SEC Issues More than $54 Million to Two Whistleblowers

On September 6, 2018, the SEC Office of the Whistleblower awarded $39 million to one whistleblower and $15 million to another. The $39 million award is the second-largest award in the history of the program, behind a $50 million award made in March of this year.

The Chief of the SEC Office of the Whistleblower, Jane Norberg, said in a press release that “[w]histleblowers serve as invaluable sources of information, and can propel an investigation forward by helping us overcome obstacles and delays in investigation.” She added, “[t]hese substantial awards send a strong message about the SEC’s commitment to whistleblowers and the value they bring to the agency’s mission.”

According to the Order, the first whistleblower’s award was slightly reduced based on delay in reporting the misconduct. This reduction, however, was smaller than usual because the majority of the time period during which the whistleblower failed to report predated the SEC whistleblower program.

In addition, the second whistleblower provided information in connection with an earlier investigative interview, which the SEC found to be an involuntary submission.  However, because the whistleblower did not know the information at the time of the interview and promptly informed the SEC upon discovery, the SEC granted an award as a limited waiver of the voluntariness requirement.

Also, both whistleblowers’ respective related-action claims were denied. The first was denied because the original information did not lead to a successful agency action in another action.  The second was denied because an additional waiver related to a second agency’s action was not in the public interest. The SEC said allowing whistleblowers to recover funds both under its program and a separate program “for the same action would produce the irrational result of encouraging multiple ‘bites of the apple’ in adjudicating claims for the same action.”

An award for a third claimant was denied, as the information he or she provided did not lead to a successful covered action.

Since its first award in 2012, the SEC has awarded more than $320 million to 57 individuals.

CFTC Issues $30 Million Whistleblower Award

On July 12, 2018, the U.S. Commodity Futures Trading Commission (CFTC) issued its largest whistleblower award ever, approximately $30 million, as part of its Dodd-Frank whistleblower program.  This is the first award under the Trump Administration, and only the fifth award that the CFTC has issued since the inception of its whistleblower bounty program.  Notably, this award dwarfs the next highest award of $10 million, which was awarded in April 2016.

The CFTC Chairman, J. Christopher Giancarlo, said in a press release that he “hope[s] that an award of this magnitude will incentivize whistleblowers to come forward with valuable information and provide notice to market participants that individuals are reporting quality information about violations of the Commodity Exchange Act.”  (The CFTC’s press release can be accessed here.)  As is the case with the CFTC’s prior awards, the Agency did not provide details about the whistleblower or the information that led to the enforcement action.

This $30 million award ties the third-highest award under the U.S. Securities and Exchange Commission’s (SEC) whistleblower program, which made a $30 million award in September 2014.

Third Circuit Affirms Dismissal of SOX Whistleblower Suit

On June 27, 2018, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal on summary judgment of a SOX whistleblower retaliation claim, concluding that the Plaintiff’s purported belief that the Defendant had committed fraud was not objectively reasonable. Westawski v. Merck & Co., No. 16-4075, 2018 WL 3159093 (3d Cir. June 27, 2018).

Background

Plaintiff Joni Westawski was a research analyst at Merck & Co.  She was assigned to oversee a diabetes-related study for grocery chain H-E-B and its health insurance benefits administrator, Blue Cross Blue Shield of Texas (“BCBS”).  After Merck hired an outside market research firm, DrTango, to conduct the research project, Westawski complained that DrTango was more expensive than other research firms and that Merck had only hired DrTango because one of its scientists had close relationships with executives of BCBS.   After Merck terminated Westawski’s employment in a restructuring, she filed a whistleblower retaliation suit under Section 806 of SOX.

The district court granted Merck summary judgment on Westawski’s SOX whistleblower claim, holding that she could not show that she engaged in protected activity because no reasonable person in her position could have believed that the concerns she raised amounted to a violation of one of the laws enumerated in Section 806 of SOX. (We posted about the district court’s decision here.)

Rulings

The Third Circuit affirmed the district court’s grant of summary judgment to Merck, holding that “[e]ven assuming Merck selected DrTango and paid it a premium to conduct a study for H-E-B so Merck could improve its business relationship with Blue Cross [Blue Shield of] Texas, Westawski fails to explain how that is fraud.” Westawski, 2018 WL 3159093, at *2. Westawski’s “vague” assertions that the payments to DrTango were some form of “bribe,” “inducement,” or “quid pro quo” were not enough to demonstrate that her complaints “relate in an understandable way” to any of Section 806’s enumerated forms of fraud. Id. (citation omitted).

Implications

The Third Circuit’s decision is an important reminder that even applying the “reasonable belief” standard articulated by the Administrative Review Board in Sylvester v. Parexel, the plaintiff’s alleged protected activity must “relate in an understandable way” to one of the enumerated forms of fraud set forth in Section 806 of SOX.

