Proskauer Whistleblower Defense

SEC Announces Record-Shattering $279 Million Award to Whistleblower

By Steven J. Pearlman and Pinchos Goldberg on Posted in SEC

On May 5, 2023, the SEC announced an award of nearly $279 million to a whistleblower who provided the SEC with information and assistance that led to the successful enforcement of SEC and related actions.  This enormous award is the largest-ever in the history of the whistleblower program and is more than double the previous record $114 million award issued in October 2020 (see our post here).

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, noted that “[t]he size of today’s award – the highest in our program’s history – not only incentivizes whistleblowers to come forward with accurate information about potential securities law violations, but also reflects the tremendous success of our whistleblower program.”  Creola Kelly, Chief of the SEC’s Office of the Whistleblower, explained that “[t]he whistleblower’s sustained assistance including multiple interviews and written submissions was critical to the success of these actions,” and added that “[w]hile the whistleblower’s information did not prompt the opening of the Commission’s investigation, their information expanded the scope of misconduct charged.”

Since the inception of the whistleblower program in 2011, the SEC has awarded more than $1.5 billion to whistleblowers.  The order granting this record-breaking award can be accessed here.

Illinois Federal Court Grants Motion to Dismiss SOX Whistleblower Claim

By Steven J. Pearlman, Pinchos Goldberg and Jennifer McGrew on Posted in SOX Whistleblower Decisions

On February 28, 2023, the U.S. District Court for the Central District of Illinois granted a defendant-employer’s motion to dismiss a SOX whistleblower retaliation claim, holding that the plaintiff failed to adequately plead that he engaged in protected activity because his alleged attempt to raise safety concerns did not plausibly allege that he subjectively believed that he was reporting fraud.  Magnuson v. Exelon Generation Company, LLC, No. 21-cv-4142.

Background

Plaintiff, an Operations Shift Manager at a nuclear power plant, was responsible for ensuring compliance with state and federal regulations set by the Nuclear Regulatory Commission (“NRC”) (the federal agency responsible for regulating nuclear power plants and other uses of nuclear materials).  Plaintiff alleged that the Company retaliated against him after he reported various purported safety violations, including by removing his security clearance, deactivating his NRC license, suspending him, requiring him to undergo a psychological evaluation, and ultimately placing him on an involuntary leave without pay.  During this time, Plaintiff filed four separate complaints with OSHA.  He subsequently filed suit, alleging various claims under state and federal law, including a whistleblower retaliation claim under SOX.

Ruling

The court granted the Company’s motion to dismiss the SOX whistleblower retaliation claim, holding that Plaintiff failed to allege that he engaged in protected activity because none of his allegations “suggest that his disclosures were motivated by a subjective belief that he was reporting fraud within SOX’s purview but rather demonstrate a concern for nuclear safety.”  The court noted that “Plaintiff’s words, actions, and the animating beliefs he alleges overwhelmingly demonstrate that a concern for nuclear safety, not fraud, motivated his [complaints].”

Implications

This decision reaffirms the principle that SOX does not extend whistleblower protection to complaints about any form of purportedly improper conduct, but only protects complaints that are related to one of the six categories of misconduct enumerated in Section 806 of SOX.

Ohio District Court Grants Employer Summary Judgment on SOX Whistleblower Claims

By Steven J. Pearlman, Pinchos Goldberg and Ryan McGill on Posted in SOX Whistleblower Decisions

On February 15, 2023, the U.S. District Court for the Southern District of Ohio granted a defendant-employer’s motion for summary judgment on SOX whistleblower retaliation claims, holding that the plaintiff failed to establish the elements of a SOX claim, and that the company demonstrated that it would have discharged her in the absence of any protected activity.  Harmon v. Honeywell Intelligrated, No. 19-cv-670.

