SEC Brings First Stand-Alone Whistleblower Retaliation Enforcement Action
On September 29, 2016, the U.S. Securities and Exchange Commission (SEC) brought its first stand-alone whistleblower retaliation case under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC alleged that the respondent company, International Game Technology (IGT), a publicly traded U.S. subsidiary of a foreign company, had wrongfully terminated the whistleblower from his position as the director of one of the company’s divisions. The whistleblower had raised concerns regarding IGT’s model used for estimating costs associated with refurbishing used parts, which the whistleblower believed were lower than actual costs. The whistleblower gave a presentation to his supervisors in which he raised the possible material impact of the cost model on the company’s financial statements. After the presentation, the whistleblower’s supervisor was critical of this “inflammatory statement” and decided to terminate him. At the same time, the whistleblower filed a complaint with the company’s internal hotline, which resulted in a hold being placed on his termination. During the company’s internal investigation of the whistleblower’s allegations by outside counsel, the whistleblower was removed from two important company projects. After the internal investigation concluded that the cost accounting model did not cause IGT’s financial statements to be distorted, IGT terminated the whistleblower. The SEC found that IGT had violated Section 21F(h) of the Exchange Act in taking action against the whistleblower. Without admitting or denying the SEC’s allegations, IGT agreed to the settled proceeding and agreed to pay a civil money penalty of $500,000.
This matter is significant because it marks the SEC’s first retaliation enforcement action without an underlying violation by the company. Although the SEC’s order does not specifically address the internal investigation’s finding that the company’s financial statements actually had not been misstated, the order suggests that the SEC did not take issue with this finding. Thus, the SEC’s implicit finding appears to be that the whistleblower reasonably believed that the financial statements were materially affected and the company wrongfully took action on his complaint.
Director of SEC’s Division of Enforcement Touts Whistleblower Program
On September 14, 2016, Andrew Ceresney, the director of the SEC’s Division of Enforcement, spoke at the Taxpayers Against Fraud Conference and described the “transformative impact” that the whistleblower program has had on the SEC. Noting that more than $107 million has been paid to more than 30 whistleblowers, Ceresney said the impact of the whistleblower program has been shown in terms of the detection of illegal conduct and in moving the SEC’s investigations forward more quickly and efficiently. Ceresney noted that there are 18 dedicated staff attorneys, paralegals, and support staff responsible for the initial review and intake of whistleblower tips. The Whistleblower Office has received more than 14,000 tips from whistleblowers from every state in the union and from more than 95 foreign countries.
Ceresney noted that the SEC has found whistleblower assistance particularly valuable in certain types of cases, including issuer reporting and disclosure, offering frauds and Ponzi schemes, and the Foreign Corrupt Practices Act (FCPA). Ceresney also touted the SEC’s position that whistleblowers may receive awards by reporting misconduct internally rather than to the SEC. Ceresney described how awards have been made to compliance and internal audit personnel in situations after information was reported to the SEC and in situations in which there was a reasonable basis to believe that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial harm to the company or investors. He also noted that industry experts and other company outsiders had provided valuable information to the SEC. Ceresney observed that two recent multi-million-dollar awards were made to whistleblowers whose tips did not initiate an investigation, but rather aided an ongoing investigation. Ceresney also said that the SEC welcomes the involvement of counsel to whistleblowers, who can help the SEC triage tips that have a nexus to the federal securities laws and work with the whistleblowers to help advance SEC investigations.
Finally, Ceresney stressed that the SEC encourages whistleblowers to provide corroborating information, including documents or the names of other individuals who can provide information. He noted, however, that whistleblowers should not provide information protected by attorney-client privilege or work product doctrine because such information can delay investigations. He recommended that, if whistleblowers and their lawyers are not sure if information is privileged, they should segregate the information and discuss with the SEC staff how to proceed.
