The extent to which the SEC would reward whistleblowers, who themselves engaged in wrongdoing, has been the subject of considerable debate since the SEC promulgated its Dodd-Frank Act whistleblower rules in 2011. A recent order makes this significant as it appears to confirm that the SEC will pay whistleblower awards to wrongdoers — even those against whom the SEC has a judgment arising from the whistleblower’s conduct in the very case that has led to the award.
On April 7, 2016, the SEC ordered that a whistleblower would receive more than $275,000 for having provided information that led to monetary sanctions collected in an undisclosed enforcement matter filed in federal district court. The redacted order, however, suggests that the whistleblower in the case may have been a party that the SEC found to be liable for wrongdoing in connection with the same or a related matter. Specifically, the award states that the whistleblower’s award shall be subject to an offset for any obligation that remains unpaid from the “final judgment” entered against the whistleblower in an undisclosed matter.
On April 4, 2016, the U.S. Commodity Futures Trading Commission (CFTC) announced its largest whistleblower award to date ̶ more than $10 million. The award is the third, and by far the largest, whistleblower award the CFTC has issued since the Dodd-Frank Act authorized it to pay bounties to individuals who provide the CFTC with original information that leads to enforcement actions yielding more than $1 million in sanctions. The CFTC did not identify the subject enforcement action or percentage of the monetary sanctions that were awarded to the whistleblower, but the CFTC noted that the whistleblower’s information was “sufficiently specific, credible, and timely to cause the Commission to open an investigation.” The CFTC added that it based the amount of the award on the significance of the whistleblower’s information, the degree of assistance the whistleblower provided, and the Commission’s programmatic and law enforcement interests. The Commission further noted that the whistleblower did not participate or have any involvement in the violations, did not participate and or interfere with internal complaints and reporting systems, and did not unreasonably delay reporting the information to the Commission.
The SEC recently announced the payment of approximately $2 million to three whistleblowers who provided information to the SEC that led to a qualifying enforcement action. The SEC said in a press release that the largest of the three awards, approximately $1.8 million, would go to the whistleblower who provided the information that prompted the SEC to open its investigation and who continued to provide valuable information throughout the investigation. The other two whistleblowers will receive approximately $65,000 each for providing information. These two whistleblowers appealed a preliminary determination of their respective awards, but the SEC upheld the preliminary determination. In that decision, the SEC noted that the information provided by the other two whistleblowers was submitted approximately 18 months after the original whistleblower submitted information that caused the SEC staff to open its investigation.
The SEC continues to file amicus briefs in an effort to convince federal courts that the Dodd-Frank Act protects whistleblowers from retaliation regardless of whether they provided information to the SEC before adverse action was taken against them.
The SEC filed an amicus brief in Verble v. Morgan Stanley Smith Barney, LLC, No. 15-6397, which is now on appeal at the U.S. Court of Appeals for the Sixth Circuit. The district court dismissed the plaintiff’s Dodd-Frank retaliation claim because the plaintiff provided information to the SEC only after he had been terminated and thus was not a “whistleblower” under 15 U.S.C. § 78U-6(a)(6). [See January 7, 2016, Legal News, “Tennessee Federal Court Dismisses Whistleblower Retaliation Claims and Declines to Follow Berman v. Neo@Ogilvy. The SEC’s brief in support of the whistleblower’s position did not address the particular facts of the case, but rather described the ongoing debate between the courts as articulated in Asadi v. G. E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013) and Berman v. Neo@Ogilvy LLC, 803 F.3d 145 (2nd Cir. 2015), noting that the Second Circuit in Berman elected to defer to the SEC’s interpretation of its whistleblower rules.
The SEC also has weighed in regarding the retaliation suit David Danon filed against Vanguard Group Inc., arguing in an amicus brief filed in the U.S. District Court for the Eastern District of Pennsylvania that Danon’s internal complaints qualified for whistleblower protection under the anti-retaliation provisions of the Dodd-Frank Act. The Vanguard litigation has been the subject of much attention because Danon was an in-house attorney at Vanguard, who alleged in a New York state court qui tam case that Vanguard had charged artificially low prices to its related funds for investment management and administrative services to avoid paying federal and state income tax on the profits. A judge dismissed that suit in late 2015, ruling that Danon could not proceed with his complaint because he was prohibited from disclosing Vanguard’s confidential information under New York’s attorney ethics code. In his federal lawsuit, Danon now pursues, among other things, Dodd-Frank retaliation claims.
The SEC announced in January that it had awarded more than $700,000 to a “company outsider,” who provided the SEC with a detailed analysis that resulted in a successful SEC enforcement action. In its press release announcing the award, the SEC’s Director of the Division of Enforcement Andrew Ceresney said: “The voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders.” Sean McKessy, the chief of the SEC’s Office of the Whistleblower added: “We welcome analytical information from those with in-depth market knowledge and experience that may provide the springboard for an investigation.” While the Dodd-Frank framework clearly contemplates whistleblower awards to company outsiders, this award was the first of its kind.
Several weeks after the SEC’s announcement, Eric Scott Hunsader came forward in media interviews and revealed himself to be the whistleblower who had received the award. Hunsader, who owns a market data firm, said that he discovered that traders, using one of the New York Stock Exchange’s proprietary data feeds, received a head start over those that used the consolidated feed. Believing that this was against SEC regulations, Hunsader said he submitted his findings to the SEC and had a meeting shortly thereafter with the SEC enforcement staff.
While the award to Hunsader was the first of its kind, it is unlikely to be the last. It no doubt causes further concern for executives who are already worried about their employees raising issues to the SEC rather than registering complaints internally. The possibility that outside analysts and industry experts may be looking for securities violations in order to reap whistleblower awards only reinforces that companies should be on the lookout for wrongdoing and seek to remedy it before others identify it.
In Weist v. Tyco Electronics Corp., 812 F.3d 310 (3d Cir. 2016), the Third Circuit affirmed the dismissal of a Sarbanes-Oxley (SOX) whistleblower retaliation claim that has been the subject of numerous court decisions. The plaintiff, a manager in Tyco’s accounts payable department, allegedly raised concerns regarding certain expenses and invoices submitted in connection with extravagant Tyco events. The case had been to the Third Circuit a few years earlier. In Weist v. Lynch, 710 F.3d 121 (3d Cir. 2013), the Third Circuit joined the growing number of courts giving deference to the U.S. Department of Labor Administrative Review Board’s new requirements for pleading “protected activity” under § 806 of SOX, and rejecting prior case law holding that violations of misconduct under SOX must “definitively and specifically” relate to one of the enumerated categories of violation in § 806 of SOX. After remand, the district court ultimately granted summary judgment in Tyco’s favor, concluding that the plaintiff had not shown that his complaints were a “contributing factor” to his discharge. On appeal, the Sixth Circuit defined a “contributing factor” as “any factor, which alone or in combination with other factors, tends to affect in any way the outcome of the decision.” Despite this liberal standard, the court, nevertheless, found that the plaintiff had failed to show that his complaints were a contributing factor in his termination.
The Weist decision highlights the importance of a credible investigation in defeating a whistleblower retaliation claim. The court noted the temporal proximity between the plaintiff’s complaints and the adverse employment action, which came approximately 10 months later after an internal investigation regarding sexual harassment allegations. The court further noted the plaintiff had received praise and commendation during and after his complaints. The court applauded the integrity of the company’s investigation that resulted in the termination, noting, among other things, that the human resource department members investigating sexual harassment claims against the plaintiff were not aware of his protected activity.
Chair, Government Enforcement, Compliance & White Collar Practice