Proskauer Whistleblower Defense

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

By Steven J. Pearlman, Pinchos Goldberg and Scott Tan on Posted in SOX Whistleblower Decisions

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

By Steven J. Pearlman, Pinchos Goldberg and Julia Hollreiser on Posted in Key ARB Decisions

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.

Whistleblower Attorney Challenges SEC Final Rule Changing Its Whistleblower Program

By Lloyd B. Chinn, Pinchos Goldberg and Scott Tan on Posted in SEC

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.

Fifth Circuit Affirms Dismissal of SOX Whistleblower Claim for Lack of Employer-Employee Relationship

By Steven J. Pearlman, Pinchos Goldberg and Rebecca Fishbein on Posted in SOX Whistleblower Decisions

On January 29, 2021, the U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal of a SOX whistleblower retaliation claim where the plaintiff failed to establish an employer-employee relationship with the defendant.  Moody v. Am. Nat’l Ins. Co., No. 20-cv-40462.

Background

Plaintiff was the owner and president of Moody Insurance Group (“MIG”).  MIG contracted with American National Insurance Company (“ANICO”) to sell ANICO’s insurance products.  During the term of the contract, Plaintiff complained to the ANICO Board that ANICO was in violation of certain SEC regulations.  He also filed a shareholder derivative suit.  The ANICO Board subsequently terminated ANICO’s contract with MIG.

In June 2019, Plaintiff filed suit in the U.S. District Court for the Southern District of Texas, alleging that ANICO retaliated against him in violation of Section 806 of SOX for his complaints by canceling his company’s contract, among other things.  In June 2020, the district court granted ANICO’s Rule 12(b)(6) motion to dismiss the SOX claim, holding that Plaintiff failed to allege facts showing that he was a covered employee of ANICO under SOX (our post on that decision is here).  The district court agreed with ANICO’s argument that the U.S. Supreme Court’s decision in Lawson v. FMR (2014) (discussed here), only permits the employees of a contractor to bring suit against their actual employer, and not against the public company with which their employer contracts.

Ruling

The Fifth Circuit affirmed the district court’s grant of ANICO’s motion to dismiss, explaining that the Supreme Court made clear in Lawson that SOX only covers “actions an employer takes against its own employees” and, therefore, “the whistleblower entitled to protection must be an employee of the retaliator.”  Because Plaintiff was an employee of MIG (a private company), and not ANICO (a public company), Plaintiff failed to plead sufficient facts to show that he is a covered employee protected by SOX.

Implications

This decision clarifies that even under the Lawson, employees of private companies that contract with public companies can only pursue a SOX claim against their actual employer.

Bloomberg: SEC Receives Record Number of Whistleblower Tips From Remote Employees

By Harris Mufson and Pinchos Goldberg on Posted in SEC

A recent Bloomberg article reports that whistleblower complaints to the SEC have soared as employees have been working from home during the COVID-19 pandemic.  According to the article, the SEC received 6,900 complaints in the fiscal year that ended on September 30, 2020 – a 31% jump from the previous 12-month record.

The article discusses how the isolation associated with working remotely has emboldened employees to speak out.  The article quotes a former SEC official as stating: “It’s never been easier to record a meeting when you can do it from your dining room table.”  The article also quotes a psychologist and professor who has studied the motivations of whistleblowers as stating: “[w]hen you feel disconnected from work, you feel more comfortable speaking up.”

According to the article, because of the lag in time between complaints and SEC investigations, the impact of the recent explosion in whistleblower tips will be felt long after employees return to the office.

Notably, the Bloomberg article comes on the heels of our prediction last year that employers are likely to face a deluge of whistleblower claims under various laws and legal theories in the wake of the COVID-19 pandemic.  As a result, employers should consider strengthening compliance policies and opening up additional channels for internal reporting of employee concerns.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

CFTC Releases 2020 Annual Report on its Whistleblower Program

By Steven J. Pearlman, Pinchos Goldberg and Scott Tan on Posted in CFTC

The Commodity Futures Trading Commission (“CFTC”) recently released its 2020 Annual Report on the status of its whistleblower program for the fiscal year ending on September 30, 2020.

