Several important matters related to whistleblower actions occurred toward the close of 2015, including the first instance of a director being held individually liable for retaliation, a dismissal of the Berman v. Neo@Ogilvy LLC case, and two hefty whistleblower awards. Here are the full highlights:

2015 Whistleblower Office Report Confirms Increasing Tips and Awards

On November 16, 2015, The U.S. Securities and Exchange Commission (SEC) Office of the Whistleblower recently issued its Fiscal Year 2015 annual report, which highlights the increasing number of tips received under the whistleblower program – 3,923 tips from whistleblowers in fiscal year 2015.

This represents an eight percent increase from fiscal 2014 and a 30 percent increase from the number of tips received in fiscal 2012, the program’s first full year. The report also noted that the SEC paid more than $37 million to eight whistleblowers in fiscal 2015. The report emphasized some of the more significant awards, including:

• The award to a whistleblower in the SEC’s first anti-retaliation case
• The record $30 million award to a whistleblower announced on September 22, 2014
• The award of more than $1 million to a compliance professional who provided information leading to a successful enforcement action
• The half-million dollar award to a former company officer

Here is a breakdown of the tips received:

• The SEC received more than 2,800 phone calls from the public. The most tips originated in California, Florida, New York, Texas, and New Jersey.
• Tips came from 61 foreign countries, with the bulk of those tips originating from Britain, India, Canada, China, and Australia.
• The type of tips remained relatively consistent with prior year results. The most common types of complaints reported included: corporate disclosures and financials (18 percent), offering fraud (16 percent), and manipulation (12 percent).

The report provides some details on the individuals who have received awards since the whistleblower program’s inception:

• Almost 50 percent of the individuals receiving awards were current or former company employees when they reported information regarding wrongdoing.
• Of the award recipients who were current or former employees, approximately 80 percent raised their concerns internally to their supervisors or compliance personnel before reporting information to the SEC.

Besides the numbers, the SEC focused on two primary whistleblower issues:

1. The report describes its In re KBR enforcement action under Rule 21F-17(a), which prohibits any action that “impedes” an individual from communicating with the SEC staff about a possible securities law violation. (See April 2, 2015, Legal News, “SEC Brings Enforcement Proceeding Relating to Confidentiality Agreements That May Stifle Whistleblowers”). The annual whistleblower report notes that the SEC “will continue to focus on agreements that have language that could reasonably have the effect of impeding whistleblowers from reporting securities violations to the Commission.”
2. The report notes the SEC’s efforts to clarify that the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) retaliation protections apply when employees internally report potential securities law violations and the Second Circuit’s recent ruling in Berman v. Neo@Ogilvy LLC, in which the court deferred to the SEC’s view. (See September 14, 2015, Legal News, “Second Circuit: No SEC Reporting Requirement in Dodd-Frank Whistleblower Provisions”).

SEC Awards Whistleblower More Than $325,000

On November 4, 2015, the SEC announced an award of more than $325,000 to a former investment firm employee who provided information to the SEC that enabled the SEC enforcement staff to uncover fraudulent activity. The SEC noted that the former employee provided a detailed description of the misconduct and identified individuals behind the wrongdoing that helped the SEC bring a successful enforcement action. The SEC noted, however, that the whistleblower had unreasonably waited until after leaving the firm to report the wrongdoing, and that he could have received an even larger award had he not delayed coming forward.

No Supreme Court Writ of Certiorari for Berman v. Neo@Ogilvy LLC

As previously discussed, the United States Court of Appeals for the Second Circuit created a circuit split when it decided in Berman v. Neo@Ogilvy LLC, No. 14-4626 (2d Cir. Sept. 10, 2015) that whistleblowers need not report information to the SEC in order to seek protections under the Dodd-Frank anti-retaliation provisions. On October 14, 2015, the Second Circuit stayed the issuance of its mandate to allow the United States Supreme Court to decide whether it would take up the issue. However, on November 10, 2015, the defendants in the matter advised the Second Circuit that they would not be pursuing a writ of certiorari with the Supreme Court. Thus, the matter will be remanded to the district court for further proceedings.

Plaintiffs May Sue Individual Directors for Violation of Whistleblower Retaliation Provisions

In a matter of first impression, the court in Wadler v. Bio-Rad Laboratories, Inc., 2015 U.S. Dist. LEXIS 144468 (N.D. Cal. October 23, 2015), ruled that directors who take retaliatory actions against a whistleblowing employee are subject to individual liability under the Sarbanes-Oxley Act of 2002 (SOX) and Dodd-Frank whistleblower provisions. In Wadler, Bio-Rad’s former general counsel sued Bio-Rad and members of its board of directors, alleging that he had been terminated in retaliation for investigating and reporting to senior management possible violations of the Foreign Corrupt Practices Act. Wadler contended that the decision to terminate him had been made by the full board and that certain board members had known that he had reported the alleged misconduct to his supervisors and others with investigative authority. The defendants sought to dismiss, arguing that neither SOX, nor Dodd-Frank, permit directors to be held personally liable for retaliation against whistleblowers.

