SEC Announces First Whistleblower Award of 2014: $875,000
On June 3, 2014, the Securities and Exchange Commission (“SEC”) announced a whistleblower award of $875,000 to be split evenly by two individuals who acted together in assisting the SEC. The SEC, consistent with prior practice, did not disclose the names of the award recipients, nor did it disclose the name or type of enforcement action involved. The $875,000 award is the second-largest award to date.
In the SEC’s press release, Sean McKessy, chief of the SEC’s Office of the Whistleblower explained, “These whistleblowers provided original information and assistance that enabled us to investigate and bring a successful enforcement action in a complex area of the securities market.” Press Release, Sec. Exch. Comm’n, SEC Awards $875,000 to Two Whistleblowers Who Aided Agency Investigation (June 3, 2014). Here, the $875,000 represented the highest possible award – 30% of the sanctions collected. See Whistleblower Award, Exchange Act Release No. 34,753 (June 3, 2014).
SEC Brings First Anti-Retaliation Case Under Dodd-Frank Act Whistleblower Provisions
On June 16, 2014, the SEC brought its first enforcement action based on violations of the anti-retaliation provisions of the Dodd-Frank Act. The SEC found that illegal retaliation occurred after an investment adviser’s head trader reported improper principal trades without effective disclosure to a client. Please see our client alert here regarding In the Matter of Paradigm Capital Management, Inc. and Candace King Weir, Admin. File No. 3-15930 (June 16, 2014).
Another Court Rules That Dodd-Frank Act Whistleblowers Need Not Disclose Information Directly to the SEC
In Bussing v. COR Clearing, LLC, No. 8:12-CV-238 (D. Neb. May 21, 2014), a federal judge ruled that the anti-retaliation provision of the Dodd-Frank Act protects whistleblowers who do not disclose information directly to the Securities and Exchange Commission (“SEC” or “Commission”). In so ruling, the Bussing court joined a growing majority of federal courts that have found that employees that report internally are protected from retaliation, thus rejecting the conclusion of the Fifth Circuit in Asadi v. G.E. Energy (U.S.A.), L.L.C., 720 F.3d 620 (5th Cir. 2013).
The court noted that subsection (iii) of 15 U.S.C. § 78u-6(h)(1)(A) prohibits employers from retaliating against “a whistleblower” who “mak[es] disclosures that are required or protected under ... any ... law, rule, or regulation subject to the jurisdiction of the Commission.” 15 U.S.C. § 78u-6(h)(1)(A). Nevertheless, a separate subsection of the Dodd-Frank Act, 15 U.S.C. § 78u-6(a)(6), defines “whistleblower” as “any individual who provides ... information ... to the Commission.” 15 U.S.C. § 78u-6(a)(6) (emphasis added). Joining several other courts, the district court ruled that the statutory definition did not define “whistleblower” as used in subsection (iii). The court conceded that statutory definitions ordinarily control the meaning of statutory terms, but the court was influenced by its view that the purpose of subsection (iii) was to “protect a broad range of disclosures.” The court found this to be “an unusual case.” Because “applying the definition to the provision at issue would defeat that provision’s purpose,” the court ruled that the statutory definition did not define “whistleblower” as used in subsection (iii).
In addition to this threshold legal issue, Bussing is also significant due to its facts. The plaintiff, an Executive Vice President, alleged that she was fired because she complied with a Financial Industry Regulatory Authority (“FINRA”) request, pursuant to FINRA Rule 8210, to produce documents during an investigation of her employer, an investment company. In the course of preparing responses to this request, the plaintiff alleged that she identified potential or existing violations of FINRA rules and federal securities laws. Despite her superiors’ attempts to discourage her from cooperating with FINRA, she complied with the FINRA request and participated in FINRA’s onsite examination.
The defendants argued that complying with the FINRA request was not a “disclosure” protected by the Dodd-Frank Act. The court disagreed, noting that the plaintiff had prepared her employer’s response to the FINRA request, which was provided, “i.e., disclosed,” to FINRA. The court further rejected the defendants’ argument that the Dodd-Frank Act should not be interpreted so broadly as to apply to gathering information for FINRA. The court viewed the response, which identified several particular violations, to be a disclosure “in a classic whistleblowing context.” Finally, the court held that FINRA Rule 8210 is a “rule ... subject to the jurisdiction of the Commission.” Thus, the court allowed the Dodd-Frank Act claim to proceed.
CFTC Announces First Whistleblower Award
On May 20, 2014, the Commodity Futures Trading Commission (“CFTC”) announced its first whistleblower award since it implemented its whistleblower program in 2011 after the passage of the Dodd-Frank Act. The whistleblower will receive $240,000. According to Gretchen Lowe, acting director of the CFTC’s Division of Enforcement, the recipient of this award provided “specific, timely and credible information that led to the Commission bringing important enforcement actions.” Press Release, Commodity Futures Trading Comm’n, CFTC Issues First Whistleblower Award (May 20, 2014), http://www.cftc.gov/PressRoom/PressReleases/pr6933-14. The identity of the whistleblower was not made public, nor was the nature of the enforcement action.
While the CFTC’s whistleblower program has received only a fraction of the attention received by the SEC’s whistleblower program, the provisions are quite similar. Under the Dodd-Frank Act, the CFTC must provide monetary awards to individuals who provide original information regarding violations of the Commodities and Exchange Act that leads to successful enforcement action. The enforcement action must result in more than $1,000,000 in sanctions, and the award may range between 10% and 30% of the sanctions collected. Like the SEC provisions, the CFTC’s whistleblower rules include anti-retaliation provisions. Unlike the SEC, however, the CFTC has not asserted that it has enforcement authority regarding the anti-retaliation provisions.
