Proskauer Whistleblower Defense

CFTC Issues $2 Million Whistleblower Award to Individual Whistleblower for Analysis of Market Data

By Harris Mufson and Andrew Sherwood on Posted in CFTC, Dodd Frank

On March 4, 2019, the U.S. Commodity Futures Trading Commission (CFTC) issued a whistleblower award totaling more than $2 million to be paid to an individual whistleblower, as part of its Dodd-Frank whistleblower program.  This award is particularly interesting because the whistleblower “provide[d] critical information through independent analysis of market data,” according to the CFTC press release, but was not a corporate insider.

The Director of the Whistleblower Office, Christopher Ehrman, said in the press release that the award “illustrates two key aspects of our Whistleblower Program — that an individual doesn’t have to be an insider to receive a whistleblower award and the Commission can pay awards based on related actions brought by other regulators.”

The CFTC Order highlighted that the whistleblower’s original information caused the CFTC to open an investigation and bring a successful covered action.  It also highlighted that the information led, in part, to the initiation and resolution of a related action brought by an unnamed “Federal Regulator.”  The whistleblower was lauded by the CFTC Order for providing the Staff with “assistance and analysis in interpreting voluminous data” during the investigation.

This is the CFTC’s first award of 2019 and only the sixth award issued since the inception of its whistleblower bounty program created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  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.

Fifth Circuit Affirms Summary Judgment on SOX Whistleblower Claim

By Steven J. Pearlman, Lloyd B. Chinn and Edward Young on Posted in SOX Whistleblower Decisions

On February 15, 2019, the Fifth Circuit affirmed the grant of summary judgment in favor of Andeavor Corporation f/k/a Tesoro Corporation on a SOX whistleblower claim, concluding that the plaintiff lacked an objectively reasonable belief that the company was misreporting its revenue to the SEC.  Wallace v. Andeavor Corp., No. 17-cv-50927.

Background

Plaintiff, a Vice President of Pricing and Commercial Analysis, was a sub-certifier of the company’s financial statements.  He was tasked with investigating the company’s financial performance in various industry segments, and purportedly concluded that it improperly booked taxes as revenues in certain internal reporting channels.  On February 8, 2010, he reported his concerns to his supervisor.  Yet, shortly thereafter, he certified that he knew of no reason why the company’s 2009 10-K could not be certified.  That 10-K, which was filed on March 1, 2010, included a statement disclosing that certain taxes were included in both the “Revenues” and “Costs of Sales and Operating Expenses.”  Also, on March 12, 2010, Plaintiff certified that he was unaware of any “business or financial transaction that may not have been properly authorized negotiated or recorded” for 2009.

While Plaintiff was investigating the company’s internal profitability and accounting for taxes, the human resources department determined that he had been creating a hostile work environment, and his employment was terminated.  His termination occurred on March 12, 2010, the same day he provided the above-referenced certification.  Plaintiff filed suit in the Western District of Texas under Section 806 of SOX, claiming he was discharged in retaliation for reporting the company’s alleged practice of booking sales taxes as revenues, which he claims was not properly disclosed in SEC filings.  The district court granted summary judgment in the company’s favor, concluding that the decision to terminate the plaintiff’s employment was not prohibited retaliation and that the plaintiff did not have an objectively reasonable belief that the company had misreported its revenue to the SEC.

Ruling

The Fifth Circuit focused on whether Plaintiff had an objectively reasonable belief that the company was misreporting revenue.  In ruling on this issue, it noted that Plaintiff had extensive business experience, including with the company’s accounting systems, and had expertise in SEC financial reporting practices.  It concluded that in light of his position as a sub-certifier with accounting oversight experience, he should have investigated to ensure the reasonableness of his conclusion that the public disclosures contained a reporting violation.  According to the court, had he conducted a limited investigation, he would have determined that the company had properly disclosed its treatment of certain taxes as revenue in the 10K that was filed with the SEC.  Thus, the court concluded, he lacked an objectively reasonable belief that the company had violated the law.

