On April 16, 2020, the Securities and Exchange Commission (“SEC”) announced a $27 million whistleblower award, its largest award of 2020 and the sixth-highest whistleblower award since the inception of its whistleblower program in 2012.[1] Twelve days later, the SEC announced another large whistleblower award of $18 million.[2] With more than $450 million awarded to whistleblowers and dozens of related enforcement actions since 2012, there is no doubt that the program works to induce employees to report alleged corporate misconduct. The open question is whether the COVID-19 crisis and its related impact on corporate revenues, expenses, and employee health and safety will lead to a new wave of whistleblower complaints and a resulting surge in investigations by the SEC and others. The answer, almost undoubtedly, is yes.

While whistleblowers often initiate actions regarding financial misreporting and disclosures, the underlying cause of the alleged corporate malfeasance is almost always related to employee misconduct or operational issues. In normal times, employee misconduct and operational issues can take many forms, such as insider trading, sales force abuses, supply chain interruptions, or illegal payments to foreign officials. The COVID-19 pandemic will likely result in allegations of increased corporate misconduct, as companies may make material misstatements such as misrepresenting losses or future business projections to protect the company’s value. In addition, company executives may improperly use insider information regarding the effects of COVID-19 on the business’s economic outlook to avoid losses to their stock portfolios. This will only result in the filing of additional whistleblower complaints with the SEC.

Due to the awards recently granted to whistleblowers by the SEC, employees may raise complaints with the SEC that would typically be raised in other forums. For example, because many companies are now receiving federal grant money to assist with their COVID-19 responses, employees who work for such companies may file complaints with the SEC reporting fraudulent conduct that would typically be filed under the False Claims Act. Also, employees may file claims related to the health or safety of their workplace, which would generally be protected under Section 11(c) of the Occupational Safety and Health Act (“OSHA”). Even more, unionized employees may file complaints alleging retaliation for engaging in concerted activity, such as speaking up about the lack of safety or personal protective equipment – something typically protected by the National Labor Relations Act. The SEC may eventually send these complaints to another agency, but it is sure to take a hard look first to make sure nothing is improper under the securities laws and regulations.

The COVID-19 pandemic also raises the possibility that whistleblowers will bring complaints to the SEC about less traditional forms of corporate misconduct. As the pandemic continues, companies may attempt to limit, delay, or prevent negative information from being disclosed to the market. For example, companies may seek to suppress the public dissemination of information regarding employee safety and health issues, COVID-19 infections, outbreak responses, staffing reductions, and pay cuts in order to avoid any negative impact on the company’s value. Such actions would likely result in additional whistleblower filings with the SEC and, therefore, additional enforcement actions and whistleblower awards.

Notably, the SEC has regularly pursued enforcement actions against companies for failing to disclose material events even if not historically linked to a company’s financials but otherwise critical to investors. On April 24, 2018, the SEC brought an enforcement action against Yahoo! Inc. (“Yahoo”) for failing to disclose a massive data breach for two years and for filing misleading risk factor disclosures in its annual and quarterly reports.[3] The SEC’s order stated that Yahoo legal, staff and management did not properly assess the scope and business impact or legal implications of the data breach, including whether and how the breach should have been disclosed and whether the fact of the breach made any filings misleading. The order also found that Yahoo failed to inform its auditors and legal counsel of the breach in order to avoid disclosure obligations.[4]

The SEC has also brought actions against car manufacturers such as General Motors Company (“GM”) and Volkswagen Aktiengesellschaft AG (“VW”) alleging a failure to disclose material information regarding environmental and safety issues in their vehicles. On January 18, 2017, the SEC charged GM with internal accounting controls violations for failing to disclose defective ignition switches in its vehicles.[5] The SEC alleged that GM knew in 2012 that there were defective ignition switches causing accidents and the failure to deploy airbags but did not disclose these defects until 2014 because the proper departments within GM were not informed of the issue and therefore did not properly account for potential recalls.[6] On March 14, 2019, the SEC filed a complaint against VW in the Northern District of California alleging that VW failed to disclose that “clean diesel” cars used defeat devices to conceal substantial emissions problems in violation of environmental laws.[7] These enforcement actions are instructive of how the SEC may approach a company’s failure to disclose, or improper disclosure of, employment, health, and safety issues related to the COVID-19 pandemic.

