A Review of Recent Whistleblower Developments

19 July 2017 Legal News: Whistleblower Developments Publication
Author(s): Lisa M. Noller Bryan B. House

Whistleblower Developments is a periodic report covering significant cases, decisions, proposals, and legislation related to whistleblower statutes and how they may impact your business. Recent developments include:

  • Supreme Court Will Resolve Circuit Split Over Dodd-Frank Whistleblowers
  • SEC to Continue Whistleblower Program Despite Financial CHOICE Act
  • SEC Awards Over $4 Million to Two Whistleblowers in One Week
  • SEC Denies Whistleblower Award, Defends Eligibility Cut-Off
  • With Circuit Split Pending, Illinois District Court Dismisses Dodd-Frank Act Whistleblower Claim for Failure to Meet Act's "Whistleblower" Definition
  • Jury Upholds $7.96 Million Verdict
  • Court Affirms Dismissal of SOX Retaliation Claim
  • Amendments of the CFTC's Whistleblower Rules

Supreme Court Will Resolve Circuit Split Over Dodd-Frank Whistleblowers

On June 26, 2017, the United States Supreme Court agreed to review whether the Dodd-Frank Act prohibits retaliation against internal whistleblowers who have not reported concerns over securities law violations to the U.S. Securities and Exchange Commission (SEC), and thus, to resolve a circuit court split.

By way of background, Paul Somers, the former Digital Realty Vice President of Portfolio Management, brought a lawsuit claiming the company discriminated against him based on his sexual orientation, and then fired him in retaliation for reporting his supervisor’s violations of the Sarbanes-Oxley Act. The trial court denied Digital Realty’s motion to dismiss Somers’s claims, and the Ninth Circuit affirmed that decision. The trial court also certified the question of whether Somers qualified as a Dodd-Frank whistleblower to the Ninth Circuit.

In its opinion, the Ninth Circuit joined the Second Circuit in holding that the Dodd-Frank Act’s anti-retaliation provision “unambiguously and expressly protects” those who report to the SEC directly and those who report internally within an organization. The decision widened a split with the Fifth Circuit, and Digital Realty asked the Supreme Court to review this conflict and resolve it.

SEC to Continue Whistleblower Program Despite Financial CHOICE Act

As the Financial CHOICE Act works its way through Congress, former SEC Chair, Mary Jo White, made it clear the agency wants to continue its whistleblower award program despite the pushback the proposed legislation could create.

Though the Financial CHOICE Act stands to limit those eligible for awards under the current whistleblower program, the changes would be minimal. One of the legislation’s proposed changes would affect co-conspirators. The current program allows the SEC to make whistleblower awards to co-conspirators even if they were involved in the wrongdoing, so long as the co-conspirators were not criminally charged. The Financial CHOICE Act is poised to prohibit awards to co-conspirators regardless of whether they are criminally convicted.

The legislation’s proposed prohibition on whistleblower awards to co-conspirators could also create an uptick in the number of Sarbanes-Oxley Act whistleblower claims. As of 2011, the number of whistleblower claims asserted under the Sarbanes-Oxley Act had fallen by 25 percent, while the total number of whistleblower claims under all other statutes (including Dodd-Frank) increased by more than 40 percent. The huge drop in the number of cases filed under the Sarbanes-Oxley Act could be attributed to the enactment of the Dodd-Frank Act. If the Financial CHOICE Act is ultimately enacted, including its prohibition on whistleblower awards to co-conspirators, the pendulum may swing back toward the Sarbanes-Oxley Act.

We will continue to provide updates on the status of this legislation, and other proposed legislation that may impact the SEC’s Whistleblower Program.

SEC Awards Over $4 Million to Two Whistleblowers in One Week

On April 25, 2017, the SEC awarded a whistleblower 4 million dollars, its tenth-highest whistleblower award to date. The tipster gave detailed information about securities misconduct, and assisted the SEC throughout its investigation by providing industry-specific knowledge and expertise.

About a week later, the SEC awarded $500,000 to a corporate insider whose tips prompted and assisted with an enforcement action. The tipster informed the SEC about hard-to-detect violations of securities laws. The information led the SEC to conduct a formal investigation and take subsequent enforcement action.

Since the program’s commencement in 2011, the SEC has received over 10,500 tips and awarded hundreds of millions of dollars to whistleblowers. To date, enforcement actions attributed to whistleblowers’ tips have resulted in the SEC’s collection of over $953 million dollars.

SEC Denies Whistleblower Award, Defends Eligibility Cut-Off

The SEC has stood firm in its position that the Dodd-Frank Act cannot be applied retroactively to information provided before the law’s enactment. On June 8, 2017, the SEC denied a whistleblower award where the individual’s tips were given in 2007, four years before the Dodd-Frank Act’s enactment.

The SEC pointed to Section 924(b) of the Dodd-Frank Act and read it to limit an individual’s eligibility for a whistleblower award to information submitted in writing after the Act’s enactment, but before the implementation of any associated rules.

The SEC also declined the individual’s request to delay the final resolution of this award application, and to allow for the filing of a rulemaking petition. In doing so, the SEC reasoned that the claimant could have filed a rulemaking petition when the rules were first adopted in 2011.