Implications

As we previously reported (here and here), and as set out in the ARB’s seminal holding in Welch v. Cardinal Bankshares Corp., ARB Case No. 05-064 (May 31, 2007), the “reasonable belief” standard looks beyond a plaintiff’s purported subjective belief of wrongdoing to whether that belief is objectively reasonable based on the expertise and background of the complainant.  This decision holds experienced professionals bringing SOX whistleblower claims to a higher standard and considers whether they conducted reasonable investigations in determining whether they held an objectively reasonable belief that unlawful conduct occurred.

First Cir. Sets Pleading Standard For FCA Whistleblower Retaliation Claims

By Steven J. Pearlman and Edward Young on Posted in False Claims Act

On January 15, 2019, the First Circuit ruled that a plaintiff adequately alleges protected activity under the FCA whistleblower protection provision where he asserts that he reported concerns about his employer’s conduct that could reasonably lead to a viable FCA action.  Guilfoile v. Shields, Sr., No. 17-1610.

Background

Plaintiff, a former executive of pharmacy chain Shields Health Solutions who reported directly to owner John Shields, alleged that during the course of his employment he became concerned that Shields was paying a consulting firm $35,000 per quarter for each hospital contract the consulting firm successfully referred to the company.  Plaintiff allegedly believed this violated the federal Anti-Kickback statute, 42 U.S.C. § 1320a-7b(b)(2)(B).  Plaintiff alerted Shields of his alleged concerns, causing Shields to have the consulting firm waive a payment yet to be made for one of two referrals.  Allegedly believing this was insufficient, Plaintiff asked Shields to notify the board of directors, but Shields refused.  On December 22, 2015, Shields told Plaintiff he was concerned that Plaintiff was “going over his head,” and suggested they consider “parting ways.”  A week later, the company terminated Plaintiff’s employment with no further explanation.  Plaintiff then sent the board of directors a letter setting forth the concerns he previously voiced to Shields.  Thereafter, Shields alleged that Guilfoile threatened to sue him for defamation and tortious interference.  On February 26, 2016, Guilfoile received a letter from the company stating for the first time that his employment had been terminated for cause.

Ruling

Plaintiff filed suit against Shields, Shields Health Solutions and several related entities alleging he was retaliated against under the FCA.  He alleged that defendants retaliated against him for his “efforts to stop violations of the [FCA],” specifically his “disclosures … related to kickbacks [defendants] paid [to the consulting firm] in exchange for referrals of federally insured patients.”  Plaintiff further alleged that he reasonably believed the payments violated the Anti-Kickback Statute.  The District of Massachusetts granted a motion to dismiss, determining Plaintiff failed to adequately plead protected activity.

A split panel of the First Circuit reversed the dismissal of Plaintiff’s claim that he was retaliated against under the FCA for complaining of kickbacks.  The majority determined that protected activity under the FCA should be interpreted broadly, and a plaintiff need only plead that he was retaliated against based on conduct that reasonably could lead to a viable FCA action.  In other words, a plaintiff need not plead the existence of the actual submission of a false claim to the government.  Moreover, because an FCA retaliation claim does not require a showing of fraud, a plaintiff alleging retaliation need not meet the heightened pleading standards of FRCP 9(b).

Implications

This decision arguably sets a less stringent pleading standard with respect to protected activity under the FCA.

U.S. Department of Labor Appoints Three New Members to the ARB

By Lloyd B. Chinn and Pinchos Goldberg on Posted in Key ARB Decisions, Uncategorized

On January 8, 2019, the DOL announced Secretary Alexander Acosta’s appointment of three new members to the Administrative Review Board (ARB), filling vacancies that had been open for months, and marking the first appointments to the ARB of the Trump Administration.

The ARB issues final agency decisions on behalf of the Secretary of Labor in cases arising under a number of worker protection laws, including the whistleblower-protection provision of SOX. Cases considered by the ARB arise upon appeal from a decision of an ALJ and the parties may appeal the ARB’s decisions to federal district or appellate courts.

All three new appointees were chosen from within the DOL. William Thomas Barto, who will serve as the chair of the ARB, previously served as an Administrative Law Judge for the DOL. James A. Haynes most recently served as an Appellate Administrative Law Judge for the Employees Compensation Appeals Board. Daniel T. Gresh previously worked as an attorney for the ARB. The new members will serve two-year terms. The ARB consists of a maximum of five members and two vacancies still remain open.

