectively reasonable in light of the fact that Plaintiff’s primary job was to increase efficiencies and reduce costs.  The court ruled that an objectively reasonable person with Plaintiff’s background and job responsibilities would not believe a failure to root out misconduct by outside vendors constituted bank, wire, or securities fraud, or a violation of SEC rules.

Implications

This decision underscores the need for a purported SOX whistleblower to hold a belief of a violation of one of the provisions enumerated in SOX that is both subjectively and objectively reasonable.

6th Circuit: FCA Whistleblower Protections Extend to Post-Employment Retaliation

On March 31, 2021, the Sixth Circuit addressed an issue of first impression in the circuit, holding that the False Claims Act’s (“FCA”) whistleblower protection provisions protect former employees from post-employment retaliation.  United States, ex rel. Felten v. William Beaumont Hospital, No. 20-1002.

Background

Plaintiff was employed as a doctor at a Michigan hospital.  He filed a qui tam action against the hospital alleging that it was paying kickbacks to various physicians and physicians’ groups in exchange for patient referrals.  Plaintiff also claimed that the hospital terminated his employment and then maligned him in retaliation for his reports of illegal conduct, thus undermining his employment applications to numerous other institutions.

The U.S. District Court for the Eastern District of Michigan dismissed Plaintiff’s retaliation claims pertaining to conduct that occurred after his termination, holding that the FCA’s anti-retaliation protections apply only to conduct occurring during the course of employment.  Plaintiff requested that the dismissal order be amended to restore all of his claims, and the district court certified for interlocutory appeal the question of whether the FCA’s anti-retaliation provision applies to allegations of post-employment retaliation.  The Sixth Circuit granted interlocutory review.

Ruling

A split Sixth Circuit panel vacated the district court’s dismissal order, holding that the FCA’s anti-retaliation provision protects former employees from post-employment retaliation.  Following the statutory interpretation framework laid out by the Supreme Court in Robinson v. Shell Oil, 519 U.S. 337 (1997)—in which the Court held that Title VII covers former employees—the court concluded that the term “employee,” as used in the FCA, is ambiguous and could encompass both current and former employees.

Given the statute’s ambiguity, the court examined the “broader context” and “primary purpose” of the FCA’s anti-retaliation provision to determine whether it covers former employees.  Explaining that the provision is meant to encourage the reporting of fraud against the government by protecting individuals who assist in the discovery and prosecution of such fraud, the court held that former employees can invoke the statute’s protections.  The court reasoned that potential whistleblowers would be dissuaded from reporting fraud if employers had the ability to retaliate against them without repercussion as long as they terminate the employee first.  Notably, however, the court did not address whether blacklisting is a form of retaliatory conduct that is prohibited by the FCA, and it remanded the issue for the district court to decide.

Implications

This decision creates a circuit split, as the Sixth Circuit’s holding contradicts the decisions of the Tenth Circuit and numerous federal district courts which have held that former employees are not covered by the FCA’s anti-retaliation provision.

SEC Awards Joint Whistleblowers More Than $50 Million

On April 15, 2021, the SEC announced payment of more than $50 million to joint whistleblowers who provided the SEC with information that resulted in the return of tens of millions of dollars to harmed investors.

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, noted that “this award is the second largest in the history of the SEC’s whistleblower program” (following only the record-breaking $114 million award announced in October 2020), and reflects “the tremendous contribution of these joint whistleblowers to our ability to recover funds for harmed investors.”

Since the inception of the whistleblower program in 2011, the SEC has awarded approximately $812 million to 151 individuals, including over a quarter of a billion dollars in the first seven months of this fiscal year alone.  The order granting the award can be accessed here.

SEC Whistleblower Chief Jane Norberg to Leave, Agency Announces

The SEC announced on April 8, 2021 the departure of Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  Ms. Norberg had been with the Office nearly since its inception in 2012, serving as its first Deputy Chief and then as Chief following the departure of Sean McKessy in 2016.