Background

Plaintiff, a Data Entry Associate, alleged that she was harassed and retaliated against after she complained about “unethical accounting practices” in the company.  According to Plaintiff, her complaints led to an “organized group” trying to “get rid of [her]” and contributed to a hostile work environment that ultimately led to her taking an extended leave of absence.  Plaintiff alleged that the harassment continued while she was on leave, when she was denied leave benefits to which she was entitled, and culminated with her termination one month after she filed a whistleblower retaliation complaint with OSHA.  She subsequently filed suit, alleging that various claims under state and federal law, including whistleblower retaliation claims under SOX.

Ruling

The court granted the company’s motion for summary judgment on Plaintiff’s SOX claim, holding that Plaintiff failed to provide admissible evidence to establish a prima facie case of whistleblower retaliation.  First, Plaintiff’s claims of retaliation during her employment were time-barred because she waited until after the 180-day statutory period expired to file an administrative complaint with OSHA, as required under the statute.  Second, Plaintiff failed demonstrate that hat she was wrongfully denied short term leave benefits in retaliation for her complaints because that decision was not made by the employer, but by a third-party benefits administrator.  Finally, Plaintiff failed to provide sufficient evidence that her discharge was retaliatory because the company demonstrated that it had already put into motion the necessary steps to terminate her employment prior to the SOX complaint filing because she had already been absent from work more than 18 months.

Implications

This decision underscores the importance of documenting in real time the justifications for any employment actions so that employers can demonstrate when and why the decisions were made should they be challenged.

OSHA Implements Pilot Program to Streamline Complaint Intake Process

By Steven J. Pearlman, Pinchos Goldberg and Ryan McGill on Posted in OSHA Administration

OSHA’s new nationwide year-long pilot program that took effect on February 17, 2023, will aim to streamline the whistleblower complaint intake process.

OSHA, which administers over two dozen whistleblower statutes, has seen a rising number of whistleblower complaints filed in recent years.  This pilot program aims to relieve the strain on OSHA’s investigative resources by allowing an investigator to administratively close a complaint without needing to contact the Complainant.

Under the program, OSHA will administratively close a complaint if it facially: (1) is not covered by an OSHA-administered whistleblower statute; (2) is untimely filed and equitable tolling does not appear to apply; or (3) only alleges safety or compliance issues but does not allege retaliation or other prohibited activity.

Upon closure, the Complainant will receive a letter notifying them of the closure and informing them that they may provide additional information to change the closure decision.

Notably, when OSHA administratively closes a complaint, it will preserve the filing date for timeliness purposes.

The program is an expansion of a similar pilot program implemented by OSHA Region II between May 1, 2020 and April 30, 2021.  OSHA adopted improvements to the program, including adding more information to the closure letters about equitable tolling to assist Complainants in refiling with additional information where their complaint was closed for timeliness.  The closure letter may also include referrals to other agencies; for example, if the Complainant alleged discrimination based on a protected category, the letter will provide a referral to the EEOC.

An important takeaway is that the apparent need for this program reflects the proliferation of whistleblower complaints in recent years.

Third Circuit Affirms Dismissal of Untimely SOX Whistleblower Claims

By Steven J. Pearlman, Pinchos Goldberg and Ariel Brotman on Posted in SOX Whistleblower Decisions

On January 4, the Third Circuit affirmed the dismissal of a former bank executive’s whistleblower retaliation claims, holding that two procedural errors doomed his case: he sued before exhausting his administrative remedies; and then he belatedly filed an administrative complaint after the statute of limitations had run.  Jaludi v. Citigroup, No. 21-cv-1108.

Background

Plaintiff alleged that he was demoted, transferred and ultimately discharged after he reported alleged wrongdoing.  He also alleged that he was then “blacklisted” from the financial industry.