The membership of the ARB is significant, as previous boards have issued widely-divergent decisions regarding the scope of the whistleblower protection laws, which have in turn influenced the courts’ interpretation of those laws. For example, in Platone v. FLYi Inc., ARB Case No. 04-154 (Sept. 29, 2006), the Bush-era ARB introduced an employer-friendly standard for a SOX whistleblower complaint, requiring the whistleblower to describe conduct that “definitively and specifically” relates to one of the six categories of unlawful acts set forth in the statute. That standard was adopted by the First, Second, Fourth, Fifth and Ninth Circuits. But, in 2011, the Obama-era ARB abrogated Platone in Sylvester v. Parexel International LLC, No. 07-123 (ARB May 25, 2011), and dramatically lowered the bar for what constitutes “protected activity” under SOX, holding 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. Federal courts, including the Second, Third, Sixth and Tenth Circuits, subsequently adopted the ARB’s more liberal Sylvester standard.

The ARB has not issued any decisions since July 2018. This more than five-month hiatus is unprecedented since the ARB was established in May 1996, and we expect that the board will issue a flurry of decisions in the coming months as its works through a backlog of cases. Given the new membership of the board, we would not be surprised to see further developments in the ARB’s shifting interpretation of the whistleblower laws.

We will be monitoring the ARB’s activities closely and will report on future developments of interest.

California Federal Court Stays SOX Claim Pending Arbitration of Related Claims

By Lloyd B. Chinn, Pinchos Goldberg, Tony S. Martinez and Steven J. Pearlman on Posted in SOX Whistleblower Decisions

On December 21, 2018, the U.S. District Court for the Northern District of California stayed a plaintiff’s whistleblower retaliation claim under SOX (which was not subject to mandatory arbitration) while granting a motion compelling arbitration of the plaintiff’s remaining employment discrimination and retaliation claims. Anderson v. Salesforce.com, Inc., No. 18-cv-06712-PJH.

Background

Plaintiff alleged that he was terminated after he raised concerns about his employer’s accounting practices. He subsequently filed suit in the Northern District of California asserting ten causes of action under the FMLA and California law for various forms of employment discrimination and retaliation, and an eleventh cause of action under SOX for whistleblower retaliation. While employed, the plaintiff had signed an arbitration agreement in which he agreed to “resolve by arbitration all claims or controversies, past, present, and future” that he may have against Defendant. However, as Dodd-Frank invalidated pre-dispute arbitration agreements regarding whistleblower claims under SOX, 18 U.S.C. §1514A(e)(2), the employer moved to compel arbitration only of the first ten causes of action, and to stay the SOX claim pending resolution of the arbitration.

Ruling

The court granted the motion to compel arbitration and stayed the SOX claim pending resolution of the arbitration. In granting the motion to compel arbitration, the Court found that a valid and enforceable agreement to arbitrate existed between the parties and that the claims at issue fell squarely within the scope of the agreement. The Court also granted the employer’s motion to stay the non-arbitrable SOX claim, because that claim arose from the same conduct as Plaintiff’s arbitrable claims. The Court reasoned that allowing the arbitration to run its course would simplify issues of law or questions of fact relating to the SOX claim in future proceedings.

Implications

This is a win for the employer, as it was able both to enforce its arbitration clause and avoid litigating essentially the same set of facts in two places at once. Moreover, to the extent the employer establishes meritorious defenses to the other claims in arbitration, those defenses may have res judicata and/or collateral estoppel effects on the stayed SOX claim.

SEC Releases FY 2018 Whistleblower Program Annual Report

By Harris Mufson and Jacob L. Hirsch on Posted in Dodd Frank, SEC

On November 15, 2018, the U.S. Securities and Exchange Commission (“SEC”) published its statutorily mandated fiscal year report to Congress covering the agency’s whistleblower program.

The report, which covers the period from October 1, 2017 through September 30, 2018, was prepared by the SEC’s Office of the Whistleblower (“OWB”) to summarize its whistleblower bounty program, report on the program’s recent growth, and highlight key amendments to the SEC’s Dodd-Frank regulations.

