Second Circuit Splits from Fifth Circuit on Whistleblower SEC Reporting Obligations
On September 10, 2015, the Second Circuit in Berman v. Neo@Ogilvy LLC, 2015 U.S. App. LEXIS 16071 (2d Cir. 2015), ruled that whistleblowers need not report to the U.S. Securities and Exchange Commission (SEC) in order to state a claim for unlawful retaliation under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) anti-retaliation provisions. The split with the Fifth Circuit’s contrary decision in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), sets up a potential review by the U.S. Supreme Court. See September 14, 2015, Legal News: Whistleblower Developments.
SEC Issues Formal Interpretation of Whistleblower Rules Regarding “Whistleblower” Definition
On August 4, 2015, the SEC issued an interpretive rule to clarify that, for purposes of the anti-retaliation provisions of the Dodd-Frank Act, an individual’s status as a whistleblower was to be determined solely by SEC Rule 21F-2(b)(1). The interpretive rule explains that Rule 21F-2(b)(1) provides expressly that, for purposes of the anti-retaliation protections, the whistleblower need not report information to the Commission. The interpretive rule focused on SEC Rule 21F-9(a), which specifies the specific procedures for reporting to the SEC that must be followed by an individual who seeks to qualify as a whistleblower under Rule 21F-2(a). The interpretive rule clarifies that Rule 21F-9(a) is “a procedural rule that applies only to help determine an individual’s status as a whistleblower for purposes of Section 21F award and confidentiality provisions.” In summary, the interpretive rule explains that the rules governing an individual’s status as a whistleblower in the retaliation context are different from those for individuals seeking to recover an award and that those rules are not governed by Rule 21F-9(a). The SEC, of course, brought this interpretive rule to the attention of the Second Circuit during its consideration of the Berman case. The majority noted the SEC’s interpretive rule, as did the dissenting judge, who was unimpressed and noted that the SEC issued its interpretive rule only after oral argument.
SEC Continues to Investigate Alleged Efforts to Impede Whistleblowers
On September 10, 2015, Barnes & Noble disclosed in a quarterly report on Form 10-Q that the SEC was investigating historical confidentiality provisions that it had in agreements with employees. The disclosure identified the investigation as relating to Rule 21F-17, the SEC rule implementing the Dodd-Frank Act whistleblower provisions, which prohibits an employer from taking steps to impede a whistleblower from reporting information to the SEC. The company noted that it is in the process of discussing a potential resolution of the issue. As we reported earlier this year, the SEC brought its first enforcement action for violation of Rule 21F-17 against KBR, Inc. in April.
SEC Pays More Than $3 Million to a Whistleblower
On July 17, 2015, the SEC announced a whistleblower award of more than $3 million to an individual that the SEC called a “company insider” in its press release. The SEC said the information provided by the whistleblower helped the SEC crack a complex fraud that would otherwise have been very difficult for investigators to detect. The SEC also noted that the whistleblower’s initial tip led to related actions that increased the whistleblower’s award. The SEC noted that this payout was the third highest award to date under the SEC’s whistleblower program. The order, however, makes clear that the whistleblower’s award was adjusted downward due to the whistleblower’s delay in reporting the fraud.
Fifth Circuit Reinstates SOX Claim Alleging Protected Activity Regarding Accounting for Taxes
On July 31, 2015, the United States Court of Appeals for the Fifth Circuit in Wallace v. Tesoro Corp., 796 F.3d 468 (5th Cir. 2015), reversed in part a decision dismissing a Sarbanes-Oxley Act (SOX) whistleblower claim for failure to allege protected activity. The plaintiff contended that he engaged in protected activity with respect to four types of impropriety, including that the defendant was improperly booking taxes as revenue. The magistrate judge and the district court dismissed the claim as to three counts of an amended complaint, including the claim regarding taxes, as not having sufficiently alleged protected activity.
With respect to a fourth claim regarding wire fraud, the court ruled that the alleged protected activity was outside the scope of the Occupational Safety and Health Administration (OSHA) complaint that the plaintiff had initially filed. The Fifth Circuit agreed that the district court correctly dismissed the plaintiff’s wire fraud claim because it was outside the scope of the OSHA complaint or any investigation that it might have prompted. With respect to the plaintiff’s report that the company was booking taxes as revenue, the Fifth Circuit reversed the district court and held that the plaintiff had sufficiently pleaded that he reasonably believed that the accounting practice violated SEC rules. The court rejected the district court’s observation that the plaintiff was an accounting expert and therefore his inability to identify a specific rule that had been violated rendered his belief of a violation unreasonable, saying “the basis for that belief in this case, including the level and role of [plaintiff’s] accounting expertise and how that should weigh against him, are grounded in factual disputes that cannot be resolved at this stage of the case.” In rejecting the defendant’s arguments, the court held that Federal Rule of Civil Procedure 9(b) does not apply to SOX complaints, citing SOX’s “low hurdle of pleading a plausible case for relief.”
District Court Rules That Accounting and Auditing Expertise Supported Reasonableness of Pro Se Plaintiff’s SOX Claim
In Huang v. Harman, Int’l Indus. Inc., 2015 U.S. Dist. LEXIS 98594 (D. Conn. July 29, 2015), the United States District Court for the District of Connecticut found that a pro se plaintiff stated a claim by attaching his OSHA complaint to his federal court complaint. In the OSHA complaint, the plaintiff sufficiently alleged that he had uncovered accounting errors, including misstated inventory reserves, sales, and gross margins, that led to an overstatement of profits of $20 million. The court found that the plaintiff’s training as an accountant and work as a SOX auditor supported plaintiff’s reasonable belief that he was engaging in SOX-protected activity. Further, the plaintiff’s supervisor had encouraged him to pursue his concerns. The court rejected the defendant’s argument that the alleged accounting errors were “innocuous or trivial” because the errors were numerous, were in different departments at different times, amounted to tens of millions of dollars, and were reported to shareholders on SEC filings.
District Court Rejects SOX Claim on Multiple Grounds, Including That Plaintiff Would Have Been Terminated in Absence of Protected Activity
In Hill v. Komatsu America Corp., 2015 U.S. Dist. LEXIS 116611 (N.D. Ill. Aug. 26, 2015), the United States District Court for the Northern District of Illinois dismissed a SOX retaliation claim on summary judgment on several grounds. The plaintiff had raised concern to the defendant’s CEO that the defendant’s repair and maintenance program offered to distributors and end users of the defendant’s products was insufficiently funded by reserves. A month or so later, the plaintiff was terminated after an unrelated investigation regarding improper expense reporting and taking his wife on company business without approval. The court granted the defendant’s motion to dismiss on four separate grounds.
First, the court found that a concern that the repair and maintenance reserve was too low was not the same as suggesting securities fraud, and the plaintiff had never suggested a material misrepresentation was made to shareholders. Second, the defendant did not know that the plaintiff was engaged in protected activity because he had not reported that anything illegal was taking place. Third, the plaintiff had not shown that his expression of concern was a contributing factor in his termination. Finally, even if the plaintiff had established a prima facie case of retaliation, the summary judgment record showed that he would have been terminated in the absence of protected activity due to his violations of the defendant’s travel and expense policy.
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:
Lisa M. Noller
Chair, Government Enforcement, Compliance & White Collar Practice
Bryan B. House
Foley & Lardner LLP Legal News Alert is intended to provide information (not advice) about important new legislation or legal developments. The great number of legal developments does not permit the issuing of an update for each one, nor does it allow the issuing of a follow-up on all subsequent developments.