On January 13, 2021, a New York whistleblower attorney filed a lawsuit in the U.S. District Court for the District of Columbia challenging a recent final rule adopted by the Securities and Exchange Commission (the “Commission or “SEC”) which made several changes to the SEC’s whistleblower program.

The SEC Final Rule

The final rule was adopted on September 23, 2020 after an extended notice-and-comment period following issuance of the proposed rule on June 28, 2018 (our post on the final rule is here).  Among other changes, the proposed rule had originally included amendments allowing the SEC to conduct a separate review process to reduce “exceedingly large awards” of at least $30 million.  The final rule scrapped this process and instead asserted that the Commission already possessed discretion to reduce large awards with high dollar amounts under the existing statutory award factors.

In addition to modifying Rule 21F-6, the final rule also amended the definition of “related action” to allow the Commission to deny an award based on an action by another regulatory authority if it determines that a different whistleblower award program (such as the CFTC’s whistleblower program) has a “more direct or relevant connection to the action.”

The Complaint

In his complaint, the whistleblower attorney alleged several violations of the Administrative Procedure Act (“APA”).  Plaintiff emphasized that in the proposed rule, the Commission “repeatedly and expressly acknowledged” that it lacked authority under its existing regulations to consider the dollar amount of a potential award, which is why it was forced to propose a “separate review process” in the first place.  The complaint also alleged that the Commission implicitly acknowledged its lack of authority by stating that the separate review process outlined in its proposed rule would only apply to future whistleblower applications.

Plaintiff also asserted that the final rule’s amendment to the definition of “related action” allowing the SEC to deny awards better suited to a different whistleblower program violated the APA.  Plaintiff alleged that the statutes enacting the whistleblower program defined a “related action” as “any judicial or administrative action brought by [the specified government entities],” and did not provide the Commission with discretion to impose additional requirements.  The complaint cited dissenting Commissioners who warned that allowing the SEC to determine, at its discretion, the most relevant whistleblower program would decrease certainty and efficiency for whistleblowers and frustrate the aim of the program—to maximize deterrence.

Finally, Plaintiff noted that whistleblowers often fear being retaliated against or blacklisted due to their actions, and thus prefer to report anonymously.  By diverting whistleblowers to other programs, many of which do not offer anonymous reporting, some individuals will choose not to report at all.  

Takeaways

This lawsuit presents a novel challenge to the Commission’s final rule, which drew criticism by numerous stakeholders in the years prior to its adoption.  It remains to be seen whether plaintiff’s claims under the Administrative Procedure Act will bear fruit.  The true impact, if any, of the final rule on the whistleblower program is unlikely to be revealed until the SEC releases its annual report later this year.

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Photo of Lloyd B. Chinn Lloyd B. Chinn

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative…

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd’s practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media, education and technology, he focuses a substantial portion of his practice on the financial services sector. He has tried to final verdict or arbitration award substantial disputes in this area.

Due to Lloyd’s litigation experience, clients regularly turn to him for advice regarding the full range of employment matters, including terminations, whistleblower policy and procedure, reductions in force, employment agreements, and employment policies. For example, in the wake of the financial crisis, he has counseled a number of firms through reductions in force and related bonus and deferred compensation disputes. Lloyd has also been retained to conduct internal investigations of allegations of workplace misconduct, including claims leveled against senior executives.

Lloyd has represented global businesses in matters involving Sarbanes-Oxley and Dodd-Frank whistleblower claims. He has taken an active role in the American Bar Association on these issues, currently serving as Co-Chair of the Whistleblower subcommittee of the ABA Employee Rights and Responsibilities Committee. Lloyd has spoken on whistleblowing topics before a numerous organizations, including the American Bar Association, ALI-ABA, Association of the Bar of the City of New York, and New York University School of Law. He has testified twice before Congressional subcommittees regarding whistleblower legislation and has also published blog postings, articles and client alerts on a variety of topics in this area, including the Dodd-Frank Act’s whistleblower provisions. Lloyd is a co-editor of Proskauer’s Whistleblower Defense Blog, and he has been widely quoted by on whistleblower topics by a number of publications, including the New York Times, the Wall Street Journal, the National Law Journal and Law 360.

