SEC Whistleblower Office 2014 Annual Report Details Rising Number of Tips and Increasing Awards
On November 17, 2014, the U.S. Securities and Exchange Commission (SEC) Whistleblower Office issued its Fiscal Year 2014 Annual Report. The report highlighted the increasing number of tips received under the whistleblower program — 3,620 tips from whistleblowers in fiscal year 2014 (up 12 percent from fiscal 2013). The report also noted the increasing number (and magnitude) of the awards made to whistleblowers. Of the 14 awards issued since the whistleblower program began, nine awards were made in fiscal year 2014. The report emphasized some of the more significant awards, including the coordinated activity with the SEC Enforcement staff that resulted in an enforcement action against Paradigm Capital Management (see July 2, 2014, newsletter, SEC Brings First Anti-Retaliation Case Under Dodd-Frank Act Whistleblower Provisions), the award to an employee with audit and compliance responsibilities on August 29, 2014 (see October 3, 2014, newsletter, SEC Makes First Whistleblower Award to a Compliance Professional), and the record $30 million award to a whistleblower on September 22, 2014 (see October 3, 2014, newsletter, SEC Announces Record Award of $30 Million to Foreign Whistleblower).
The report contains a breakdown of the reports received:
Since the program began in mid-2011, a total of 10,193 reports have been made to the SEC. The report provides some details on the individuals who have received awards:
The report confirms prior public statements that the Whistleblower Office is working to identify confidentiality, severance, and other agreements that may interfere with an employee’s ability to report wrongdoing. The report states that the Whistleblower Office is “actively working with Enforcement staff to identify and investigate practices in the use of confidentiality and other kinds of agreements that may violate” the SEC rule prohibiting “taking any action to impede an individual from communicating directly with the SEC about a possible securities law violation.”
Administrative Review Board Clarifies Burden-Shifting Framework for SOX Whistleblower Claims
In Fordham v. Fannie Mae, Administrative Review Board (ARB) No. 12-061 (Oct. 9, 2014), the ARB issued an opinion that could have significant ramifications for employers seeking to establish affirmative defenses in SOX whistleblower administrative hearings. In Fordham, the administrative law judge (ALJ) dismissed the complainant’s claim, finding that the complainant had not met the burden of showing that her protected activity was a “contributing factor” to the employer’s adverse employment action. The ARB reversed, holding that evidence that the employer would have taken the same action against the employee, even if the employee had not engaged in protected activity, cannot be taken into account until the ALJ first decides whether the SOX complainant has met her burden of proving that her conduct was a contributing factor in the employer's adverse decision. The ARB reasoned that allowing the employer’s evidence to come in earlier would permit ALJs to weigh the employer’s evidence by a “preponderance of the evidence” standard and not by SOX’s required “clear and convincing” standard to establish an affirmative defense in the standard burden-shifting framework. As a result, Section 806 claims have two separate burdens of proof: a preponderance of the evidence burden for the whistleblower, and a higher, clear and convincing burden for the employer.
Fifth Circuit Confirms That Identifying Whistleblower to Co-Workers Can Be an Adverse Action Under SOX
In Halliburton, Inc. v. Administrative Review Board, 771 F.3d 254 (5th Cir. 2014), the Fifth Circuit upheld an ARB ruling that the identification of an employee as a whistleblower was an “adverse action” under the Sarbanes-Oxley Act of 2002. The complainant had raised a concern to his supervisors and others about Halliburton’s revenue recognition policies. He later reported the same concerns to the SEC. When the SEC contacted Halliburton and instructed it to retain certain documents regarding revenue recognition, Halliburton assumed (correctly) that the complainant had reported his concerns to the SEC. The general counsel sent an email to the complainant and his colleagues, instructing them to retain certain documents because “the SEC has opened an inquiry into the allegations of [complainant].” The complainant claimed that after he was identified as having blown the whistle to the SEC, his colleagues began treating him unfavorably.