The report, prepared by the CFTC’s Whistleblower Office (“WBO”), contains statistics on the tips received and awards granted during the previous fiscal year, describes the WBO’s recent outreach and education initiatives, and provides an update on the CFTC Customer Protection Fund, which finances these efforts.

Under the CFTC’s whistleblower program, whistleblowers who voluntarily provide original information about violations of the Commodity Exchange Act are eligible to receive between 10 and 30 percent of resulting sanctions that exceed $1 million.  Eligible sanctions can be collected via CFTC enforcement actions or related actions by other federal regulators.

Whistleblower Tips Received

In FY 2020, the WBO received a record high of 1,030 whistleblower tips and complaints, which represents an increase of 126% over the 455 tips received in FY 2019, as well as an increase of 36% over the previous record of 760 tips in FY 2018.  These tips and complaints concerned activities such as failures to supervise; record keeping or registration violations; swap dealer business conduct; wash trading; solicitation, misappropriation, and other types of fraud; use of deceptive or manipulative devices in trading; as well as spoofing and other forms of disruptive trading or market manipulation.

The WBO also received 191 non-whistleblower tips, including 64 referrals from the Securities and Exchange Commission.

Whistleblower Awards Granted

During FY 2020, the CFTC issued 11 whistleblower awards to 16 individuals, several of whom contributed to the same enforcement action.  The CFTC also denied 80 award applications, primarily because they did not relate to a qualifying sanction obtained by the CFTC or another regulatory agency.

The 11 awards combined for a total of approximately $20 million, down from the $75 million issued last year in just 5 whistleblower awards.  Since the inception of the Whistleblower Program in FY 2012, the CFTC has issued 25 whistleblower awards for a total of more than $120 million.  The actions associated with these awards have resulted in nearly $1 billion in sanctions.

The awards issued during FY 2020 illustrate that the award amount is determined not just by the size of the sanction collected, but also by several additional considerations.  One award was reduced because the whistleblower declined to provide a declaration in support of the CFTC’s enforcement action; another award of $250,000 was reduced because the whistleblower did not promptly report the violations.  Multiple whistleblowers can report the same illegal activity: an award of more than $2 million was shared between four whistleblowers, who had jointly submitted a tip to the CFTC and “individually provided significant, ongoing assistance” to the investigation.  Another award was shared by two whistleblowers, one based in the US, who first alerted the CFTC to the fraudulent activity, and the other based overseas, who provided additional information, including about efforts by the perpetrators to avoid detection.

SEC Announces Record-Breaking $114 Million Award to Whistleblower

By Lloyd B. Chinn and Pinchos Goldberg on Posted in SEC

On October 22, 2020, the SEC announced an award of over $114 million to a whistleblower who, after reporting internally to their employer, provided the SEC with information and assistance that led to the successful enforcement of SEC and related actions.  The $114 million award consists of an approximately $52 million award in connection with the SEC case and an approximately $62 million award arising out of the related actions by another unidentified agency.  The combined $114 million is the largest amount ever awarded under the SEC’s whistleblower program and far surpasses the next-largest award of $50 million made to an individual in June 2020.

SEC Chairman Jay Clayton noted that “[w]histleblowers make important contributions to the enforcement of securities laws and we are committed to getting more money to whistleblowers as quickly and as efficiently as possible.”  Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “[t]he actions of the whistleblower awarded today were extraordinary,” explaining that “[a]fter repeatedly reporting concerns internally, and despite personal and professional hardships, the whistleblower alerted the SEC and the other agency of the wrongdoing and provided substantial, ongoing assistance that proved critical to the success of the actions.”

Since the inception of the whistleblower program in 2011, the SEC has awarded approximately $676 million to 108 individuals.  The order granting this record-breaking award can be accessed here.