Lloyd has also become active in the International Bar Association, presenting on a variety of subjects, including: the #MeToo movement, the COVID-19 pandemic and employment law, and cross-border harmonization of employment provisions in transactions. Lloyd also hosts a quarterly roundtable discussion among financial services industry in-house employment lawyers. He has also published articles and given speeches on a variety of other employment-law topics, including non-solicitation provisions, FINRA arbitration rules, cross-border discovery, e-discovery, and the use of experts.

Photo of Pinchos Goldberg Pinchos Goldberg

Pinny Goldberg is a senior counsel in the Labor & Employment Law Department and a member of the Whistleblowing & Retaliation and Wage & Hour Practice Groups.

Pinny represents employers in a broad array of matters before federal and state courts, FINRA and…

Pinny Goldberg is a senior counsel in the Labor & Employment Law Department and a member of the Whistleblowing & Retaliation and Wage & Hour Practice Groups.

Pinny represents employers in a broad array of matters before federal and state courts, FINRA and other arbitration panels, and administrative agencies, including the EEOC and its state equivalents, and in pre-litigation negotiations. Matters he works on include discrimination and harassment, whistleblowing and retaliation, wage and hour, covenants not to compete, and tort and contract claims.

As an experienced trial lawyer, Pinny has successfully litigated numerous cases from complaint through jury verdict or arbitral award. Notably, Pinny served as trial counsel to King & Spalding LLP in a widely publicized wrongful termination lawsuit brought by a former associate in which the jury returned a complete defense verdict on the seventh day of trial.

In addition to handling litigation and dispute resolution, Pinny regularly advises clients on a wide variety of employment issues, including drafting, reviewing and revising handbooks and workplace policies. He also addresses questions and concerns related to hiring, wage and hour issues, employee leave, performance problems, terminations of employment, and separation agreements and releases.

Pinny represents employers across a broad range of industries, including financial services, insurance, law firms, media and entertainment, professional sports, and higher education.

In addition to his active practice, Pinny serves as an editor for the Proskauer Whistleblower Defense Blog and Proskauer on Trade Secrets Blog. He is also a regular author of “Expert Analysis” articles for Law360.

While in law school, Pinny served as an editor for the Cardozo Law Review.

Photo of Scott Tan Scott Tan

Scott Tan is an associate in the Labor & Employment Law Department.  Scott represents employers in a variety of matters in federal and state court, arbitrations and state and local administrative proceedings.  His practice encompasses a wide range of labor and employment matters…

Scott Tan is an associate in the Labor & Employment Law Department.  Scott represents employers in a variety of matters in federal and state court, arbitrations and state and local administrative proceedings.  His practice encompasses a wide range of labor and employment matters, including employment discrimination, retaliation, breach of contract, whistleblower claims, restrictive covenants, and wage & hour claims.  Scott also counsels clients on a diverse array of employment matters, including accommodations requests, reductions-in-force, pay equity, wage and hour issues, and compliance with federal, state, and local laws.  Scott’s recent work has involved advising and representing clients across industries such as financial services, sports, news and media, healthcare, legal services, and real estate, in matters ranging from single and multi-plaintiff lawsuits to class and collective actions.

Scott has an active pro bono practice and advises non-profit organizations on employee separations and other employment issues.  He recently secured a favorable judgment in New York state court on behalf of a charitable foundation.  Scott also co-leads Proskauer’s Moot Court Program, where he introduces local high school students to appellate advocacy and coaches them to participate in an annual competition against other New York City high schools.

Scott received his J.D. from UCLA School of Law, where he served on the Moot Court Honors Board and worked as a research assistant for Professor Jennifer Mnookin and Professor Hiroshi Motomura.