An ALJ dismissed his complaint, finding that the disclosure of the complainant’s name was not an adverse action. The ARB disagreed and remanded. The ALJ then ruled that Halliburton had demonstrated a legitimate business reason for disclosing the complainant’s identity. The ARB reversed again, ruling that Halliburton failed to prove by clear and convincing evidence that its disclosure of the whistleblower’s identity was dictated by “a legitimate, non-discriminatory business reason unrelated to his protected activity.” The Fifth Circuit upheld the ARB’s ruling, finding that the disclosure of a whistleblower’s identity may constitute an adverse action under SOX because “[i]t is inevitable that such a disclosure would result in ostracism.” The court said that when identifying the whistleblower, “the boss could be read as sending a warning, granting his implied imprimatur on differential treatment of the employee, or otherwise expressing a sort of discontent from on high.” The Fifth Circuit also held that the whistleblower need not show that the disclosure was driven by improper motive.
Notably, in this case, the SEC declined to pursue the allegations of accounting improprieties, yet Halliburton found itself in litigation for years over its handling of the whistleblower. The case highlights the difficult position in which employers find themselves when a current employee makes whistleblower claims. Maintaining absolute confidentiality of a whistleblower’s identity, even where colleagues clearly know the source of the complaints, may conflict with an employer’s ability to preserve evidence and gather information about those complaints.
Third Circuit Holds That Dodd-Frank Act Anti-Retaliation Claims May Be Subject to Arbitration
On December 8, 2014, the United States Court of Appeals for the Third Circuit held in Khazin v. TD Ameritrade Holding Corp., 2014 U.S. App. LEXIS 23098 (3d Cir., Dec. 8, 2014), that Dodd-Frank Act whistleblower retaliation claims are not exempt from pre-dispute arbitration agreements. The plaintiff, a former financial services professional, alleged that he discovered violations of the federal securities laws relating to his employer’s pricing practices. The plaintiff prepared an analysis showing that changing the practice would cost the company more than one million dollars in revenues. The plaintiff alleged that, after seeing the analysis, his supervisor told him to drop the matter, and he was fired. The district court dismissed the plaintiff’s anti-retaliation claim based on the plaintiff’s arbitration agreement, finding that the Act’s anti-arbitration provision did not apply retroactively. (See April 1, 2014, newsletter, Two District Courts Grant Defendants’ Motions to Arbitrate Whistleblower Employment Disputes.)
The Third Circuit did not address whether the Act’s anti-arbitration provision applied retroactively, but affirmed on the ground that the “text and structure” of the Act did not preclude arbitration of a Dodd-Frank anti-retaliation claim. Even though the Act’s anti-arbitration restrictions apply to retaliation claims brought under the Sarbanes-Oxley Act of 2002, the Commodity Exchange Act, and the Consumer Financial Protection Act, the court noted that there was no provision in the Act that would preclude arbitration of the newly created Dodd-Frank anti-retaliation claims. The Third Circuit rejected the plaintiff’s position that this was an error, finding that the statutory scheme suggested that the omission was “deliberate” and that Congress had “expressed its intent unambiguously.” The Third Circuit also rejected the plaintiff’s argument that requiring arbitration would undermine the Dodd-Frank Act’s broader purpose of enhancing protection for whistleblowers, stating that the plaintiff could not invoke the purported purpose of legislation “at the expense of the terms of the statute itself.”
This was the first federal Court of Appeals decision to address the enforceability of arbitration agreements for claims brought under Dodd-Frank’s anti-retaliation provision. This decision will be viewed largely as a victory for employers, and it will also require plaintiffs to seriously consider whether they wish to pursue whistleblower claims under SOX versus Dodd-Frank in light of the fact that the latter may be subject to mandatory arbitration agreements.