The SEC’s press release highlights a number of milestones achieved during Ms. Norberg’s tenure as Chief of the Office, including:

  • The issuance of awards totaling nearly $650 million to more than 110 individual whistleblowers under the SEC’s whistleblower program, including nine of the ten largest awards in the program’s history.
  • A record-breaking year during Fiscal Year 2020, in which the number of awards issued to whistleblowers was tripled and the SEC received a record number of whistleblower tips.
  • Successful enforcement actions that resulted in orders for more than $3.1 billion in sanctions, including more than $1.8 billion in disgorgement of ill-gotten gains and interest.
  • Eight enforcement actions for violations of the provision that prohibits a company or individual from impeding someone’s efforts to report information to the commission (we covered some of those actions here, here, and here), as well as three cases for retaliating against whistleblowers (see our post here).

The SEC also noted that $200 million has been awarded to 40 individuals under the program during the first six months of Fiscal Year 2021, already surpassing the record set in FY2020.  This trend shows no sign of slowing down, as demonstrated by the SEC’s announcement on April 9, 2021 that it had awarded $2.5 million to yet another whistleblower under the program.

According to the press release, the Office’s Deputy Chief, Emily Pasquinelli, will serve as Acting Chief following Ms. Norberg’s departure.

7th Circuit Affirms Denial of Equitable Tolling of Statute of Limitations Under SOX

On March 22, 2021, the Seventh Circuit affirmed a decision by the ARB dismissing a whistleblower retaliation complaint under SOX for failure to file within the 180-day statutory deadline.  Xanthopoulos v. U.S. Department of Labor, No. 20-2604.  The court rejected the plaintiff’s equitable tolling arguments.

Background

Plaintiff was an employee of an investment company, and his employment was terminated on October 3, 2017.  Prior to and after his discharge, Plaintiff filed several reports on the SEC’s whistleblower website by submitting a “tips, complaints, and referrals” electronic form (“TCR Form”).  The TCR Forms focused on allegations that Plaintiff’s employer was engaged in securities fraud by manipulating investment portfolio ratings and disseminating those ratings to clients.

On September 18, 2018, Plaintiff filed a complaint under SOX with OSHA.  Plaintiff renewed his securities fraud claims and alleged that his employer violated SOX’s anti-retaliation provision by terminating him.  OSHA dismissed the complaint as untimely because Plaintiff filed 350 days after his termination, which was outside SOX’s 180-day statute of limitations.  Plaintiff appealed the decision, arguing that the statute of limitations should be equitably tolled because the TCR Forms he submitted to the SEC constituted SOX claims mistakenly filed in the wrong forum.  The ARB dismissed his claims and Plaintiff appealed.  (We previously covered the ARB’s decision here.)

Ruling

On review, the Seventh Circuit held that equitable tolling due to a mistakenly filed claim was warranted only if a plaintiff could demonstrate that he had “raised the precise statutory claim in issue but done so in the wrong forum.”  If, instead, the earlier, timely-filed claim has remedies that are “separate, distinct, and independent” from those of the untimely claim, the two claims are distinguishable, and the statute of limitations is not tolled.

The Seventh Circuit agreed with the ARB that Plaintiff did not seek employee-based remedies available under SOX in his TCR Forms, such as reinstatement, back pay, or other damages associated with his termination.  Instead, Plaintiff repeatedly referenced Dodd-Frank and sought a whistleblower award, which is only available under Dodd-Frank, not SOX.  The Seventh Circuit found that Plaintiff sought not to “vindicate his right to be free from retaliation under Sarbanes-Oxley … but rather to prosecute [his employer’s] securities fraud, a separate and independent remedy.”  The court concluded that Plaintiff’s filings did not constitute the “precise statutory claim” mistakenly filed in the wrong forum, and thus, equitable tolling of SOX’s 180-day statute of limitations was not warranted.

