For Whom The Whistle Tolls In 2014

by Orrick - Securities Litigation and Regulatory Enforcement Group
Contact for the SEC’s Dodd Frank whistleblower program is growing, and 2014 can be expected to bring continued expansion of the program and the number and types of whistleblower actions initiated by the SEC.  The SEC’s annual report to Congress reported that 3,238 whistleblower tips were received in 2013, up almost 10% from 2012, and awards to whistleblowers who provide information to the SEC are increasing as more substantive tips are received.

An investigation by the SEC into a whistleblower tip can take several years to culminate in an enforcement action, so the last year likely saw just the beginning of a wave of enforcement actions.  Despite the fact that over 6,000 tips have been received through 2013, the SEC has issued only six separate awards to tipsters.  Those awards have ranged from $125,000 to a record $14 million, representing 10 to 30 percent of the overall funds recovered by the SEC in these whistleblower cases.

These actions have included a successful investigation against a Texas Ponzi scheme operator, an enforcement action and related criminal charges against a hedge fund manager who misled investors about his qualifications and directed investor funds into a personal account, a settlement for violation of market access rules, and a settlement with a private equity fund that deceived investors about the funds’ performance.  The $14 million award was issued in an undisclosed enforcement action for a tip that allowed the SEC to halt a fraudulent scheme and recover at least $46.7 million in investor funds.

Major 2013 court developments will reverberate through 2014 and beyond, including a growing disagreement among federal courts over who qualifies for protection under  Dodd-Frank’s anti-retaliation provisions.  The Supreme Court is also expected to resolve a debate among the courts and the Labor Department over who qualifies as a whistleblower under Sarbanes-Oxley’s whistleblower protections.  For an in-depth look at recent developments in whistleblower cases under Sarbanes-Oxley and Dodd-Frank, see here.

There is a growing split among federal courts over which whistleblowers are protected by Dodd-Frank’s anti-retaliation provisions.

Federal courts have differed as to whether a whistleblower must report directly to the SEC, rather than internally within a company, to qualify for the whistleblower protections contained in Dodd-Frank.  While Dodd-Frank section 922 defines “whistleblower” as one who provides information to the SEC, the Act protects, among other types of reports, those “required or protected” under Sarbanes-Oxley.  The SEC’s regulations promulgated under Dodd-Frank provide that those who submit tips internally may be eligible for “whistleblower” status and awards. The broader definition of whistleblower as covering those who make internal reports of violations was adopted in seven federal district court decisions in 2012 and 2013, including rulings from the Southern District of New York, the District of Massachusetts, the District of Connecticut, the District of Colorado, and the Middle District of Tennessee, all of which allowed retaliation claims by individuals who reported internally to go forward.  However, in a victory for employers, the Fifth Circuit defined “whistleblower” narrowly in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013), where it held that the anti-retaliation provisions in Dodd-Frank unambiguously protect employees who provide tips directly to the SEC, but do not protect internal reporters. The Fifth Circuit’s Asadi decision was followed by the Northern District of California in Banko v. Apple Inc., Case No. 3:13-cv-02977-RS (N.D. Cal. Sept. 26, 2013), and by the District of Colorado in Wagner v. Bank of America Corp., Case No. 12-cv-00381 (D. Colo. July 19, 2013), in which judges dismissed Dodd-Frank retaliation claims by employees who only made complaints internally and did not report directly to the SEC before the alleged retaliation. These rulings counter the recent trend among federal courts to a more expansive interpretation of Dodd-Frank.  The Fifth Circuit remains the only court of appeals to weigh in to date, but as other circuit courts weigh in, Supreme Court review becomes more likely.

The SEC will pursue anti-retaliation actions against employers in 2014.

Perhaps as a response to decisions limiting the protective scope of SEC anti-retaliation regulations, the SEC is also actively working on investigations into retaliatory conduct by registrants.  According to SEC whistleblower chief Sean McKessy, who spoke at an  event sponsored by the American Bar Association on January 22, 2014, potential actions by the SEC against employers who retaliate against whistleblowers could include a cease and desist order or monetary sanctions.  The SEC’s authority to pursue these actions and levy sanctions is an open question – neither Dodd-Frank nor its implementing regulations expressly provide the SEC with authority to police retaliatory conduct.  The SEC’s stated intent also conflicts with the views of at least one other federal agency.  The CFTC, which also has a Dodd Frank whistleblower program, does not believe Congress has granted it the authority to pursue such actions.

The U.S. Supreme Court will clarify the scope of whistleblower protections under Sarbanes-Oxley.

In its first whistleblower case under Sarbanes-Oxley, Lawson v. FMR, Docket No. 12-3, the U.S. Supreme Court is expected to clarify the extent to which employees of contractors and subcontractors of publicly traded companies are covered by Sarbanes-Oxley’s whistleblower protections . The case involves plaintiffs who worked for privately-held investment advisors for Fidelity mutual funds who claimed they were retaliated against for internal complaints about financial irregularities at Fidelity, who did not employ them directly.  The district court held that the investment advisors were contractors of the public company, and that the plaintiffs were protected, but the First Circuit reversed, holding that Sarbanes-Oxley applies only to employees of covered companies.  After the U.S. Dept. of Labor’s Administrative Review board rejected the First Circuit’s rationale in a subsequent case before the agency, Spinner v. Landau and Assoc., ARB Case. Nos. 10-111 and 10-115 (May 31, 2012), the petitioners requested further review from the Supreme Court.

At argument on November 12, 2013, some of the justices expressed skepticism that Sarbanes-Oxley was intended to cover every single contractor or subcontractor of a public company.  Justice Breyer questioned whether a public company’s gardener’s employees would be protected under Sarbanes-Oxley.  The government, as amicus, argued that Congress intended to cover contractors and subcontractors such as a accountants, lawyers and outside auditors, but there could nevertheless be limits imposed on who could qualify.  However, members of the Court also questioned a narrow reading of the rule that would limit its application only to direct employees of public companies.  A decision is expected in 2014.

2014 is likely to bring more clarity as to who can qualify as a whistleblower, what specific reports those individuals must make to be entitled to protection, and whether the SEC has been granted authority to protect whistleblowers within its purview.  As the Dodd-Frank whistleblower program continues to gain momentum, more unresolved questions are likely to arise in their place. Public companies should continue to pay close attention to developments in whistleblower enforcement actions and maintain clear policies regarding internal reporting and compliance that are consistent with new developments as they occur.

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.

© Orrick - Securities Litigation and Regulatory Enforcement Group | Attorney Advertising

Written by:

Orrick - Securities Litigation and Regulatory Enforcement Group

Orrick - Securities Litigation and Regulatory Enforcement Group 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.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

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.


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 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:

- 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.