A Review of Recent Whistleblower Developments

30 January 2018 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:

  • Despite SEC’s Friend-of-the-Court Brief in Digital Realty Trust Appeal Over “Whistleblower” Definition, U.S. Supreme Court Seems Skeptical
  • SEC Announces Two Substantial Whistleblower Awards in One-Week Period
  • Seventh Circuit Rejects Ex-CEO’s Would-Be Whistleblower Claims
  • 2017 Whistleblower Office Report Emphasizes Increasing Tips and Record Awards

Despite SEC’s Friend-of-the-Court Brief in Digital Realty Trust Appeal Over “Whistleblower” Definition, U.S. Supreme Court Seems Skeptical

As we reported in our October and July 2017 newsletters, the U.S. Supreme Court is currently reviewing a circuit split concerning whether the Dodd-Frank Act prohibits retaliation against internal whistleblowers who did not report their concerns regarding securities law violations directly to the SEC prior to filing suit. By way of brief background, the appeal involves a federal trial court declining to dismiss a former Digital Realty Trust employee’s whistleblower retaliation claims. The basis for Digital Realty Trust’s attempt to have the suit dismissed was that the former employee failed to take his concerns directly to the SEC before he initiated his lawsuit under the Dodd-Frank Act’s whistleblower provisions. The Ninth Circuit Court of Appeals agreed with the trial court and upheld its decision. Thereafter, Digital Realty Trust appealed the case to the U.S. Supreme Court, which agreed to review it.

The central issue in this appeal is whether the definition of “whistleblower” in the Dodd-Frank Act includes individuals who only report their concerns of securities law violations internally with their employer, rather than externally to the SEC. Since the U.S. Supreme Court accepted the appeal, several entities, including the U.S. Chamber of Commerce, submitted friend-of-the-court briefs.

In late October 2017, the SEC offered its own brief, which advocates for a more broad reading of the Dodd-Frank Act that would cover internal whistleblowers like Digital Realty Trust’s former employee. In its brief, the SEC reasons that “[e]xcluding such persons from Dodd-Frank’s protections would depart from usual understandings of the term ‘whistleblower’ and would undermine Congress’ effort to promote more rigorous and effective internal compliance programs.”

At oral argument in November, Justices Kagan, Breyer, and Gorsuch seemed to express skepticism in response to both the former employee’s and the SEC’s appeals for a broader definition of the term “whistleblower” under the Dodd-Frank Act.

We will continue to provide updates as this appeal develops before the U.S. Supreme Court.

SEC Announces Two Substantial Whistleblower Awards in One-Week Period

Within just five days of each other, the SEC announced, on November 30 and December 5, 2017, two separate whistleblower awards totaling more than $20 million.

The November 30, 2017 award was made to two whistleblowers for their role in a case that caused the total recovery by the SEC, through its whistleblower award program, to exceed $1 billion. Each whistleblower received $8 million, which puts both in the top-ten highest whistleblower awards made by the SEC. As is customary, the SEC did not reveal much in the way of information about either of the individual whistleblowers or the information they provided. However, the SEC did disclose that each whistleblower came forward separately with information, and the second whistleblower provided ongoing assistance to the agency during its investigation.

The December 5, 2017 whistleblower award was made to a foreign national who the SEC says assisted it in uncovering substantial and longstanding securities law violations at his or her former company. The SEC divulged only that the individual was not a U.S. citizen and that he or she worked for this company’s overseas operations. The total award made to this individual was $4.1 million. In making its award, the SEC took into account this individual’s “unreasonable delay” in reporting the securities law violations but also noted several factors mitigated the informant’s delay: First, much of the individual’s delay in reporting took place before the SEC’s whistleblower award program was launched in 2010; and second, overseas whistleblowers face legal uncertainty, as the anti-retaliation provisions of the Dodd-Frank Act may not protect them from adverse employment action.

As of this writing, the SEC has awarded nearly $180 million to individuals through its whistleblower award program.

Seventh Circuit Rejects Ex-CEO’s Would-Be Whistleblower Claims

On January 11, 2018, the Seventh Circuit Court of Appeals affirmed the trial court’s grant of summary judgment in favor of Orion Energy Systems, Inc. (“Orion”) on ex-CEO Neal Verfuerth’s (“Verfuerth”) aspirational Sarbanes-Oxley Act (“SOX”) and Dodd-Frank Act whistleblower claims.