Three Companies Sanctioned For Violating Whistleblower Protection Provisions as SEC Continues to Crack Down on Language in Severance Agreements
In the Matter of Anheuser-Busch InBev SA/NV
On September 28, 2016, the SEC announced a settled administrative proceeding that included findings that the respondent, Anheuser-Busch InBev, improperly impeded a whistleblower’s communications with the SEC through severance agreement language. The violation of the whistleblower rules were related to the SEC’s additional findings that Anheuser-Busch InBev had violated the FCPA when it used third-party sales promoters to make improper payments to government officials in India. In 2010 and 2011, an employee raised concerns about the possible use of these third parties to make the improper payments. The employee was terminated in 2012, and the respondent’s Indian subsidiary engaged in mediation regarding the employee’s potential employment law claims. At the time, the employee was communicating with the SEC about his concerns regarding potential FCPA violations. The mediation resulted in a Confidential Agreement and General Release that included strict confidentiality provisions and a liquidated damages provision of $250,000 in the event of a breach of such confidentiality provisions. After signing the agreement, the former employee stopped communicating with the SEC because he feared triggering the agreement’s liquidated damages provision.
In addition to FCPA violations, the SEC found a violation of Rule 21F-17, noting that the language of the separation agreement had impeded the employee from communicating with the SEC staff. The SEC’s order also noted that the respondent had remediated the violation by including in its separation agreements the following language, “I understand and acknowledge that notwithstanding any other provision in this Agreement, I am not prohibited or in any way restricted from reporting possible violations of law to a governmental agency or entity, and I am not required to inform the Company if I make such reports.”
In the Matter of BlueLinx Holdings, Inc.
On August 10, 2016, the SEC announced a settled administrative proceeding with BlueLinx Holdings, Inc., for violation of Rule 21F-17, which provides in part that no person may “impede” an individual from communication with the SEC. The SEC found that BlueLinx entered into agreements with employees who were leaving the company and who received severance or other post-employment consideration that:
-
Prohibited the employees from sharing with anyone confidential information that the employee had learned while employed with the company, unless compelled to do so by law or legal process; and
-
Required employees to either provide written notice to the company or obtain written consent from the company’s legal department prior to providing such confidential information.
Further, in mid-2013, two years after Rule 21F-17 was adopted, BlueLinx made changes to some of its severance agreements but continued to require notice of any required disclosure to the company’s legal department. Other changes made at the same time recognized an employee’s ability to file a “charge” with the SEC, but provided that the employee understood that he or she was “waiving the right to any monetary recovery in connection with any such charge … ”
The SEC found that these provisions violated Rule 21F-17. Without admitting or denying the SEC’s findings, BlueLinx agreed to pay a civil money penalty of $265,000 and cease and desist from further violations. In addition, BlueLinx agreed to include in its severance agreements language specifically noting an employee’s right to file a charge or complaint with the SEC and to provide documents without first providing notice to BlueLinx. Finally, the language confirmed that the agreement does not limit an employee’s right to receive an award from the SEC or another government agency. As part of its undertaking, BlueLinx undertook to contact employees who had received the severance agreements with the prohibited language.
In the Matter of Health Net, Inc.
Days after the BlueLinx proceeding, the SEC settled another Rule 21F-17 case, this time with Health Net, Inc. The SEC alleged that from 2011 to 2015 Health Net had used a variety of severance agreements containing a Waiver and Release of Claims that required an employee to waive “the right to file an application for an award for information submitted pursuant to Section 21F of the Securities Exchange Act of 1934.” Another provision of the agreements required employees to waive their rights to any monetary recovery relating to any federal agency investigation. In 2013, while amending the severance agreements to provide that nothing in the agreements prohibited the employee from cooperating with a regulator, the revised Waiver and Release of Claims continued to provide that the employee waived any right to an individual monetary recovery. Even without evidence that these provisions ever prevented an employee from reporting to the SEC or that Health Net took action to enforce the provisions, the SEC found violations of Rule 21F-17 because the provisions were intended to remove the financial incentives that are designed to encourage people to communicate with the SEC.