California Federal Court Grants Motion to Compel Arbitration of Dodd-Frank Whistleblower Claim

On June 27, 2018, the U.S. District Court for the Central District of California granted Snap Inc.’s motion to compel arbitration of a Dodd-Frank whistleblower retaliation claim.  Pompliano v. Snap Inc., No. 17-cv-3664 (2018 WL 3198454).

Background.   Plaintiff signed an employment agreement (the “Agreement”) with Snap Inc. (the “Company”) without consulting an attorney.  Fired just “three tension-filled weeks” after starting, he sued under Dodd-Frank’s whistleblower provisions, claiming retaliation for allegedly opposing the use of faulty growth metrics prior to the Company’s IPO.

The Company contended the termination was performance-related and moved to compel arbitration per the Agreement’s terms.  In response, Plaintiff argued the Agreement and its arbitration provisions were unconscionable due to (i) the Company’s alleged demand that Plaintiff sign the Agreement the same day it was provided to him; (ii) Plaintiff’s non-legal background; and (iii) a “delegation provision” requiring that an arbitrator—not the court—decide the arbitrability of any disputes.  Finally, relying on an unpublished district court opinion from Connecticut, Plaintiff argued that his Dodd-Frank claims also arose under SOX, and thus SOX’s provision barring enforcement of pre-dispute arbitration agreements prevented arbitration of the dispute.

Rulings.  The court held the Agreement enforceable.  Plaintiff—who was heavily courted by the Company and had negotiated a higher salary than what was initially offered—was deemed savvy enough to evaluate its contents, despite some pressure to sign quickly.

Further, the delegation clause was not substantively unconscionable, because it applied to both sides equally.  Finally, the court sided with the vast majority of courts in holding that Dodd-Frank whistleblower claims do not per se arise simultaneously under SOX.  It noted that Dodd-Frank exists in an entirely different title of the U.S. Code from SOX and contains numerous distinct features.  Moreover, the Federal Arbitration Act favors arbitration, and the court declined to restrict its application in the absence of a clear Congressional mandate to do so.

Implications.  This result supports the enforceability of arbitration provisions generally—particularly against relatively sophisticated parties—and, in particular, delegation provisions.  The decision also follows decisions from other jurisdictions holding that SOX’s predispute arbitration ban is inapplicable to Dodd-Frank whistleblower claims.

SEC Votes in Favor of Proposal to Amend Whistleblower Rules to Comport with U.S. Supreme Court’s Holding in Digital Realty Trust

On June 28, 2018, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) voted in an open meeting on several final rules and rule proposals that will have a material impact on the Commission’s whistleblower program. Most notably, the SEC approved a rule proposal that would modify its Rule 21F, which defines who is a whistleblower and establishes anti-retaliation protection, to comport with the U.S. Supreme Court’s holding in Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018).

As detailed on our blog, in February, the U.S. Supreme Court unanimously held that the anti-retaliation provision of the Dodd-Frank Act only applies to individuals who have provided information regarding a violation of the securities laws to the SEC. In so holding, the Court ruled that the SEC’s Rule 21F-2, which enabled an individual to gain anti-retaliation protection from complaints not made directly to the SEC (such as internal company complaints), was in clear contravention of Congress’s instruction that a “whistleblower” is a person who provides “information relating to a violation of the securities laws to the Commission.”

The SEC’s proposed rule will comport with the Court’s holding by requiring, inter alia, that an individual seeking anti-retaliation protection report, in writing, information about possible securities laws violations to the SEC itself. The proposed rule would apply uniformly: to the SEC’s whistleblower award program, the heightened confidentiality program, as well as for employment anti-retaliation protection. Continue Reading

Alabama Federal Court Partially Grants Motion to Dismiss SOX Claim On Exhaustion Grounds

On May 29, 2018, the U.S. District Court for the Northern District of Alabama granted a motion to dismiss in part Plaintiff’s whistleblower retaliation claims under SOX on the grounds that the Plaintiff failed to exhaust his administrative remedies against the Defendant CEO.  Wingo v. S. Co., 17-cv-01328.

Background.  Plaintiff, a Project Manager, informed his supervisor that a project was on track for a delayed Commercial Operation Date (“COD”).   Plaintiff alleged that after he informed his supervisor of his findings, management pressured employees to take dangerous shortcuts and continued to tout that an on-time COD was possible, because governmental and private incentives were contingent on a timely execution of the project.  Plaintiff allegedly reiterated his concerns to management and ultimately expressed his concerns to the CEO.  Plaintiff alleged that management began to retaliate against him and he was subsequently terminated.  Plaintiff then submitted a report to the SEC and filed a SOX whistleblower retaliation complaint with OSHA.  He then filed suit in federal district court, naming his employer and the CEO as defendants. 