After his termination in November 2012, Verfuerth claimed that he qualified as a whistleblower under both SOX and Dodd-Frank because, before his firing, he complained to Orion’s board of directors about a wide range of matters that allegedly evidenced violation of securities laws. Those matters included: (1) overbilling by outside counsel; (2) a potential patent infringement by one of Orion’s products; (3) potential conflicts of interest involving a member of the board and a company executive; (4) miscellaneous violations of internal company policy, like consumption of alcohol at an informal board meeting; (5) the board’s handling of a defamation suit brought by a former employee who had been accused of stock manipulation; and (6) the chairman of Orion’s audit committee allowing his CPA license to expire. The trial court granted Orion’s summary judgment motion.

In affirming the trial court’s grant of summary judgment in favor of Orion, the Seventh Circuit observed that Verfuerth’s “whistleblower” claims did not qualify as such under either SOX or Dodd-Frank. Specifically, the practices that Verfuerth claims he complained about were not “fraud” within the meaning of SOX. Nor could Verfuerth allege securities fraud because the directors failed to disclose his complaints to Orion shareholders. The Court said that theory would allow a person to become a whistleblower under SOX just by advising his or her colleagues about their own disclosure obligations but then doing nothing when they fail to follow that advice.

The Seventh Circuit was also unpersuaded by Verfuerth’s claim that he attempted to report his concerns directly to the SEC by making an online complaint. The SEC never received that complaint, nor did Verfuerth have any evidence that he actually submitted his complaint electronically. In any event, the Seventh Circuit observed that Verfuerth’s claims were nonsensical in that, as Orion’s CEO, he had the ultimate responsibility to report fraud to the SEC and admittedly failed to do so. Thus, if Orion’s failure to disclose the complained-of conduct amounted to securities fraud, then Verfuerth participated in that fraud when he knowingly filed SEC reports, during his tenure, that made no mention of those issues.

Ultimately, because Verfuerth’s Dodd-Frank Act whistleblower claim was entirely derivative of his SOX whistleblower claim, and his SOX claim failed, the Seventh Circuit affirmed summary judgment in favor of Orion on both counts.

2017 Whistleblower Office Report Emphasizes Increasing Tips and Record Awards

On November 15, 2017, the SEC’s Office of the Whistleblower issued its Fiscal Year 2017 annual report. The report highlights an increase in the number of whistleblower tips the Office of the Whistleblower received over Fiscal Year 2016 to more than 4,400 individual tips in Fiscal Year 2017. The report also highlighted the Office of the Whistleblower’s focus on the following areas: 

  • Employers’ usage of confidentiality, severance, and other kinds of agreements that may interfere with individuals’ ability to report potential wrongdoing directly to the SEC;
  • An ongoing commitment to initiating enforcement actions, where appropriate, against employers who violate the anti-retaliation provisions of the Dodd-Frank Act, even in situations where the alleged whistleblower only reported possible securities laws violations internally, rather than externally, to the SEC; and
  • An ongoing commitment to raising public awareness of the SEC’s whistleblower program and the activities of the Office of the Whistleblower.

The report also summarized the whistleblower awards issued in fiscal 2017, which totaled nearly $50 million to 12 individuals. The report emphasized some of the year’s more significant awards, including:

  • The third-highest whistleblower award, of $20 million, to an individual who provided information leading to a speedy and successful enforcement action;
  • The award of $7 million to three whistleblowers, in January 2017, that enabled the SEC to stop an investment scheme that defrauded hundreds of investors;
  • The award of $5.5 million to a company insider who not only provided information that initiated an SEC enforcement action but continued to provide information and assistance to the SEC during its investigation; and
  • The award of $4.5 million to a whistleblower who provided the SEC with industry-specific expertise during its enforcement action.

The report provided a breakdown of the tips that the SEC received:

  • More than 3,200 phone calls from the public. The most tips originated in California, New York, Texas, Florida, and New Jersey.
  • Tips came from 114 foreign countries, with the bulk of those tips originating from the United Kingdom, Canada, and Australia.
  • Consistent with prior-year results, the most common types of complaints reported included corporate disclosures and financials (19 percent), offering fraud (18 percent), and manipulation (12 percent).

The annual report further provides some details about the individuals who have received awards since the whistleblower program’s inception:

  • About 62 percent of the individuals receiving awards were current or former company employees when they reported information regarding wrongdoing;
  • Of the whistleblower award recipients who were current or former employees of a subject company, almost 83 percent of them raised their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms, or otherwise understood that their supervisor or relevant compliance personnel knew of the violations before they reported their concerns to the SEC.

The full report can be accessed here.