Ga. District Court Dismisses Dodd-Frank and SOX Whistleblower Claims

By Steven J. Pearlman, Pinchos Goldberg and Melissa A. Overbeck on Posted in Dodd Frank, SOX Whistleblower Decisions

On September 30, 2020, the U.S. District Court for the Northern District of Georgia granted an employer’s motion to dismiss a Dodd-Frank whistleblower claim on the ground that the alleged whistleblower did not complain to the SEC prior to his termination.  The court also granted Plaintiff’s SOX whistleblower claim as against three affiliates of Plaintiff’s employer, holding that Plaintiff had failed to exhaust administrative remedies as to those defendants because he did not specify the allegedly wrongful conduct attributable to each of them in his administrative complaint.  Slawin v. Bank of America Merchant Services., et al., No. 19-cv-04129 (N.D. Ga. Sept. 30, 2020).

Background

Plaintiff, a former Vice President and Operations Control Officer at the Company, filed a whistleblower retaliation action against Company, its parent, and two joint venturers (the “non-Company Defendants”), alleging his employment was terminated in retaliation for his complaints regarding Company’s purported failure to comply with Payment Card Industry (“PCI”) standards.  Specifically, he alleged that the Company, an entity that provided payment processing services to other companies and municipalities, not only failed to handle consumers’ personal data in compliance with PCI standards, but also knowingly misled its customers into believing that it was, in fact, PCI compliant.  Following his termination, Plaintiff filed whistleblower retaliation complaints with the SEC and OSHA, alleging wrongful conduct by the Company but only naming the remaining defendants in the context of explaining their relationship to the Company.

All four Defendants moved to dismiss, with the Company moving as to Plaintiff’s Dodd-Frank and CFPA claims, and the three remaining defendants seeking dismissal of the entire complaint as against them. Specifically, Defendants argued that Plaintiff’s Dodd-Frank claim should be dismissed because he failed to make a report to the SEC prior to his termination, and his CPFA claim should be dismissed because Defendants did not qualify as “covered persons” or “service providers” under that statute because they did not provide services to “customers.”  The three non-Company Defendants further argued that Plaintiff’s SOX and CFPA claims should be dismissed as to them because Plaintiff failed to exhaust his administrative remedies by not attributing any alleged conduct to them in his SEC or OSHA complaints.

Ruling

Relying on the Supreme Court’s decision in Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018) (our post on that decision is here), the court held that because Plaintiff did not provide information to the SEC before his termination, he did not qualify as a “whistleblower” under Dodd-Frank at the time of the alleged retaliation.  Accordingly, the court dismissed Plaintiff’s Dodd-Frank claim as to all Defendants.

Similarly, the court granted the non-Company Defendants’ motion as to Plaintiff’s SOX claim, holding that Plaintiff had failed to exhaust his administrative remedies as to them.  Specifically, relying on the Eleventh Circuit’s unpublished decision in Smith v. Psychiatric Sols., Inc., 358 Fed. Appx. 76, 78 (11th Cir. 2009), in which that court affirmed a decision finding lack of exhaustion against defendants not named as respondents in the administrative complaint.  After specifically noting that it did not read Smith as adopting a per se rule requiring naming a SOX defendant as a respondent in an administrative complaint to exhaust remedies as to that defendant, the court noted that the few references to these defendants in Plaintiff’s OSHA Complaint were insufficient.

Implications

This decision serves as a reminder that Dodd-Frank’s anti-retaliation provisions are only triggered where a plaintiff makes a pre-termination external report to the SEC.  It also highlights an avenue to seek dismissal of a SOX whistleblower retaliation complaint naming multiple corporate defendants where the plaintiff does not sufficiently specify in an administrative complaint alleged wrongful acts committed by each defendant.

SEC Awards Almost $30 Million to Two Insider Whistleblowers

By Lloyd B. Chinn and Pinchos Goldberg on Posted in SEC

On September 30, 2020, 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.  (The order granting the awards can be accessed here.)  The larger of the two awards, $22 million, is one of the SEC’s highest awards to date and was awarded to an insider who was the first to alert the SEC of potential wrongdoing, persistently internally reported and elevated their concerns in an effort to remedy the conduct, and provided substantial, ongoing assistance to the SEC during the investigation.  The second award of $7 million was given to an insider who provided additional valuable information.

