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

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

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.

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