In 2015, Plaintiff filed suit in the U.S. District Court for the Middle District of Pennsylvania alleging various claims, including unlawful retaliation under SOX’s anti-retaliation provision.  The district court initially granted the bank’s motion to compel arbitration, but in 2019, the Third Circuit reversed, holding that the Dodd-Frank Act amended SOX to prohibit pre-dispute agreements requiring arbitration of SOX whistleblower claims.  On remand, the district court dismissed the SOX claim as untimely because Plaintiff waited more than two years after the last incident of alleged retaliation to file an administrative complaint with OSHA—long after the 180-day deadline.

Ruling

On appeal, the Third Circuit affirmed.  The court first held—after analyzing the statute’s plain language and applying basic rules of statutory construction—that SOX’s statute of limitations and exhaustion requirements are not jurisdictional.  The court therefore determined that it could proceed to the merits.  The court then concluded that Plaintiff’s SOX claims were time-barred because he failed to exhaust administrative remedies before filing suit in court, and only filed his administrative complaint after the 180-day statute of limitations had expired.  The court also rejected Plaintiff’s request for leave to amend, ruling that any amendment would be futile.

Implications

This decision serves as a reminder that courts will strictly construe the 180-day statute of limitations applicable to SOX whistleblower claims.

DC Circuit: SOX’s Anti-Retaliation Provision Does Not Apply Extraterritorially

By Pinchos Goldberg and Ariel Brotman on Posted in SOX Whistleblower Decisions

As we previously reported, on February 13, 2020, an Administrative Law Judge (ALJ) of the Department of Labor (DOL) dismissed a former in-house attorney’s whistleblower claims because he worked entirely outside of the United States.  On December 23, 2022, the D.C. Circuit unanimously affirmed, holding that SOX’s anti-retaliation provision does not apply extraterritorially.  Garvey Morgan Stanley, No. 21-1182.

Background

In 2006, Complainant began working in Tokyo for a foreign subsidiary of a U.S. company.  In 2011, he began working for a different foreign subsidiary of the same U.S. company and relocated to Hong Kong.  In February 2016, Complainant claimed that he was constructively discharged after he objected to certain conduct that he believed was in violation of the U.S. Foreign Corrupt Practices Act and other laws.

In August 2016, Garvey filed suit under SOX’s anti-retaliation provision (Section 806), and the company moved to dismiss on the grounds that the ARB’s decisions in Hu v. PTC, Inc., ARB Case No. 2017-0068 (Sept. 18, 2019) and Perez v. Citigroup, Inc., ARB Case No. 2017-0031 (Sept. 30, 2019) precluded extraterritorial claims under Section 806.  The ALJ adopted the Board’s analysis in Hu and Perez, holding that “(1) Section 806 lacks extraterritorial reach, and (2) Garvey, like Hu, was a foreign-based worker at a foreign subsidiary employed entirely outside of the United States who could not allege a domestic application of Section 806.”

After unsuccessfully seeking review of the ALJ’s decision by the Board, Complainant appealed to the D.C. Circuit.  He argued that his complaint stated a viable cause of action because the primary focus of SOX’s anti-retaliation provision is to prevent corporate fraud and his allegations of fraud affecting U.S. securities markets were sufficient to establish a domestic nexus.  Complainant also argued that, upon filing his complaint, the U.S. company had harassed his attorneys, which itself constituted an adverse employment action and a domestic application of SOX.

Ruling

The D.C. Circuit denied Complainant’s petition for review and affirmed the Board’s judgment.  The court held that “the text, context, and legislative history of Section 806 do not contain a clear, affirmative indication that the statute applies extraterritorially.”  The court found unconvincing Complainant’s arguments that the scope of Section 806 was limited by definitions that had specific extraterritorial reach and that Section 806 incorporated predicate statutes that had extraterritorial reach.  In addition, the court concluded that the clear focus of Section 806 was on regulating employment relationships and not on preventing corporate or securities fraud violations.  Thus, given Garvey’s undisputed employment abroad, the court found that this case did not involve a domestic application of Section 806.