With Circuit Split Pending, Illinois District Court Dismisses Dodd-Frank Act Whistleblower Claim for Failure to Meet Act’s “Whistleblower” Definition

On June 7, 2017, the United States District Court for the Northern District of Illinois dismissed a would-be whistleblower’s case for failure to plead facts indicating that he qualified as a whistleblower under the Dodd-Frank Act.

In this case, the district judge ruled “(1) that the congressionally enacted definition of ‘whistleblower’ in the Dodd-Frank Act’s retaliatory provision is unambiguous and (2) that no administrative regulation can turn the jurisprudential world upside down to override that unambiguous provision.” Thus, because the plaintiff in this case reported internally, and not to the SEC, the district court decided that he did not qualify as a “whistleblower” under the express definition in the Dodd-Frank Act. This issue has been discussed in great depth by three other Courts of Appeals (discussed above and here), resulting in a circuit split on the issue, which the U.S. Supreme Court will resolve this term (as also discussed above).

The case is Jeffrey Martensen v. Chicago Stock Exchange, case number 17-C-1494, 2017 U.S. Dist. LEXIS 87621 (N.D. Ill. June 7, 2017).

Jury Upholds $7.96 Million Verdict

On February 7, 2017, a jury awarded Sanford Wadler $2.96 million in past economic loss damages and $5 million in punitive damages against Wadler’s former employer, Bio-Rad Laboratories, Inc. (Bio-Rad). On May 10, 2017, Bio-Rad’s motion for new trial was denied, and the jury’s verdict was upheld.

In support of its motion, Bio-Rad argued that Wadler’s claim under the Dodd-Frank Act failed because Wadler did not report the alleged violations to the Foreign Corrupt Practices Act (FCPA) directly to the SEC. However, the court looked to Somers v. Digital Realty Trust Inc., in which the Ninth Circuit held the Dodd-Frank Act extends protections to those who report internally. Based on the Ninth Circuit’s precedent, the court ruled Wadler was not required to report to the SEC, and Bio-Rad was not entitled to a new trial.

Further, Bio-Rad asserted that Wadler’s disclosure of alleged FCPA violations was not protected activity under the Sarbanes-Oxley Act. However, the court ruled that the FCPA is an amendment to the Securities and Exchange Act of 1934, and is codified within it. Thus, Wadler’s disclosures are protected under the Sarbanes-Oxley Act, and Bio-Rad was prohibited from retaliating against him for such disclosures.

Court Affirms Dismissal of SOX Retaliation Claim

On June 1, 2017, the Second Circuit affirmed the dismissal of a Sarbanes-Oxley Act claim because the plaintiff, Ronald Kantin, lacked a reasonable belief that his former employer, Metropolitan Life Insurance Co., engaged in any fraudulent conduct. In his complaint, Kantin claimed that the company fired him because he informed them of alleged pricing irregularities related to the company’s joint life insurance policies, which Kantin claimed raised questions of illegal activity. Kantin also claimed he complained about commission payments that he considered unethical, but not illegal.

When seeking relief under § 1514A of the Sarbanes-Oxley Act, a plaintiff must have a reasonable belief that the conduct in question violated one of the enumerated provisions. The reasonable belief must contain both subjective and objective components. The plaintiff must not only believe the conduct constitutes a violation, but that a reasonable person in similar circumstances would believe the conduct violates one of the provisions as well.

The Second Circuit held that Kantin failed to demonstrate both an objectively and subjectively reasonable belief that any of the conduct complained of constituted a violation. He admitted that he himself did not believe the commission payments he complained of were illegal. Further, he failed to show that a reasonable person would believe the pricing anomalies for joint life insurance policies in question violated any provisions of the Sarbanes-Oxley Act. As such, Kantin failed to establish that he engaged in protected whistleblower activity under the Sarbanes-Oxley Act.

The case is Ronald Kantin v. Metropolitan Life Insurance Company, case number 16-1091-cv, 2017 U.S. App. LEXIS 9635 (2d Cir. June 1, 2017).

Amendments to the CFTC’s Whistleblower Rules

Among other amendments to the rules, the Commodity Futures Trading Commission (CFTC) unanimously amended its Whistleblower Rules. The CFTC’s amendments are intended to strengthen anti-retaliation protections for whistleblowers, and to enhance the CFTC’s process for reviewing whistleblower claims regarding possible violations of the Commodity Exchange Act (CEA).

Under the amended rules, a whistleblower retains the right to bring an action against an employer for retaliation. However, the CFTC now has the authority to bring an action against an employer who retaliates against a whistleblower, regardless of whether the whistleblower qualifies for an award. Additionally, the new amendments prohibit employers from preventing a whistleblower from communicating directly with CFTC staff about possible misconduct in violation of the CEA by using a confidential, pre-dispute arbitration agreement. Under the amended CFTC Whistleblower Rules, whistleblowers may not receive an award if they have already been granted an award by the SEC for the same action under the SEC’s whistleblower program.

The CFTC amendments also establish a new process for determining whether an award claim should be granted or denied. The CFTC’s new claims review process replaces the Whistleblower Award Determination Panel with a Claims Review Staff. Additionally, whistleblowers will now have an opportunity to review the record and contest the decision before the CFTC issues a Final Determination of his or her eligibility for a whistleblower award.

The CFTC’s amendments will go into effect 60 days after publication in the Federal Register. For more information on these rule changes, please see the CFTC's Fact Sheet.