Rulings.  The CEO moved to dismiss the SOX claim against him individually, arguing that Plaintiff’s OSHA filings poorly communicated his charges and failed to properly reference him, despite naming him as a defendant.  The court agreed, concluding that OSHA was not on notice that it should investigate the CEO’s alleged conduct.  Thus, the court granted the CEO’s motion to dismiss.   

Implications.  This decision is a favorable result for individual defendants in SOX cases, who are sometimes improperly named as parties and where claims against them in OSHA complaints are lacking.

 

Update on BofI Whistleblower Litigation

We previously reported in March and last October on a whistleblower litigation brought by Charles Erhart, a former Bank of Internet Holding, Inc. (BofI) internal auditor.  On December 3, 2015, in a separate action, the shareholders of BofI brought a derivative suit, based in part on the facts of the whistleblower case, claiming BofI’s board of directors engaged in multiple schemes that caused a drop in stock price.  On May 11, 2018, the United States District Court for the Southern District of California tentatively dismissed a sizeable portion of the suit due to the claims being “unripe.”  In Re: BofI Holding, Inc. Shareholder Litigation, No. 3:15-cv-02722.

BofI shareholders filed a putative class action securities fraud suit when BofI’s stock price fell over 30% after news broke of the whistleblower litigation. The suit was dismissed March 2017. The present suit was brought against the bank’s directors and officers for knowingly breaching their duties, taking no action after learning Erhart was fired despite his whistleblower status, disregarding internal controls, and producing misleading securities disclosures, among other actions.

The company moved for a judgment on the pleadings, and the court found  “derivative plaintiffs do not state a ripe claim when it is dependent on the conclusion of securities or whistleblower litigation regarding the same conduct.”  As a result, the plaintiffs have two options: (1) filing an amended complaint and proceeding with the claims that are ripe and supported by sufficient allegations of Article III standing, or (2) seeking to stay the case until the whistleblower litigation concluded.

As for the original whistleblower case, Erhart v. BofI Holding, Inc., No. 15-cv-02287, a jury trial has been set for June 11, 2019.

We will continue to monitor developments in these related matters.  This decision highlights that issues arising from employee whistleblower claims can have implications beyond the employment litigation itself.

 

ARB Rejects SOX Claim Due to Complainant’s Harassment

The ARB recently affirmed a motion for summary decision against a Complainant claiming retaliatory discharge under SOX, finding that he failed to demonstrate that he engaged in protected activity and that the Company would have discharged him in the absence of any protected activity given his misconduct. Latigo v. ENI Trading & Shipping, 2018 DOL Ad. Rev. Bd. LEXIS 15, Arb. No. 16-076, ALJ No. 2015-SOX-031 (Mar. 8, 2018).

Complainant, a trading analyst, was hired by ENI Trading & Shipping (“Company”) to analyze and reconcile crude oil production volumes and sales. In October 2014, Complainant allegedly expressed concerns to his supervisor about a discrepancy between the oil volume measured and the amount invoiced to third parties, stating that “the missing amount was not accounted for in [the Company’s] profit and loss statement, and that profits were overstated.”  Complainant’s supervisor responded that there was no unaccounted-for discrepancy since the imbalance had been accruing as a future payable.

At or around the same time, an employee complained to the Company that Complainant had been blackmailing and harassing a female co-worker, who had attempted suicide due to the alleged harassment. Outside counsel investigated the complaint, concluded that Complainant had engaged in harassing behavior and recommended termination of his employment.  Shortly thereafter, the Company terminated Complainant’s employment.

Complainant then filed a complaint with OSHA alleging whistleblower retaliation under SOX. After OSHA dismissed the Complaint, Complainant appealed to the ALJ.  The Company moved for summary decision, arguing that Complainant failed to show that he engaged in protected activity because while the reasonableness of his belief “ceased . . . when Complainant’s supervisor explained that the discrepancy did not in any way impact” the Company’s profit and loss statement.   The Company further argued that Complainant’s alleged protected activity did not contribute to his discharge and that it would have taken the same action if Complainant had not engaged in protected activity because the Company’s acting president had no knowledge of the alleged protected activity until the moment he suspended Complainant, and instead based his decision to suspend and terminate Complainant solely on the results of the independent investigation of harassment.  In response, Complainant alleged that his co-worker and the Company were colluding and hacked his computer “to prevent [Complainant] from reporting [the Company] to OSHA and federal securities authorities.”