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said in a press release that “[t]he information and assistance provided by today’s whistleblowers helped the agency return tens of millions of dollars to harmed retail investors.”  She added, “[w]e hope that awards like the ones issued by the Commission today will continue to incentivize individuals to come forward and report high-quality tips to the SEC.”

Since the inception of the whistleblower program in 2011, the SEC has awarded approximately $557 million to 102 individuals.

SEC Amends Whistleblower Program Rules

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

On September 23, 2020, by a vote of 3 to 2, the U.S. Securities and Exchange Commission announced the adoption of a final rule implementing several changes to its whistleblower program, citing the need to “provide greater clarity to whistleblowers and increase the program’s efficiency and transparency.”  The following addresses the key provisions of the final rule.

The Commission Clarifies Its Award-Setting Procedures

One of the most notable provisions of the final rule changed how the Commission sets award amounts.  Under the terms of the Dodd-Frank Act which established the whistleblower program, awards must equal between 10 percent and 30 percent of the total monetary sanctions recovered as a result of the information provided by the whistleblower, as determined by the award criteria outlined in 17 C.F.R. § 240.21F-6.

Presumption of the Statutory Maximum for Awards Less than $5 Million

For awards where the statutory maximum of 30 percent is $5 million or less, the final rule adopted a presumption that the whistleblower will receive the maximum award, so long as none of the negative award-reducing criteria in Rule 21F-6(b) are present.  The Commission noted that approximately 75% of all awards have been for $5 million or less, and thus, this presumption should provide increased transparency and streamline the award determination process.

Continued Discretion in Setting Awards More Than $5 Million

For awards expected to exceed $5 million, the Commission’s original proposal in July 2018 included a separate review process allowing it to make additional downward adjustments to “exceedingly large awards” of at least $30 million to an individual whistleblower.  The final rule removed this process, but the Commission noted that it already possessed broad discretion to adjust award amounts under the existing award criteria in Rule 21F-6.  The Commission further clarified that while it would evaluate only the statutory award criteria in setting award amounts, consistent with its long-standing practices, this evaluation would consider not just the percentage of monetary sanctions captured by the award but also the total dollar amount of the award.  One rationale provided by the Commission was that “actual dollar figures—not abstract percentages—are most likely to advance the whistleblower award program’s goal of incentivizing potential whistleblowers.”

However, the Commission noted that based upon historical application of the award criteria, if none of the negative award-reducing criteria specified in Rule 21F-6(b) are present, the award amount should be in the top third of the award range.

Allowing Awards for Additional Forms of Dispute Resolution

To qualify for an award, information provided by a whistleblower must lead to the collection of monetary sanctions through either: 1) a judicial or administrative enforcement action by the Commission; or 2) a related action brought by the U.S. Attorney General, another regulatory authority, a self-regulatory organization, or a state attorney general in a criminal case.  The final rule added additional types of Commission enforcement actions that will now be eligible for a whistleblower award: 1) deferred prosecution agreements; 2) non-prosecution agreements; and 3) settlement agreements outside the context of a judicial or administrative proceeding.  The amount of the awards stemming from these alternative resolutions will still consist of a percentage of the money recovered, as determined by the standard award-setting process.

Prohibiting Multiple Recoveries under Other Whistleblower Programs

The final rule introduced a provision clarifying that an action by a separate regulatory authority does not qualify as a related action under the Commission’s whistleblower program if the Commission determines that there is a different award program (such as the CFTC whistleblower program) that more appropriately applies to the separate regulatory action.  Furthermore, this “multiple-recovery” rule also precludes whistleblowers who have been denied awards by other whistleblower programs from re-adjudicating issues before the Commission that were already resolved against them by the other program and requires whistleblowers to waive their claims to awards under other programs prior to accepting an award from the Commission.