Importantly, the SEC and Department of Justice (“DOJ”) have already emphasized that they are watching companies closely during the pandemic. These agencies have emphasized that they will focus on COVID-19-related fraud and misconduct, further incentivizing whistleblowers to raise concerns. As a result of the heightened sensitivity expressed by the SEC and DOJ, along with the whole host of potential whistleblowing issues arising from the pandemic, there may be a substantial rise in whistleblower activity in the coming months. Indeed, there have already been widespread reports of nurses and other healthcare professionals filing complaints in state courts and with OSHA and the National Labor Relations Board concerning the safety and sufficiency of personal protective equipment. Even more, on April 8, 2020, the Department of Labor (“DOL”) released a statement reminding employers that more than 20 federal whistleblower statutes protect workers who report unsafe and unhealthful working conditions.[8] In its statement, the DOL also directed employees to the webpage of OSHA’s Whistleblower Protection Program, which provides resources on federal whistleblower protections for employees in multiple industries.

In light of the likelihood of increased whistleblower activity and enforcement actions by the SEC and other governmental agencies, companies should make sure they have robust compliance policies and procedures in place regarding whistleblowers. Companies should continue to ensure that employees have the ability to report concerns internally, and they should make sure any concerns that are raised are adequately investigated and effectively addressed. Companies should also continue to require management employees to consistently follow anti-retaliation policies, especially as many employees are now facing potential layoffs and furloughs. It is important to note that some whistleblowers will bypass internal procedures altogether and go straight to the federal government to file a whistleblower complaint. To protect against possible whistleblower liability, it is recommended that companies review their internal policies and procedures and determine whether they need to be updated to address this new and changing environment.

The attorneys who comprise BakerHostetler’s White Collar team and Whistleblower and Corporate Compliance team have significant expertise in defending companies against whistleblower complaints filed with the SEC, OSHA, and many other federal and state governmental agencies. They have also helped numerous clients avoid liability in enforcement actions. BakerHostetler’s attorneys have also successfully worked with potential whistleblowers in showing them a lack of legal violations and avoiding any federal investigation. Most importantly, however, BakerHostetler’s attorneys are especially adept at assisting companies avoid potential whistleblower complaints by drafting and revising internal policies, providing management training, and offering timely advice and counseling.

[1] Order Determining Whistleblower Award Claim, Exchange Act Release No. 88658 (April 16, 2020), available at https://www.sec.gov/rules/other/2020/34-88658.pdf.
[2] Order Determining Whistleblower Award Claim, Exchange Act Release No. 88759 (April 28, 2020), available at https://www.sec.gov/rules/other/2020/34-88759.pdf.
[3] Altaba Inc., f/d/b/a/ Yahoo! Inc., Admin Proc. File No. 3-18448, Exchange Act Release No. 83096 (April 24, 2018), available at https://www.sec.gov/litigation/admin/2018/33-10485.pdf.
[4] Id. at 6.
[5] General Motors Company, Admin Proc. File No. 3-17797, Exchange Act Release No. 79825 (Jan. 18, 2017), available at https://www.sec.gov/litigation/admin/2017/34-79825.pdf.
[6] Id. at 4.
[7] Complaint, SEC v. Volkswagen Aktiengesellschaft AG et al., Case No. 3:19-cv-01391 (N.D. Cal. March 14, 2019), available at https://www.sec.gov/files/complaint-2019-03-14_0.pdf.
[8] Press Release, U.S. Department of Labor Reminds Employers That They Cannot Retaliate Against Workers Reporting Unsafe Conditions During Coronavirus Pandemic, Dept. of Labor Release No. 20-596-NAT (April 8, 2020), available at https://www.osha.gov/news/newsreleases/national/04082020.