SEC Reverses Course and Awards Dodd-Frank Whistleblower $400,000
On July 31, 2014, the SEC awarded $400,000 to a whistleblower who had reported internally before providing information to the SEC. The award was unique because the SEC’s Claims Review Staff had denied the whistleblower’s claim on the grounds that the information provided had not been provided voluntarily because there had been a prior inquiry into the matter conducted by a self-regulatory organization. The whistleblower filed a response to the initial determination, which the SEC said persuaded it that there were “significant extenuating circumstances” that caused the SEC to waive the “voluntary” requirement of its whistleblower rules “in the public interest and consistent with the protection of investors.”
The SEC’s order noted several “highly unusual circumstances” that prompted the award, including: (1) the whistleblower had worked aggressively internally to bring the securities laws violations to the appropriate personnel in order to obtain corrective action; (2) the self-regulatory organization’s inquiry originated from information that identified the whistleblower’s role in identifying and trying to correct the violations; and (3) the whistleblower persisted in his efforts to obtain corrective action after seeing the self-regulatory organization inquiry had been closed and his internal efforts would not protect efforts from harm. The SEC said that the size of the award reflected the significance of the information that the whistleblower provided, the whistleblower’s efforts to protect investors and to report the violations internally, and the personal and professional injuries that the whistleblower suffered in reporting the violations.
The SEC’s press release touted the whistleblower’s efforts to report internally. “The whistleblower did everything feasible to correct the issue internally,” said Sean McKessy, Chief of the SEC’s Office of the Whistleblower. “This award recognizes the significance of the information that the whistleblower provided us and the balanced efforts made by the whistleblower to protect investors and report the violation internally.”
SEC Makes First Whistleblower Award to a Compliance Professional
On August 29, 2014, the SEC made its first award, in the amount of $300,000, to an individual in a compliance or audit function at a company. The heavily-redacted SEC order granting the award suggested that the information had been obtained in the whistleblower’s capacity as a compliance professional. While, under the SEC’s whistleblower rules, the information would thus not be considered to be derived from the whistleblower’s “independent knowledge or independent analysis,” the exception to this rule applied because the whistleblower had reported the information internally at least 120 days before reporting the information to the SEC.
In the SEC’s press release announcing the award, Sean McKessy said: “Individuals who perform internal audit, compliance, and legal functions for companies are on the front lines in the battle against fraud and corruption. They often are privy to the very kinds of specific, timely, and credible information that can prevent an imminent fraud or stop an ongoing one.” The press release confirmed that the whistleblower reported concerns of wrongdoing to appropriate personnel within the company, including a supervisor. After the company took no action on the information for more than 120 days, the whistleblower reported the information to the SEC.
SEC Announces Record Award of $30 Million to Foreign Whistleblower
On September 22, 2014, the SEC announced its largest whistleblower award to date – at least $30 million. The size of the award is notable because it is more than twice the prior record award of $14 million made in October 2013. The SEC’s order granting the award also is significant because the award was made to a foreign whistleblower. This is not the SEC’s first award to a foreign whistleblower, but it comes on the heels of the Second Circuit’s suggestion in Liu v. Siemens AG, _ F.3d _ (2d Cir. Aug. 14, 2014), that the Dodd-Frank whistleblower bounty provisions may not apply extraterritorially. (See “Second Circuit Adopts Broad Pleading Standard for Whistleblower Protection Under Sarbanes-Oxley Act, But Affirms Dismissal of Complaint” below.) In its order, the SEC said that a “sufficient U.S. territorial nexus” exists in any case in which a whistleblower’s information leads to a successful enforcement action concerning violations of the United States securities laws. The SEC specifically found that the Liu court’s conclusion that there was an insufficient territorial nexus for the anti-retaliation provisions to apply in that case was not controlling to its award determinations. The SEC said that its bounty provisions have “a different Congressional focus than the anti-retaliation provisions.”
In addition, the $30 million award was notable because it could have been higher if not for a downward adjustment due to the whistleblower’s delay in reporting to the SEC. The SEC said the length of whistleblower’s delay, the length of which was redacted from the order, was “unreasonable.” The SEC noted that investors continued to suffer significant monetary injury during the period of delay. The SEC said that the whistleblower’s uncertainty regarding whether the SEC would in fact take action did not excuse the delay. The SEC also rejected the whistleblower’s complaint that the award was below the average percentage award to other successful whistleblowers. The SEC said that each award involves an individualized review of applicable facts and circumstances, thus precluding any meaningful comparison among awards.
Second Circuit Adopts Broad Pleading Standard for Whistleblower Protection Under Sarbanes-Oxley Act, But Affirms Dismissal of Complaint
On August 8, 2014, the United States Court of Appeals for the Second Circuit in Nielsen v. AECOM Technology Corp., No. 13-235-cv, __ F.3d __ (2d Cir. Aug. 8, 2014), joined a growing number of federal appellate courts that have adopted the Department of Labor’s plaintiff-friendly pleading standards in cases involving alleged violations of Sarbanes-Oxley’s (SOX) anti-retaliation provisions. Nevertheless, the Second Circuit found the plaintiff’s complaint lacking and affirmed dismissal of the complaint.