Without admitting or denying the SEC’s findings, Health Net agreed to pay a civil money penalty of $340,000. In addition, Health Net agreed to make reasonable efforts to contact former Health Net employees who had signed the Waiver and Release of Claims forms during the period and provide them with the SEC’s order and a statement that Health Net, in fact, does not prohibit former employees from seeking and obtaining a whistleblower award pursuant to Section 21F of the Securities Exchange Act.
SEC Finds that Merrill Lynch Violated Rule 21F-17 But Notes Remediation Efforts
On June 23, 2016, Merrill Lynch Pierce Fenner & Smith settled SEC allegations involving violation of the SEC’s customer protection rule by misusing customer cash for its own profits rather than placing that cash in appropriate reserve accounts. As part of the order settling the administrative proceeding, the SEC noted that Merrill Lynch had violated Rule 21F-17 through certain provisions in severance agreements with employees. Those agreements prohibited a former employee from disclosing any aspect of confidential information, except pursuant to formal legal process or unless the employee first obtained written approval of Merrill Lynch. In addition, the offending agreements were amended to provide that a former employee was not precluded from initiating communication with the SEC, but that the former employee could only provide information about the severance agreements or “its underlying facts and circumstances.” While the SEC said it had no evidence that any employee actually was prevented from providing information to the SEC or that any of the subject provisions had been enforced, the SEC found that the provisions violated Rule 21F-17.
In its order, the SEC noted that Merrill Lynch had performed “substantial remedial acts” to address the Rule 21F-17 violations. Among other things, Merrill Lynch had agreed to modify the confidentiality provisions in the agreements to allow the disclosure of confidential information to the SEC in connection with any suspected violations of law. The language also makes clear that the employee does not need permission to engage in the protected whistleblower activity. In addition, all employees are now required to participate in annual training that includes a summary of employee rights to report possible violations of law. Finally, Merrill Lynch updated its code of conduct to ensure that employees understand that there is no restriction on their rights under Rule 21F-17.
Size of SEC Whistleblower Awards Continues to Grow
On August 30, 2016, the SEC announced an award of more than $22 million to a whistleblower whose tips and assistance helped the SEC stop an ongoing fraud at the whistleblower’s employer. This is the SEC’s second-largest award, trailing only a September 2014 award of $30 million. As is typical, the SEC’s order says very little about the fraud or the whistleblower’s actions. However, the SEC’s order notes that, in determining the appropriate percentage to award the whistleblower (by statute between 10 percent to 30 percent of the sanctions collected), the whistleblower’s culpability was considered. The order further notes that several factors “mitigating the Claimant’s culpability were also considered,” but the only factor not redacted was that the whistleblower “did not financially benefit from the conduct.” In finding the redacted percentage to be appropriate, the SEC noted that it considered the positive and negative factors set forth in the whistleblower rules.
On June 9, 2016, the SEC announced a $17 million award to a former company employee who provided the SEC with a detailed tip aiding regulators’ investigation and enforcement proceedings. In its release announcing the award, the SEC noted that it had paid five whistleblowers more than $26 million over the preceding five months.
SEC Awards $3.5 Million to Whistleblower for Bolstering an Already Existing Ongoing Investigation
In May 2016, the SEC clarified that whistleblowers are encouraged to come forward and report allegations of potential securities laws violations even if they think the SEC may already be looking into the violation. Andrew Ceresney, director of the SEC’s Division of Enforcement, stated, “whistleblowers can receive an award not only when their tip initiates an investigation, but also when they provide new information or documentation that advances an existing inquiry.” Driving this point home, on May 13, 2016, the SEC announced a $3.5 million award to a company employee whose tip bolstered an ongoing investigation with additional evidence of wrongdoing that strengthened the SEC’s case.
Originally, the SEC considered the whistleblower’s information insufficient to justify an award. The claimant, however, contested the preliminary determination with the support of the SEC Enforcement Division staff. In reversing the preliminary decision and making such a substantial award, the SEC recognized the importance of whistleblower information that not only leads to opening an investigation, but also information that “significantly contribute[s]” to an ongoing investigation. In announcing the award, the SEC additionally stated it had considered “unique hardships” experienced by the whistleblower in determining the award amount, noting that the tipster had been unable to find work primarily as a result of the whistleblowing.