Implications

The Seventh Circuit’s decision highlights notable distinctions between SOX and Dodd-Frank.  Though both statutes contain anti-retaliation provisions, the two differ in important respects.  For example, Dodd-Frank authorizes an aggrieved employee to file directly in federal court, while SOX requires a claim to be filed first with OSHA.  In addition, SOX provides standard employment-based remedies, such as reinstatement, backpay, and other damages.  Dodd-Frank goes further and permits the SEC to provide a whistleblower award of up to 30% of the total monetary sanctions resulting from the whistleblower’s complaint.  As this decision illustrates, a plaintiff who seeks to recover under Dodd-Frank by submitting TCR Forms may not later assert that he or she was actually making a SOX claim all along.

ARB Affirms Dismissal of SOX Whistleblower Claim for Lack of Protected Activity

On December 17, 2020, the Administrative Review Board (“ARB”) of the U.S. Department of Labor affirmed the dismissal of a former employee’s whistleblower retaliation claim under Section 806 of SOX.  The ARB concluded that the Complainant did not engage in protected activity, noting that his complaints regarding a lack of what he characterized as “internal controls” were inadequate.  The ARB also concluded that the Respondent showed it would have terminated Complainant’s employment even in the absence of his alleged protected activity.  Thibodeau v. Wal-Mart Stores, Inc., ARB Case No. 2017-0078.

Background

Complainant worked for Respondent as a Senior Estimator, with responsibility for evaluating contractors’ requests for additional payments.  When Complainant’s supervisor cancelled the licenses for certain estimating software, he escalated concerns to management because he believed the software was essential for reviewing payment requests.  After Complainant successfully negotiated a lower license rate, Respondent renewed the software.  Throughout the following several months, Complainant’s supervisors brought numerous performance issues to his attention, issued him three levels of coaching under Respondent’s progressive discipline policy, and notified him that his employment was subject to termination if issues continued.  Later that year, Complainant raised concerns that a contractor’s payment request was deficient, resulting in a contentious telephone conversation with the contractor.  This incident prompted an automatic third-strike-and-out termination of Complainant’s employment.

Complainant filed a complaint with OSHA claiming that his termination violated SOX’s whistleblower protection provision.  After OSHA dismissed the complaint, an ALJ conducted a hearing and similarly dismissed the complaint.  Complainant then appealed to the ARB.

Ruling

The ARB affirmed, finding that: (1) Complainant did not engage in protected activity, and (2) Respondent nevertheless would have terminated Complainant’s employment in the absence of his alleged protected activity, as evidenced by Complainant’s progression through the discipline policy.

Notably, the Complainant argued that reviewing contractors’ additional payment requests was a part of the internal controls over financial reporting, and that he therefore engaged in protected activity when he complained about the software license cancellation and reported deficient contractor requests.  The ARB ruled, however, that internal operational and managerial controls are distinguishable from internal controls over financial reporting.  The ARB concluded that Complainant’s payment request reviews are a cost-saving endeavor for Respondent, and thus fall outside the scope of the SEC’s rules for internal controls over financial reporting.  The ARB further held that, although Complainant subjectively believed the conduct he was reporting constituted a violation of SEC regulations, that belief was not objectively reasonable.

Of significance, the ARB also clarified its position regarding what constitutes “protected activity” under SOX.  The ARB previously held in Sylvester v. Parexel Int’l LLC, No. 07-123 (ARB May 25, 2011), that an employee’s complaint need not “definitively and specifically” relate to an enumerated legal violation, and that complainants only had to show that they reasonably believed the conduct complained about violated one of the laws enumerated in SOX.  Here, the ARB clarified that the standard established in Sylvester should not be interpreted to convert SOX into a general anti-retaliation statute.  Rather, complainants must still provide information regarding conduct that they reasonably believe constitutes a violation of one of the legal violations enumerated in SOX.  The ARB further clarified that an ALJ may consider, as part of the totality of the circumstances, evidence relevant to particular elements of the enumerated law when deciding if it was reasonable for the employee to believe that the law had been violated.

Implications

This decision is a valuable win for employers, as it clarifies what a complaint regarding a lack of internal controls must include and fortifies the rule that SOX is not a general anti-retaliation statute, despite the standard articulated in Sylvester.

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