The Securities and Exchange Commission (SEC) recently announced a settlement with a Nevada corporation of its first stand-alone whistleblower anti-retaliation case. On September 29, the SEC announced a $500,000 sanction against International Game Technology (IGT) for violating Section 21F(h) of the Exchange Act by firing an employee who raised concerns regarding the company’s financial reporting.
According to the SEC’s order, the whistleblower reported concerns that IGT’s cost model could inflate its cost of sales resulting in material inaccuracies in the company’s financial statements. The whistleblower presented his concerns to his supervisors and included statements regarding his concern in a written presentation. Several weeks later, the whistleblower also reported his concerns to the company’s internal hotline, and stated that he believed his supervisors were retaliating against him for his earlier report. IGT conducted an internal investigation with its outside counsel through which it determined that its cost model was appropriate and there were no material misstatements in its financial reports. During the course of the internal investigation, IGT removed the whistleblower from projects that were part of his position and prohibited the whistleblower from attending an annual convention at which he had previously represented the company. The company terminated the whistleblower at the end of its investigation.
In determining that the whistleblower’s firing was not merit-based, the SEC noted that the individual had received positive performance reviews and bonuses at or near the highest levels given in his division throughout his time with IGT and had never been formally disciplined for any aspect of his job performance. The whistleblower’s supervisor ranked him as a top employee with “high potential” and even sought out approval for a special retention bonus given the employee’s importance to the company. Based on this evidence and the timing of his dismissal, the SEC determined that the company retaliated against the whistleblower. According to Andrew J. Ceresney, director of the SEC Enforcement Division, “This whistleblower noticed something that he felt might lead to inaccurate financial reporting and law violations, and he was wrongfully targeted for doing the right thing and reporting it.”
The SEC has authority to bring enforcement actions based on whistleblower retaliation under a 2011 rule implementing Section 922 of the Dodd-Frank Act, which created a Securities Whistleblower Incentives and Protection Program. The Whistleblower Program has become increasingly active in recent years – receiving over 14,000 tips and issuing totaling more than $100 million. This is the only the second time in the past five years that the SEC has instituted proceedings for retaliation against a whistleblower. In 2014, the SEC announced a $2.2 million sanction against Paradigm Capital Management Inc., an Albany-based hedge fund advisory firm charged with engaging in prohibited principal transactions and then retaliating against the employee who reported the activity to the SEC.
The SEC has indicated that this enforcement action should serve as a warning to other companies against engaging in similar whistleblower retaliation. As Jane A. Norberg, Chief of the SEC’s Office of the Whistleblower, explained, “Bringing retaliation cases, including this first stand-alone retaliation case, illustrates the high priority we place on ensuring a safe environment for whistleblowers. We will continue to exercise our anti-retaliation authority when companies take reprisals for whistleblowing efforts.” Accordingly, companies should ensure they have policies in place prohibiting whistleblower retaliation, and should provide a robust complaint procedure to receive and investigate complaints from any employee who believes he or she has suffered from retaliation.
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