Another Federal Appeals Court Endorses the DOL’s Standard for Pursuing a Retaliation Claim under SOX Act
In Beacom v. Oracle America, Inc., the United States Court of Appeals for the Eighth Circuit upheld the district court’s summary judgment decision dismissing Vincent Beacom’s claim under the Sarbanes-Oxley Act (SOX) and Dodd-Frank anti-retaliation provisions. Beacom was Oracle’s vice president of sales in the Americas. The court found that Beacom failed to establish that a reasonable person in his position, with the same training and experience, would have believed Oracle was committing a securities violation. The Eighth Circuit thus becomes the fourth federal appeals court to endorse the Department of Labor’s (DOL) standard that a fired employee may pursue a SOX Act claim if a “reasonable employee” under the same circumstances “would believe that the employer violated securities laws,” even if that belief turned out to be mistaken. While adopting the less rigorous standard, the court affirmed the dismissal of the complaint. The court found that Beacom’s concern that Oracle systematically gave inaccurate forecasts and projections of earnings to Wall Street was unreasonable for a person in his position and with his experience. Noting that Beacom’s business unit missed its projections by no more than $10 million, the court held that people with similar background and experience would understand the “predictive nature” of revenue projections and understand that $10 million is a minor discrepancy for a company that annually generates billions of dollars.
Fourth Circuit Upholds Front-Pay Award to Corporate Whistleblower Under SOX Act
In Deltek, Inc. v. Dep’t of Labor, the United States Court of Appeals for the Fourth Circuit, in a split decision, affirmed the DOL Administrative Review Board’s decision to award a whistleblower four years of advance pay, totaling $300,352, and required the company to maintain its tuition reimbursement program for the whistleblower, valued at $30,000. The court found the company had retaliated against the whistleblower in violation of Section 806 of the SOX Act. The former financial analyst claimed her employer wrongly terminated her for reporting her reasonable belief that her employer was deliberately subjecting invoices to baseless disputes in an effort to hide a telecommunications budget shortfall and obfuscate the true financial condition of the IT Department.
This decision highlights the risk of oversized front-pay awards in SOX cases. Although it is an administrative law judge’s (ALJ) and the court’s stated preferences to reinstate employees rather than award front-pay for unlawful discharge in whistleblower cases, courts are willing to award other relief, particularly where the parties have a history of animosity. Indeed, the SOX Act does not explicitly mention front-pay as a remedy at all, entitling a prevailing employee only such “relief necessary to make the employee whole,” including reinstatement, back pay with interest, and various other fees and costs. Nonetheless, the Fourth Circuit elected to follow previous Occupational Safety and Health Administration (OSHA) cases that awarded front-pay under the SOX Act and other whistleblower statutes. The court also rejected the employer’s argument that front-pay should be limited because the employer would have found “after-acquired evidence” unrelated to whistleblowing activities that would have justified terminating the whistleblower.
New Defend Trade Secrets Act Includes Major Whistleblower Reforms
President Obama, on May 11, 2016, signed into law the Defend Trade Secrets Act (the Act). The Act contains strong new protections for corporate whistleblowers. Under the Act, “corporations will no longer be able to threaten to sue employees for lawfully disclosing trade secrets as a way to retaliate against and silence whistleblowers,” said Stephen Kohn, executive director of the National Whistleblower Center.
Prior to this law’s enactment, whistleblowers potentially faced civil claims that they improperly disclosed trade secrets when reporting potential wrongdoing. The new law addresses this by giving employees immunity if they disclose trade secrets to the government as part of a whistleblower report. In order to secure this immunity, the Act provides specific procedures for employees to follow in order to guarantee the immunity applies. Finally, the Act requires employers to notify their employees of these new rights and procedures.