With respect to Section 1514A of SOX, the court said the issue turned on whether the prohibition of retaliation by an “agent” of a public company included directors. The court concluded that the meaning of the word “agent” in the statute was ambiguous and sought to divine legislative intent. The court rejected the defendants’ argument that Congress had intended to exclude directors from individual liability. Ultimately, however, the court concluded that the SOX claims against the individual defendants other than the CEO were untimely because the plaintiff’s original administrative complaint to the U.S. Department of Labor did not provide those board members adequate notice that they would be sued in federal court.

With respect to the Dodd-Frank Act’s anti-retaliation provision, the court was required to interpret the meaning of the word “employer” because the statute simply precludes retaliation by an “employer.” The court found the term “employer” to be ambiguous and, again, the court saw nothing in the legislative history suggesting that Congress intended to eliminate individual liability for those who retaliate against whistleblowers. Noting that Dodd-Frank was clearly designed to increase whistleblower protection, the court thought a step as significant as removing individual liability would have been noted in the statute’s legislative history. Accordingly, the court ruled that directors may be held individually liable for retaliating against whistleblowers. In addition, the court joined the Second Circuit’s Berman v. Neo@Ogilvy decision in deferring to the SEC’s position that Dodd-Frank whistleblower protection extends to individuals who report suspected violations internally, as well as those who report to the SEC.

The court subsequently denied the defendants’ motion for certification of interlocutory appeal and stay of the matter pending such interlocutory appeal.

Tennessee Federal Court Dismisses Whistleblower Retaliation Claims and Declines to Follow Berman v. Neo@Ogilvy LLC

While the majority of recent cases interpreting the Dodd-Frank anti-retaliation provisions have found that a plaintiff need not report information to the SEC in order to bring a claim for retaliation, the district court for the Eastern District of Tennessee recently determined that it would follow the Fifth Circuit’s contrary conclusion in Asadi v. G. E. Energy (USA) LLC, 720 F.3d 620, 623 (5th Cir. 2013). In Verble v. Morgan Stanley Smith Barney, LLC, 2015 U.S. Dist. LEXIS 164495 (Dec. 8, 2015), the plaintiff was a financial advisor who alleged he was a confidential source to the FBI and had uncovered numerous securities law violations, including insider trading.

The plaintiff alleged that he was terminated for his involvement in the FBI investigation in violation of SOX and Dodd-Frank. The court first disposed of the plaintiff’s SOX complaint because it lacked subject matter jurisdiction over the claim because he had not filed a complaint with the Occupational Safety and Health Administration. With respect to the Dodd-Frank claim, the court noted that he provided information to the SEC more than three months after he had been terminated and, thus, was not a “whistleblower” under 15 U.S.C. Section 78u-6(a)(6). The court noted that the anti-retaliation provision does not have an alternate definition of “whistleblower.”

Thus, the court found the statutory language to be unambiguous and held that the plaintiff was not a “whistleblower and was not protected by the anti-retaliation provisions.”

Court Declines to Opine on Berman/Asadi Split, Dismisses Dodd-Frank Claim on Other Grounds

In Azim v. Tortoise Capital Advisors, LLC, 2015 U.S. Dist. LEXIS 150324 (D. Kan. Nov. 5, 2015), the court was asked to dismiss a Dodd-Frank retaliation claim because the plaintiff, a vice president at an advisory firm, had not provided information to the SEC. This is significant because whether a plaintiff is required to provide information to the SEC was a question of first impression in the court and had not been considered by the Tenth Circuit. After considering the parties’ arguments (and the SEC’s amicus brief), the court declined to resolve the “intriguing question.”

Instead, the court granted the defendants’ motion for summary judgment, concluding that the plaintiff had not internally reported potential securities law violations; rather, he had complained about management’s incompetence, mistakes, and management style. Although some of the plaintiff’s complaints related to his employer’s attempts to raise investment assets from the California State Teachers’ Retirement System, the court concluded that none of the complaints suggested violations of securities laws.

In addition, the court concluded that the plaintiff had not produced evidence that he had been terminated in retaliation for reporting a securities law violation. Rather, the facts established that he had been terminated for making critical and disparaging remarks about his employer and its management and for making unreasonable demands before he would return to work.

CFTC Announces Second Whistleblower Award

On September 29, 2015, the United States Commodity Futures Trading Commission (CFTC) announced that it would make an award of approximately $290,000 to a whistleblower who provided valuable information to the CFTC about violations of the Commodity Exchange Act. The CFTC’s whistleblower program was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and provides monetary awards to persons who report violations of the Commodity Exchange Act, if the information leads to an enforcement action that results in more than $1 million in monetary sanctions. This was the CFTC’s second whistleblower award. The first whistleblower award of $240,000 was issued on May 20, 2014.