Whistleblower Bounty Program

Through the whistleblower bounty program, the SEC offers a financial reward to individuals who report original, relevant information that leads to a successful enforcement action.  The SEC’s report states that 69% of bounty recipients to date are current or former corporate insiders.  Of these insiders, roughly 83% initially raised their concerns to their employer through internal reporting mechanisms, or perceived that their relevant compliance personnel knew of the violation, before contacting the SEC.  Bounty recipients’ tips have contributed to enforcement actions related to alleged false or misleading statements in offering memoranda or marketing materials, false pricing information, accounting violations, internal controls violations, and FCPA violations, among other conduct.  For FY 2018, the SEC reports that the most common activities reported by whistleblowers related to offering fraud (20%), corporate disclosures and financials (19%), and market manipulation (12%).

The statistics provided in the SEC’s report suggest that the whistleblower program expanded in FY 2018.  During that period, the SEC awarded more money to whistleblowers than in all of the program’s prior years combined.  In FY 2018, more than $168 million were distributed across 13 individuals whose initial tips and subsequent cooperation aided in the execution of successful enforcement actions.  The SEC’s March 2018 award of $83 million included an almost $50 million joint award to two individuals, the SEC’s largest single award ever.

OWB received a total of 5,200 whistleblower tips in FY 2018, more than in any other previous year.  This represents an almost 20% increase from FY 2017 and close to a 76% increase since the SEC started tracking statistics for this whistleblower bounty initiative in 2012.

Proposed Rule Amendments

The SEC attributes some of the recent uptick in whistleblowing to the Supreme Court’s ruling in Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018).  In that decision, the court held that Dodd-Frank’s anti-retaliation protections only cover individuals who have reported information to the SEC (as opposed to making an internal complaint to their employer).  In response to Digital Realty, the SEC revised its previously expansive definition of the term “whistleblower” to comply with the Supreme Court’s decision.

The SEC has also proposed other amendments to its regulations aimed at barring whistleblowers who repeatedly make frivolous bounty claims and affording OWB additional discretion in making bounty determinations.  For example, one such proposed amendment would require an “enhanced review” of awards resulting from enforcement actions that yield penalties in excess of $100 million whereby the gross amount of the bounty award would be a factor considered by the SEC.  With the public comment period for these rule modifications having ended on September 18, 2018, the SEC is now reviewing the comments before the rules themselves are finalized.  The full text of these proposed amendments can be found here.

N.D. Illinois Refuses To Expand Reach of Commodity Exchange Act Whistleblower Provisions

By Steven J. Pearlman and Rachel Therese Gulotta on Posted in CFTC

On October 22, 2018, the U.S. District Court for the Northern District of Illinois granted a Rule 12(b)(6) motion to dismiss a first-impression whistleblower retaliation claim under the Commodity Exchange Act (“CEA”).  Johnson v. Oystacher, No. 15-cv-02263.

Background

Plaintiff and Defendant went into business together in January 2011, with Plaintiff acting as Chief Risk Officer and Defendant handling the company’s volume futures trading.  They split ownership of the company by 10% and 90% respectively.  In December of 2012, Plaintiff testified in connection with the CFTC’s investigation of Defendant’s trading activities, stating he did not believe Defendant was engaged in improper trading.  Later, he took the opposite view, believing Defendant was engaged in “spoofing” (an unlawful trading practice).  In June 2013, Plaintiff allegedly demanded that Defendant either cease the trading activities at issue or stop trading completely.  Later the same month, Plaintiff was ousted from the company,  allegedly for “misrepresenting his capital contribution to [the company], using money from [the company] for personal use without authorization, and creating a phony [company] operating agreement.”  Plaintiff alleged that Defendant then threatened him and coerced him into relinquishing his 10% ownership interest by signing a settlement agreement, “the terms of which were meant to prevent him from disclosing to regulators information about [Defendant’s] illegal trading.”  Defendant then filed suit alleging he was retaliated against in violation of the CEA (among other claims, including RICO and state law claims) in connection with the foregoing confrontation and Defendant’s alleged attempt to prevent him from assisting the CFTC in its investigation into Defendant’s trading.