Finally, the court deemed irrelevant the alleged post-termination harassment of Complainant’s attorneys by the U.S. company.  The court noted that this was not an adverse employment action or domestic application of Section 806 because it has arisen after Complainant’s employment ended and there was no evidence it would affect his future employment opportunities.

Implications

The D.C. Circuit’s decision confirms that employees of multinational employers who live and work abroad cannot invoke the whistleblower protections of SOX.

Pennsylvania District Court Grants Employer Summary Judgment on Whistleblower Retaliation Claims

By Steven J. Pearlman, Pinchos Goldberg and Alisha Bruce on Posted in CFPA, SOX Whistleblower Decisions

On December 6, 2022, the U.S. District Court for the Eastern District of Pennsylvania granted a defendant-employer’s motion for summary judgment on whistleblower retaliation claims brought under SOX and the Consumer Financial Protection Act of 2010 (“CFPA”).  It held that the plaintiff could not prove that her alleged complaints of illegal conduct contributed to the decision to discharge her, and that even if she could prove that, the employer would have fired her anyway.  Real-Loomis v. The Bryn Mawr Trust Company, No.-cv-0441.

Background

Plaintiff, who was employed as a banker, alleged that the defendant-employer subjected its employees to “relentless” and “incessant” pressure to meet sales quotas by tracking how much new business employees generated, which caused them to fear that their employment would be terminated if they did not meet their sales goals.  Plaintiff claimed that, on three separate occasions, she complained to her supervisor and branch manager about the sales pressure she allegedly experienced, stating her belief that the employer’s sales tactics were “inappropriate, fraudulent, and not at all in the best interests of customers.”  The branch manager then shared Plaintiff’s concerns with the regional manager.

Shortly thereafter, Plaintiff opened a joint bank account with her husband after the branch manager allegedly asked for help fulfilling the branch’s sales quota.  A senior manager subsequently noticed that there had been an unusually large number of new account openings at Plaintiff’s branch on the same day, and that many of the account openings for employees’ relatives.  Following an investigation due to the suspicious nature of these openings, it was allegedly determined that Plaintiff had forged her husband’s signature.  As a result, the senior manager decided to discharge multiple employees for their involvement in the allegedly fraudulent account openings, including Plaintiff and the branch manager to whom she had previous complained.

Plaintiff proceeded to file suit (following a complaint to the U.S. Department of Labor) claiming was retaliated against for her complaints about the pressure she faced to meet sales quotas in violation of SOX and the CFPA.

Ruling

The court granted the defendant-employer’s motion for summary judgment, finding that Plaintiff could not demonstrate at least two elements of a prima facie case because she did not show: (i) that she engaged in protected activity, or (ii) that any protected activity contributed to the decision to discharge her.  The court noted that Plaintiff’s general reference to “fraudulent” conduct in her complaints to the branch manager did not constitute protected activity under SOX or the CFPA because she failed to identify specific practices that she believed violated either of those laws.  Plaintiff also could not establish that her complaints to the branch manager or her subsequent complaint to the U.S. Department of Labor was a contributing factor in the termination decision.  Plaintiff offered no evidence that the senior manager who decided to discharge her was aware of Plaintiff’s complaints to the branch manager, and therefore those complaints could not have factored into the decision.  Plaintiff’s complaint to the Department of Labor, moreover, post-dated Plaintiff’s discharge and therefore could not have played a role in the termination decision.

The court also found that Plaintiff’s claims failed because the employer established that it would have made to same decision to discharge Plaintiff regardless of any protected activity.  The court noted that the employer fired two other employees as a result of its investigation: another employee who had also purportedly forged a family member’s signature, and the branch manager who had orchestrated the purported scheme.  The court held that this treatment of similarly situated employees who did not complain about violations of SOX and the CFPA constituted clear and convincing evidence that Plaintiff would have been discharged absent any protected activity.

Implications

This decisions reaffirms certain basic principles underlying typical whistleblower retaliation claims, including the common sense notion that an employer cannot decide to retaliate against an employee based on a complaint it did not know about or that was first made after the allegedly retaliatory conduct occurred.