Clarifying the “Independent Analysis” Requirement

Section 21F of the Exchange Act limits whistleblower awards to individuals who, among other requirements, submit “original information” derived from the independent knowledge or analysis of the whistleblower.  Though “original information” can be based on an independent analysis of information from publically available sources, the Commission has always required that the analysis “reveal information that is not generally known or available to the public.”

The final rule sought to clarify this requirement by providing that the criteria of “independent analysis” is satisfied where: “1) the whistleblower’s conclusion of possible securities violations derives from multiple sources, including sources that, although publicly available, are not readily identified and accessed by a member of the public without specialized knowledge, unusual effort, or substantial cost; and 2) these sources collectively raise a strong inference of a potential securities law violation that is not reasonably inferable by the Commission from any of the sources individually.”  The Commission concluded that this change was needed to address uncertainty regarding the prior requirements, encourage more high-quality submissions, reduce the volume of non-meritorious claims, and increase the efficiency of the whistleblower program.

 

The Commission Establishes a Uniform Definition of “Whistleblower” to Comport with the U.S. Supreme Court’s Decision in Digital Realty Trust

The final rule introduced changes to comport with the U.S. Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018).  (Our post on that decision is here; our post on the SEC’s initial proposal more than two years ago to amend the whistleblower rules in response to Digital Reality is here.)  The final rule provided a uniform definition of “whistleblower” to be applied in every provision of the statute.

Though the Court in Digital Realty held only that a whistleblower must make a report to the Commission to trigger Dodd-Frank’s anti-retaliation provisions, the final rule went one step further by requiring that the report be made in writing.  The Commission acknowledged the concerns of commentators and its dissenting colleagues who argued that requiring a written report was too restrictive, but determined that the requirement would present only a “minimal burden” given the multiple means of transmission available (e.g., email, online submission, fax, and mail) while facilitating a more efficient and accurate review by Commission staff.

Under the new definition, for all provisions of Exchange Act Section 21F, including the award program, heightened confidentiality requirements, and anti-retaliation protections, a whistleblower is defined as “i) an individual, ii) who provides the Commission with information ‘in writing’, iii) that relates to a possible violation of the federal securities laws (including any law, rule, or regulation subject to the jurisdiction of the Commission) that has occurred, is ongoing, or is about to occur.”

The final rule also codified the existing requirement that to be eligible for an award or to obtain heightened confidentiality protections, in addition to making a report, a whistleblower must also submit information on Form TCR or through the SEC’s online portal within 1) thirty days of first providing information to the SEC, or 2) thirty days of receiving actual or constructive notice of this requirement.

The Commission Implements New Tools for Processing Applications

In line with the Commission’s goal of improving its efficiency in processing award applications, the final rule provided that an applicant may be permanently barred from seeking an award if the applicant submits three or more frivolous award applications.  For the first three applications determined to be frivolous, the Office of the Whistleblower will notify the applicant of its assessment and provide an opportunity to withdraw their application.  The final rule also codified the Commission’s existing practice of imposing a permanent bar on applicants who have submitted materially false, fictitious, or fraudulent statements in their application, in dealings with the Commission, or in related actions by other regulatory authorities.  Applicants will be notified and given an opportunity to respond prior to the issuance of a permanent bar.

In addition, the final rule provides for a streamlined summary-disposition procedure for five categories of common denials: 1) untimely award applications; 2) failure to submit information in the form and manner required by the rules; 3) applications where the claimant’s information was never provided or used by staff responsible for the investigation; 4) failure to comply with the Commission’s requests for additional information or other assistance; and 5) failure to specify the tip on which the award claim is based.  For these categories of denials, the Office of the Whistleblower will issue a preliminary summary disposition and provide 30 days for claimants to file a written response prior to issuing a final determination.

Takeaways

The Commission emphasized that the changes implemented by the final rule were intended to provide more clarity to whistleblowers regarding the program’s requirements and increase the efficiency of processing and disbursing awards.  Thus, the majority of changes focused on either codifying preexisting procedures or providing additional guidance to flesh out the whistleblower program’s requirements.

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