Courts Continue to Disagree Regarding Whether the Dodd-Frank Anti-Retaliation Whistleblower Provisions Require Report to the SEC
Whether a whistleblower must report complaints to the SEC in order to be a “whistleblower” for purposes of the Dodd-Frank Act anti-retaliation provisions continues to be the subject of stark disagreement among federal courts. In Connolly v. Wolfgang Remkes, 2014 U.S. Dist. LEXIS 153439 (N.D. Cal., Oct. 28, 2014), a federal court in the Northern District of California noted the split of authority regarding whether a Dodd-Frank whistleblower must report directly to the SEC. The court observed that “a large majority of district courts” have declined to follow Asadi v. GE Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013). The court adopted the majority view, finding ambiguity in the statute and holding that the plaintiff was not required to report misconduct to the SEC. The court also concluded that the SEC’s interpretation that a whistleblower need not report to the SEC was a reasonable one that warranted deference.
Just one week later in Verfuerth v. Orion Energy Systems, Inc., 2014 U.S. Dist. LEXIS 156620 (E.D. Wis., Nov. 4, 2014), the United States District Court for the Eastern District of Wisconsin reached the opposite conclusion. The court found no ambiguity in the Dodd-Frank Act. Despite what it viewed as a “surprising number of courts” that had accepted plaintiffs’ arguments that that statute is ambiguous, the court disagreed. The court said that the ambiguity argument was “based solely on a disagreement about public policy, not statutory interpretation,” and the courts rejecting Asadi simply believed that “it would have made more sense to provide whistleblower protection to any individual who engages in protected activity, regardless of whether he followed the rules for reporting to the SEC.” The court approvingly noted that the Asadi court “did not fall for this argument.” Because the plaintiff conceded that he had not reported to the SEC, the court easily concluded that he was not a whistleblower as defined by the statutory language, and his Dodd-Frank retaliation claim was dismissed.
SEC Again Files Amicus Brief Arguing That Dodd-Frank Anti-Retaliation Plaintiffs Need Not Report Information to the SEC
The SEC continues to press its view that a plaintiff need not provide information to the SEC in order to bring a claim under the Dodd-Frank Act’s anti-retaliation provisions. In our April 1, 2014, newsletter, we discussed the SEC’s amicus curiae brief in Liu v. Siemens, in which the SEC argued its position to the Second Circuit. (See April 1, 2014, newsletter, The SEC Tells the Second Circuit that Dodd-Frank Whistleblowers Need Not File a Whistleblower Report With the SEC ). In Liu, the Second Court declined to reach the issue, but rather affirmed dismissal of the complaint because it concluded that the anti-retaliation provisions did not have extraterritorial effect. (See October 3, 2014, newsletter, Second Circuit Holds That Dodd-Frank Anti-Retaliation Provisions Do Not Apply Extraterritorially).
On December 12, 2014, the SEC pressed the issue again in another amicus brief, this time to the Third Circuit in Safarian v. American DG Energy Inc., No. 14-2734 (3d Cir. 2014). Interestingly, the district court had not reached the SEC reporting issue because, even if reporting to the SEC was not required, the court concluded that the plaintiff’s internal reporting was not protected by SOX. As it did in the Liu amicus, the SEC argued that Dodd-Frank whistleblower provisions “do not unambiguously demonstrate congressional intent to restrict anti-retaliation protections to only those individuals who provide information to the SEC.” Because, in the SEC’s view, the statutory scheme is ambiguous, the SEC asserts that its rule that an individual is a whistleblower if he or she makes internal disclosures that are protected under SOX, is entitled to deference. While the Third Circuit may not need to address the issue raised in the SEC amicus, if it chooses to do so, a decision in the plaintiff’s favor would establish a Circuit split that would certainly invite the United States Supreme Court to consider the issue.
Legal News is part of our ongoing commitment to providing legal insight to our employee benefits clients and colleagues. If you have any questions about or would like to discuss these topics further, please contact your Foley attorney or any of the following:
Pamela L. Johnston
Partner and Government Enforcement, Compliance & White Collar Chair
Los Angeles, California
Bryan B. House
Let’s Talk Compliance | Provider Relief Fund: Reporting Requirements and Compliance Concerns