AML Whistleblower Improvement Act Signed Into Law

By Seetha Ramachandran and Pinchos Goldberg on Posted in AML, Legislation

On December 7, 2022, the U.S. Senate voted unanimously to expand whistleblower incentives and strengthen whistleblower protections by passing the Anti-Money Laundering Whistleblower Improvement Act.

The bill bolsters the anti-money laundering whistleblower program by adding support for whistleblowers who report violations of U.S. sanctions laws, guaranteeing that whistleblowers will be paid a minimum award amount, and providing a funding mechanism to pay whistleblower awards.  Specifically, the new legislation:

  • Enables whistleblowers who disclose a violation of the International Emergency Economic Powers Act, the Foreign Narcotics Kingpin Designation Act, and/or the Trading with the Enemy Act that leads to a successful enforcement action;
  • Entitles whistleblowers to an award of between 10 and 30 percent of the value of fines collected as a result; and
  • Creates a $300 million fund to pay whistleblower awards from fines collected by the Justice and Treasury Departments.

In announcing the passage of the bill, Senator Chuck Grassley, one of the bill’s co-sponsors (along with Senators Raphael Warnock, Elizabeth Warren, and Catherine Cortez Masto), noted that “with the False Claims Act saving taxpayers $70 billion, the SEC whistleblower program saving over $4.8 billion and the IRS whistleblower program saving over $6 billion[,] I’m optimistic that our new program encouraging individuals to come forward for suspected sanctions violations will be successful as well.”  Senator Grassley further explained that “[g]iven the expansive sanctions we’ve implemented on Russia as they wage an unjust war in Ukraine, our legislation is urgently needed to hold bad actors accountable.”

On December 29, 2022, President Biden signed the bill into law.  This legislation could significantly expand the potential monetary rewards available to whistleblowers under the AMLA, further incentivizing whistleblowers to report potential violations of the sanctions laws.

Third Circuit: Whistleblowers Are Not Shielded From Discipline for Misconduct

By Steven J. Pearlman, Pinchos Goldberg and Margo Richard on Posted in False Claims Act

On August 26, 2022, the Third Circuit affirmed a grant of summary judgment in favor of an employer, holding that whistleblower retaliation protections in the False Claims Act did not protect an employee from being discharged for harassing a co-worker.  Crosbie v. Highmark Inc., et al., No. 21-1641.

Background

Plaintiff was a fraud investigator for a health insurance company.  In 2017, he reported to his managers his discovery that some doctors in the company’s network had been convicted for selling opioid prescriptions, and that other doctors lacked required Medicaid licenses.  The managers investigated the concerns but decided not to take any action and told him to drop it, even after Plaintiff repeatedly pressed the issue.

On October 1, 2018, Plaintiff’s co-worker lodged a harassment complaint, alleging that Plaintiff called her “Miss Piggy” and “oinked” at her.  Human Resources then conducted an investigation, during which an eyewitness corroborated the complainant’s story.  The HR investigator also spoke with one of the managers who allegedly told Plaintiff to drop the fraud issue.  The manager stated that although he normally would have questioned the harassment allegations, he believed the allegations were true because he had heard Plaintiff make “coughing” and “snorting” noises earlier that day.  HR then terminated Plaintiff’s employment.

Plaintiff filed suit in the U.S. District Court for the Eastern District of Pennsylvania under the FCA, claiming he was discharged in retaliation for reporting potential fraud.  The company argued that the people in HR who decided to discharge Plaintiff knew nothing about his fraud reports and discharged him for a valid reason—for harassing a co-worker.  The district court granted summary judgment in the company’s favor, concluding that Plaintiff had failed to show “that the employers’ reason was a mere pretext for retaliation.”