The ALJ granted the Company’s motion for summary judgment, finding that Complainant failed to show he engaged in protected activity because after learning that the alleged discrepancy on the profit and loss statement was not actually a misstatement, he never voiced continued concern or offered any other affirmative evidence to demonstrate anything to the contrary. The ALJ also found that Complainant failed to establish causation because in response to the substantial evidence from the independent investigation into his harassing behavior, Complainant relied only on his own unsupported allegations to demonstrate that his alleged protected activity was a contributing factor in the Company’s decision to terminate his employment. In addition, the ALJ found that the Company demonstrated that it would have terminated Complainant even if he had not engaged in protected activity because he failed to provide any affirmative evidence to demonstrate that the independent investigation was inaccurate with respect to his harassing behavior.

The ARB affirmed, finding that the Company’s basis for its termination decision was supported by the evidentiary record. As the ARB explained, Complainant failed to “provide any affidavits, sworn statements, or other admissible evidence to rebut the clear and convincing evidence [the Company] adduced in support of its affirmative defense.”  The ARB did not make a determination as to the ALJ’s protected activity analysis.

Implications

This is a welcome decision for employers because it shows that the ARB is apt to affirm ALJ grants of summary judgment where complainants may be using whistleblower provisions to shield themselves from their own misconduct.

Chicago Federal Court Rejects Retaliatory Discharge Claim Due To Existence Of SOX Whistleblower Claim

On April 23, 2018, the U.S. District Court for the Northern District of Illinois ruled that a plaintiff’s SOX claim precluded his claim for common law retaliatory discharge.  Cohen v. Power Solutions International, Inc., No. 17-cv-4385.

Plaintiff, a COO, claimed that in early 2016, he became suspicious of the Company’s financial dealings and believed the Company “had engaged in sham transactions, channel-stuffing, and other financial and accounting misconduct.”  Plaintiff reported his purported concerns to senior executives, employees at the Company and the Board of Directors and Audit Committee.  Shortly after his report to the Board, the CEO issued Plaintiff an “Action Plan,” dated the day before Plaintiff’s report to the Board and Audit Committee.  The Action Plan outlined areas of concern with Plaintiff’s performance and action items.  Plaintiff responded to the Action Plan in writing a few days later and again raised concerns regarding financial misconduct.  Plaintiff’s employment was terminated a few weeks later.

Plaintiff then filed suit claiming retaliation under SOX and Illinois common law.  The Company filed a motion for judgment on the pleadings pursuant to Rule 12(c), arguing that the Plaintiff’s “SOX claim provides an adequate alternative remedy, and so Illinois law precludes a common law retaliatory discharge claim for the same act of retaliation.”  The court agreed, finding that “Illinois courts do not permit common law claims for retaliatory discharge where there is an adequate alternative remedy available that renders the common law remedy superfluous.”  The court noted that where the act of retaliation violates a statutory right – such as SOX – “common law retaliatory discharge claims cannot stand.”

This case precludes Illinois plaintiffs from adding common law retaliation claims to SOX claims in hopes of raising the specter of punitive damages that SOX does not provide.

Federal Court Rules That Providing Testimony to FINRA Is Not Protected Activity Under Dodd-Frank

On April 19, 2018, the United States District Court for the District of New Jersey held that providing testimony to FINRA (which is overseen by the SEC) does not constitute protected activity for purposes of establishing a Dodd-Frank whistleblower claim.  Price v. UBS Financial Services, Inc., No. 2:17-01882.

Background.  Plaintiff, a former UBS Private Wealth Advisor, testified before FINRA regarding allegedly unlawful activities by company management.  After Plaintiff was terminated, Plaintiff brought anti-retaliation claims under Dodd-Frank and the Florida Whistleblower Act.  The Court denied the dismissal of the Florida Whistleblower Act claim, but stayed the Dodd-Frank pending the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers.  On February 21, 2018, the Supreme Court issued their decision, holding that the anti-retaliation provision in Dodd-Frank does not extend to individuals who failed to report the potential violation to the SEC.  Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767, 772 (2018).

Ruling.  Following the decision in Digital Realty Trust, Inc. v. Somers, UBS moved to lift the stay and dismiss Plaintiff’s Dodd-Frank claim with prejudice arguing that testifying before FINRA did not equate to providing information to the SEC.  Plaintiff opposed the dismissal, arguing that his disclosures were sufficient since the SEC oversees FINRA and its rulemaking process and disciplinary proceedings.  The court dismissed Plaintiff’s Dodd-Frank claim, holding that the Digital Realty decision makes clear that the “core objective of Dodd-Frank’s robust whistleblower program… is to motivate people who know of securities law violations to tell the SEC.”  Digital Realty, 138 S. Ct. at 777.  (internal quotations and citations omitted).  Accordingly, the Court determined that Plaintiff’s testimony to FINRA did not meet the statutory requirement to report information to the SEC.

Implications.  This decision demonstrates that federal courts may take narrow view as to the definition of “whistleblower” under Dodd-Frank’s anti-retaliation provisions and that plaintiffs must report misconduct to the SEC in order to be protected by Dodd-Frank.

 

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