The number of whistleblower tips the CFTC has received pales in comparison to the thousands of tips the SEC has received. The CFTC received 58 whistleblower tips in fiscal 2012 and 138 tips in fiscal 2013. With the announcement of its first award, the profile of the CFTC’s whistleblower program is expected to increase.
Fourth Circuit Rules Whistleblower Failed to Show Disclosures Were a Contributing Factor to His Firing
In Feldman v. Law Enforcement Associates Corporation, No. 13-1849, 2014 U.S. App. LEXIS 8833 (4th Cir. May 12, 2014), the United States Court of Appeals for the Fourth Circuit concluded that a whistleblower, Paul Feldman, failed to demonstrate that his disclosures of alleged company wrongdoing were a “contributing factor” to his eventual discharge. In January 2008, Feldman, President and CEO of Law Enforcement Associates (“LEA”), and a co-worker, Martin Perry, reported to the Department of Commerce that LEA had made potentially illegal exports. Later, in the summer of 2009, they reported to the Department of Commerce that they suspected LEA was engaged in insider trading. On August 27, 2009, the three outside directors of LEA’s five-member board terminated Feldman. One month later, the outside directors terminated Perry.
The anti-retaliation provision of the Sarbanes-Oxley Act (“SOX”) protects whistleblowers from retaliation because the employee “provide[d] information ... regarding any conduct which the employee reasonable believe[d]” was unlawful. 18 U.S.C. § 1514A(a). As the Fourth Circuit explained, an employee claiming a violation of SOX’s anti-retaliation provision must show, among other things, that “the protected activity was a contributing factor in the unfavorable action” against him or her. Although noting that the contributing factor standard is “meant to be quite broad and forgiving,” the court concluded that Feldman had “nonetheless failed to show ... that the [protected] activities tended to affect his termination in at least some way.” The court noted that Feldman’s relationship with LEA’s outside directors had worsened throughout 2008 and 2009. Among other things, Feldman had told shareholders threatening to sue LEA that the outside directors “could do more to help the company” and were not loyal to the company. Feldman conceded that, by making these statements, the outside directors “considered him to have thrown them under the bus.” Additionally, Feldman had relocated LEA’s headquarters without first seeking the board’s approval.
Given this factual backdrop, the Fourth Circuit concluded that the district court had properly granted summary judgment in LEA’s favor. First, almost two years separated Feldman’s first report to the Department of Commerce and his eventual termination, which weighed against the suggestion that his allegedly protected activity played a role in his termination. Second, Feldman’s statements to the litigious shareholders “constitute[d] a legitimate intervening event.” Coupled with his decision to move the company, Feldman’s apparent insubordination could explain his termination. Third, the court noted that the outside directors had urged Perry to remain at LEA and only terminated his employment because they thought that Perry had voluntarily quit. Because Perry and Feldman had reported to the Department of Commerce together, this suggested that the animus between Feldman and the directors—not the disclosures—had precipitated Feldman’s firing.
While the contributing factor standard is a low burden, Feldman shows that it is a burden that a whistleblower must shoulder. In Feldman, the Fourth Circuit took a hard look at the particular facts surrounding Feldman’s termination. Timing, intervening events, and factual context all played a significant role in the Fourth Circuit’s analysis. Given the “lengthy history of antagonism” between Feldman and the outside directors, the Fourth Circuit concluded that ruling for Feldman would render the contributing factor standard “simply ... toothless.”
District Court Distinguishes Lawson v. FMR LLC and Dismisses Complaint
After the United State Supreme Court’s plaintiff-friendly decision in Lawson v. FMR LLC, 134 S.Ct. 1158 (Mar. 4, 2014), we wrote regarding the “limiting principles” that the Supreme Court said might be applied in the future in interpreting Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”). See Client Update here. Not surprisingly, lower courts are now struggling to deal with the impact of Lawson. In Gibney v. Evolution Marketing Research LLC, 2:14-cv-01913-PBT (E.D. Pa. June 11, 2014), the district court distinguished Lawson and concluded that the plaintiff’s claims fell outside the scope of SOX, although the court said this was “a close question.”
The plaintiff was employed by Evolution, a private marketing and research company that has a contract to provide consulting services for Merck & Co., the public pharmaceutical giant. The plaintiff alleged that he learned that Evolution was fraudulently billing Merck in violation of the consulting contract. He objected to these billing practices and shortly thereafter was terminated. Evolution moved to dismiss on the grounds that the plaintiff was not a protected person under SOX because his complaint did not relate to the actions of a public company.
The district court first described the Supreme Court’s decision in Lawson and its focus on SOX’s goal of preventing fraud by public companies and the unusual structure of mutual funds. The court recognized that this case presented the possible need to apply a potential “limiting principle” that the Lawson court left for another day. The court recognized that the case “at least touches on” the need to protect shareholders because Evolution’s alleged fraud on Merck ultimately defrauds Merck’s shareholders. Nonetheless, the Court concluded that the allegations fell outside the scope of SOX because: (1) the unusual structure of the mutual fund industry was not present in this case and (2) more importantly, there was no allegation of fraud by Merck, but rather Merck was alleged to have been the victim. The court said nothing in SOX or Lawson suggested that SOX applies any time an action “has some attenuated, negative effect of the revenue of a publicly-traded company.” The court said SOX was not intended to reach the scenario here: “where there are allegations of fraudulent conduct between two companies who are party to a contract, and one of those companies just happens to be publicly-held.”
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:
Pam L. Johnston
Los Angeles, California
Bryan B. House