Ruling

On appeal, the Third Circuit affirmed.  First, the court concluded that even if the investigation was imperfect, Plaintiff did not present any evidence that the “investigation was so thoroughly flawed that a jury could find [the investigation] unbelievable.”  Second, the timing between Plaintiff’s fraud reports and his termination did not support an inference of pretext because Plaintiff had initially reported the potential fraud more than one year before his discharge, and his last complaint was submitted one month prior.  The court also concluded that Plaintiff could not establish a causal connection between his protected activity and subsequent termination because the HR team that fired him was unaware of Plaintiff’s fraud reports.

The court also rejected Plaintiff’s argument that his manager had used the harassment investigation as a “cat’s-paw.”  Under a cat’s-paw theory, an employee must show that a non decision-maker harbored retaliatory animus and induced a decision-maker to act against the employee.  Plaintiff’s cat’s-paw theory failed because: (i) Plaintiff offered no evidence that his manager wanted to discharge him; and (ii) there was no indication that the HR investigator, who interviewed several other witnesses, was influenced by or relied on the manager’s interview in deciding to discharge Plaintiff.

Implications

This decision serves as a reminder that although anti-retaliation protections under the FCA are broad, employers maintain the right to discipline employees who engage in misconduct in the workplace—even if they are whistleblowers.

SEC Releases FY 2022 Whistleblower Annual Report

By Steven J. Pearlman, Pinchos Goldberg and Ryan McGill on Posted in SEC

On November 15, 2022, the SEC’s Office of the Whistleblower (OWB) released its annual report to Congress covering the period from October 1, 2021 to September 30, 2022.  The report highlights a record-breaking year for the SEC’s whistleblower bounty program in certain respects, explains factors that can increase or decrease award amounts, and discusses recent amendments to the program’s rules.

Record-Breaking Year for Whistleblower Tips

According to the report, the SEC received 12,322 whistleblower tips in fiscal year 2022, which was the record for the most tips received in any year since the SEC established the whistleblower program in 2011.

These submissions were received from around the globe.  In the U.S., the greatest number of tips were submitted by putative whistleblowers in Florida, South Carolina, California, Texas, and New York.  In the rest of the world, Canada, the United Kingdom, Germany, China, Mexico, and Brazil led the pack.

There was also a notable uptick from the previous year of tips received relating to Initial Coin Offerings and Cryptocurrencies—more than doubling as a percentage of overall tips.  The most common violations reported included: Manipulation (21%), Offering Fraud (17%), Initial Coin Offerings and Cryptocurrencies (14%), and Corporate Disclosures and Financials (13%).

Overall, the SEC awarded approximately $229 million in 103 awards in FY 2022, making this the SEC’s second highest year in terms of dollar amounts and number of awards.  The largest payout was a $40 million award to two individuals.

Since the beginning of the program, the SEC has paid more than $1.3 billion in 328 awards to whistleblowers who provided information that led to successful enforcement actions by the SEC and other agencies.

Factors that Increase or Decrease Awards

The report highlighted factors that may affect the size of an award.  Positive factors include the significance of the information provided, the nature and extent of assistance rendered by the whistleblower, the level of interest from law enforcement, and whether the whistleblower reported internally prior to their reporting even where they were not required to.

On the other hand, factors that could decrease an award include whether the whistleblower unreasonably delayed their reporting, engaged in culpable conduct, or interfered with internal reporting systems.

Changes to Whistleblower Program Rules

As we previously reported, the SEC adopted two amendments to its whistleblower program rules, which went into effect on October 3, 2022.  The first amendment permits whistleblowers otherwise eligible for an award under another whistleblower program to alternatively receive an award from the SEC if the SEC’s award would be higher.  The second amendment affirms the SEC’s authority to consider the dollar amount of a potential award as a consideration for increasing (but not decreasing) an award.

The OWB noted that these amendments “help ensure that whistleblowers are both incentivized and appropriately rewarded for their efforts in reporting potential violations of the law to the Commission.”

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