Rulings

The court granted Defendant’s motion to dismiss without prejudice.  It rejected Plaintiff’s argument “that the whistleblower protections afforded by the SEC should be imputed to the [CEA]” because the CEA protects “individuals who are retaliated against for providing information to the CFTC or for assisting in a CFTC action based upon or related to such information.”  The court found that Plaintiff failed to state a claim for relief under the CEA’s anti-retaliation provision because he was not retaliated against for providing information to the CFTC or assisting the CFTC in an investigation stemming from that information.  The court rejected Plaintiff’s argument that a new regulation, which “extend[ed] the [CEA’s] anti-retaliation protections to whistleblowers who report internally prior to providing information to the CFTC,” applied retroactively to his claim.  The court reasoned that Plaintiff did not “allege that he provided information to the CFTC or otherwise assisted it in an investigation or administrative action.  Thus, regardless of the regulator’s retroactive effect, his claim still fails.”  The court gave Plaintiff leave to plead a claim under a different theory.

Implications

This first-impression decision shows courts’ reluctance to expand the CEA whistleblower provisions beyond their plain import.

Tags: whistleblower

Federal Court Allows SOX Whistleblower Claim To Proceed But Dismisses Dodd-Frank Claim

By Steven J. Pearlman and Annabel Pollioni on Posted in SOX Whistleblower Decisions

On October 2, 2018, the U.S. District Court for the Western District of Pennsylvania federal court denied a Rule 12(b)(6) motion to dismiss a SOX whistleblower retaliation claim, reasoning that Plaintiff sufficiently alleged that he engaged in protected activity and that his protected activity was a contributing factor in his termination.  But it dismissed the Dodd-Frank whistleblower claim because Plaintiff only provided information to the SEC after his employment was terminated.  Wutherich v. Rice Energy Inc., No. 18-cv-200.

Background

Plaintiff worked for Defendant as Director of Completions.  He alleged his employment was terminated in order to conceal a report he made to the Chief Operating Officer and President that he believed the Vice President, who was an owner of a company that provided services to Defendant (Silver Creek), “was self-dealing due to his interest in Silver Creek and making bad business decisions as a result.  [And] . . . that the selection of Silver Creek constituted a securities violation.”  Plaintiff also reported to the same Vice President that Defendant’s 10-k filings with the SEC allegedly failed to list known “theft of trade secrets as one of its liability risks,” and that he believed the failure to disclose was a securities violation.  Plaintiff reported these alleged violations to the SEC after his employment was terminated.  Following the termination of his employment, Plaintiff filed suit alleging he was retaliated against for engaging in protected activity in violation of the SOX and Dodd-Frank whistleblower protection provisions.

Ruling

Defendant moved to dismiss both whistleblower retaliation claims pursuant to Rule 12(b)(6).  With respect to the SOX claim, it argued that Plaintiff did not engage in protected activity and even if he did, he did not allege that the management officials involved in the decision to terminate his employment were aware of his protected activity.  In a conclusory fashion, the court found that at this early stage in litigation the Plaintiff had alleged sufficient facts to “support an inference that his communication to [the Vice President] and others in management reflected a reasonable belief that Defendant’s conduct constituted a securities violation and thus was protected activity under [SOX].”  Likewise, the court found that Plaintiff alleged “circumstances sufficient to raise an inference that Plaintiffs protected activity was a contributing factor in his termination.”  However, the court dismissed the Dodd-Frank claim, ruling that “[b]ecause Plaintiff did not provide information to the [SEC] before his termination, he did not qualify as a whistleblower at the time of the alleged retaliation and is therefore ineligible to seek relief.”

Implications

This is the second district court case in the Third Circuit applying Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018), to alleged Dodd-Frank whistleblowers that report violations to the SEC after their employment is terminated.

Tags: SOX, SOX Whistleblower

SEC Issues More than $54 Million to Two Whistleblowers

By Steven J. Pearlman and Austin McLeod on Posted in SEC

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.

Tags: SEC

CFTC Issues $30 Million Whistleblower Award

By Lloyd B. Chinn, Harris Mufson and Andrew Sherwood on Posted in CFTC

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.

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