Don’t Ask a Whistleblower to Investigate the Conduct Reported to the SEC

by Stinson Leonard Street - Dodd-Frank and the Jobs Act
Contact

The SEC recently charged a hedge fund advisory firm, which we refer to as the employer, for the first time using its new authority to bring anti-retaliation enforcement actions.  The head trader for the employer reported to the SEC that improper, undisclosed principal transactions were occurring.

When the hedge fund advisory firm learned the whistleblower had reported the conduct to the SEC, the SEC alleged (which the employer did not admit or deny):

  • The employer informed the whistleblower that he would be removed from the employer’s trading desk and temporarily relieved him of his day-to-day trading and supervisory responsibilities. The employer informed him that, because he executed trades that were reported to the Commission, the employer needed to investigate his actions.
  • The employer further directed the whistleblower to work offsite at a different office building and instructed him to prepare a report that would detail all of the facts that supported the potential violations he reported to the Commission.
  • The whistleblower’s employment counsel proposed that the whistleblower be permitted to prepare his report from home rather than come into the office, which the employer allowed him to do. The employer and the whistleblower’s counsel also discussed the idea of the whistleblower leaving the firm in exchange for a severance payment.
  • The employer provided the whistleblower with a new email address for the purpose of communicating internally and externally as necessary to complete his report. The whistleblower worked remotely from home preparing the requested report and submitted it. On that same day, the whistleblower notified the employer that he intended to return to work on after the weekend.
  • The whistleblower emphasized that he was prepared to return to work but that he intended to return to his position as the employer’s head trader. The employer at that point made clear that the whistleblower would not return to his position as head trader until the employer’s investigation was complete. In the interim, the employer informed the whistleblower that he would be asked to perform tasks that were “meaningful and, to some extent, parallel or overlap those of head trader” and that “[it] need not explain further.”
  •  Despite the employer’s refusal to allow the whistleblower to return as head trader, the whistleblower returned to work as requested. Upon his return, he was no longer located on the trading desk and was placed instead in an office on a different floor. The employer informed the whistleblower that his first assignment and top priority was to identify any potential wrongdoing by the firm so that it could further investigate his allegations.
  • As part of that assignment, the whistleblower was asked to review more than 1,900 pages of hard-copy trading data, sorted by security. The whistleblower suggested that, rather than reviewing 1,900 pages of trading data, specific reports could be generated in an electronic format that isolate the specific trades that were potentially violative. He requested that he be provided access to the employer’s trading system so that he could generate the reports. The employer, after consulting with counsel, denied his request.
  • The employer maintained that the whistleblower could not return to the trading desk because the employer needed the whistleblower’s top priority to be identifying specific conduct that  could substantiate his claims of wrongdoing. Nonetheless, in response to the whistleblower’s allegations that the firm’s trading-related compliance policies were deficient, the employer tasked the whistleblower with the additional task of consolidating multiple trading procedure manuals into one comprehensive document and proposing revisions to enhance the firm’s trading policies and procedures.

The SEC alleged that the employer had no legitimate reason for removing the whistleblower from his position as head trader, tasking him with investigating the very conduct he had reported to the SEC, changing his job function from head trader to a full-time compliance assistant, stripping him of his supervisory responsibilities, and otherwise marginalizing him.

According to the SEC, as a result of the conduct described above, the employer violated Section 21F(h) of the Exchange Act, which prohibits an employer from discharging, demoting, suspending, threatening, harassing, directly or indirectly, or in any other manner discriminating against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower in, among other things, providing information to the SEC.

Obviously it looks like the employer did some things it shouldn’t have.  But the case seems to leave open the question about whether an employer can ever enlist a whistleblower to investigate and document wrongful conduct.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Stinson Leonard Street - Dodd-Frank and the Jobs Act | Attorney Advertising

Written by:

Stinson Leonard Street - Dodd-Frank and the Jobs Act
Contact
more
less

Stinson Leonard Street - Dodd-Frank and the Jobs Act on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.