The plaintiff was a Fire Engineering Manager, who was charged with ensuring that his subordinate’s fire safety plan met applicable standards. One of his subordinates apparently marked fire safety designs as approved, despite having not reviewed them. The plaintiff objected to his managers, but no action was taken, and he was later terminated. His SOX complaint alleged an effort to cover up the false approval of fire safety designs. The district court dismissed the complaint, relying in part on prior opinions of the Second Circuit and other courts, stating that a plaintiff “must definitively and specifically relate to one of the listed categories of fraud or securities violations in 18 U.S.C. § 1514(a)(1).” The Second Circuit rejected this prior line of cases in light of Sylvester v. Parexel Int’l LLC, ARB No. 07-123, 2011 WL 2165854, at *14-15 (ARB May 25, 2011) (en banc), in which the Administrative Review Board of the Department of Labor abrogated the “definitively and specifically” standard in favor of one that focused on the employee’s reasonable belief that the conduct violated one of the provisions listed in § 1514(a)(1). The court held that the Administrative Review Board’s new position was entitled to deference. (Notably, the Second Circuit has not taken a position with respect to the precise pleading standard required under Rule 9(b) of the Federal Rules of Civil Procedure for whistleblower allegations made under the False Claims Act. The Supreme Court recently declined to resolve a Circuit split when it declined to review the dismissal of a FCA complaint in U.S. ex rel. Nathan v. Takeda Pharms, 707 F.3d 451 (4th Cir. 2013), cert. denied, 81 U.S.L.W. 3650 (U.S. Mar. 31, 2014) (No. 12-1349)).
Applying the “reasonable belief” test, the Second Circuit nevertheless found the plaintiff’s complaint insufficient. He had not plausibly pled mail or wire fraud because the complaint contained no allegations of a scheme to steal money or property. Nor could he reasonably have thought that there was a shareholder fraud. While the plaintiff alleged that the improper fire design approval practice could potentially expose the company to risk (and thus constitute a potential shareholder fraud), these claims were conclusory. The court concluded that the link between his claims and a purported fraud against shareholders was too tenuous to survive a motion to dismiss.
Second Circuit Holds That Dodd-Frank Anti-Retaliation Provisions Do Not Apply Extraterritorially
On August 14, 2014, the United States Court of Appeals for the Second Circuit held in Liu v. Siemens AG, No. 13-4385-cv, __F.3d __ (2d Cir. Aug. 14, 2014), that the Dodd-Frank anti-retaliation protection provisions do not apply extraterritorially, but the court did not address whether those provisions apply to purely internal reporting. The facts were decidedly extraterritorial: the plaintiff was a citizen and resident of Taiwan, working for a Chinese corporation that was a subsidiary of a German corporation whose shares were listed in the New York Stock Exchange. Plaintiff alleged that employees were making improper payments to officials in North Korea and China, and he reported this conduct to his superiors. He alleged that he was demoted and ultimately fired for reporting the misconduct. After he was fired, he reported the alleged wrongdoing to the SEC.
The district court dismissed the plaintiff’s Dodd-Frank anti-retaliation complaint on two grounds: (1) the anti-relation provisions do not have extraterritorial reach, and (2) plaintiff had not made a disclosure to the SEC that was protected. The Second Circuit affirmed on the first ground, finding that nothing in the anti-retaliation provisions suggested that the statute had extraterritorial application. The court rejected the plaintiff’s argument that the statute has extraterritorial reach because the SEC has provided whistleblower awards to foreign employees under its bounty program. (See “SEC Announces Record Award of $30 Million to Foreign Whistleblower” note above.) The court said that even if the SEC’s view that the bounty provisions apply extraterritorially is correct (which the court questioned), that would not mean that Congress intended the anti-retaliation provisions to apply extraterritorially. On the facts, the court said that “this case is extraterritorial by any reasonable definition.” There had been no contact with the United States regarding the wrongdoing or the protected whistleblowing activity. Relying on the United States Supreme Court’s decision in Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010), the court held that listing securities on an exchange in the United States was not enough.
As we noted in a prior newsletter, the most-watched issue in the case was whether one must provide information to the SEC in order to be a protected “whistleblower” for purposes of the anti-retaliation provisions. In the briefing before the Second Circuit, the SEC submitted an amicus brief in support of the plaintiff’s position that he need not report to the SEC prior to his termination to have a viable claim. See our April 1, 2014 newsletter. The Second Circuit, however, expressly did not decide whether internal reporting alone is sufficient to qualify for anti-retaliation protection.
Eighth Circuit Ducks Deciding Whether Dodd-Frank Anti-Retaliation Provisions Require Reporting to the SEC
The Second Circuit was not the only federal appellate court to avoid deciding whether the Dodd-Frank anti-retaliation provisions protect individuals who report internally and not to the SEC. In our July newsletter, we discussed Bussing v. COR Clearing, LLC, No. 8:12-CV-238 (D. Neb. May 21, 2014), in which the district court held that employees that report internally are protected from retaliation. See July 2, 2014 newsletter. The defendant in the case sought interlocutory appeal of that ruling from the United States Court of Appeals for the Eighth Circuit. In support of the defendant’s request for permission to appeal, the Chamber of Commerce of the United States filed an amicus brief. The Chamber of Commerce noted that the district court’s ruling was in direct conflict with the only appellate decision addressing the issue, Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), and asserted that immediate review was of critical importance to the business community nationwide. The Eighth Circuit denied permission to appeal on September 4, 2014.
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