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:
In the wake of the U.S. Supreme Court’s landmark ruling in Digital Realty Trust, Inc. v. Somers, a New Jersey federal court on April 19, 2018, dismissed a Dodd-Frank Act whistleblower retaliation claim from a former UBS Financial Services, Inc. executive’s pending lawsuit. That claim was based on the former executive’s testimony to the Financial Industry Regulatory Authority (FINRA) about a colleague’s potential misuse of an elderly client’s funds.
By way of background, in Digital Realty Trust, the Supreme Court decided the core objective of the Dodd-Frank Act’s anti-retaliation provision is to incentivize potential whistleblowers to bring their securities law violation reports directly to the SEC. In this case, the New Jersey federal district court decided the same reasoning applied. The ex-executive did not come forward until well after the alleged securities violations, the court observed, and thus well before his FINRA testimony and ultimate termination.
The former UBS executive’s whistleblower claims also were grounded in allegations that his superiors sabotaged his work projects to justify terminating him in February 2016 as a pretext for retaliating against him for his FINRA testimony. That testimony was extensive, and a lengthy FINRA investigation ensued thereafter that implicated the company in wrongdoing. Among the actions the former executive claimed his superiors took against him in retaliation for that testimony were: questioning documentation he prepared supporting dinner marketing events and threatening him with the issuance of a written warning when similar documentation had never previously been problematic; delaying the approval of marketing seminars that resulted in those seminars having low turnout; and withdrawing permission for the ex-executive to host a high-profile charity event.
The case is Craig D. Price v. UBS Financial Services, Inc., Case No. 2:17-cv-01882, pending in the U.S. District Court for the District of New Jersey.
On June 28, 2018, the SEC issued a press release announcing its vote to propose amendments to the rules governing its whistleblower program. The SEC noted that, after administering the whistleblower program for over seven years, it had identified several ways in which the program may benefit from additional rulemaking.
The proposed rule amendments appear to be motivated, at least in part, by the SEC’s trend of making ever larger whistleblower awards. As we noted previously, three of the SEC’s 10 largest whistleblower awards were made in 2017 alone, including a more than $20 million award. The SEC’s proposed additional rules would, if adopted, provide the SEC with additional tools in making whistleblower awards to ensure meritorious whistleblowers are appropriately rewarded for their efforts. More specifically, at its open meeting, the SEC discussed proposed rules that would allow for upward adjustments of small whistleblower awards (which it defined as awards of less than $2 million). Conversely, the proposed rules also will include a mechanism whereby the SEC can adjust especially large awards so as not to exceed an amount that is reasonably necessary to reward the whistleblower, incentivize other similarly situated whistleblowers, and not provide windfalls. Additionally, the SEC will propose a rule amendment aimed at eliminating the potential for double recovery under the current definition of “related action” in the whistleblower statute. Specifically, the SEC will seek a rule amendment that would make it impossible for a whistleblower to recover multiple whistleblower awards for the same information provided to different whistleblower programs. In support of this proposed rule, the SEC noted that 40 percent of the aggregate funds awarded to whistleblowers have been paid in only three awards.
The proposed rules also will include proposed methods for decreasing inefficiencies in the administration of the whistleblower claims review process, and will seek to clarify the requirements for anti-retaliation protection under the whistleblower statute in direct response to the recent Supreme Court ruling in Digital Realty Trust, Inc. v. Somers. The SEC’s proposed rule will bring its rules in line with the standard set in Digital Realty. Specifically, the proposed rule will require, among other things, that an individual seeking anti-retaliation protection provide a written report directly to the SEC of any suspected securities laws violations. This proposed rule would apply equally to the SEC’s whistleblower award program, to claims for anti-retaliation protection in the employment context, and to the SEC’s heightened confidentiality program.
Interestingly, the SEC also included in its proposed rules a request for public comment on whether it could establish a discretionary bounty award for individuals who provide tips that lead to enforcement actions that do not meet the SEC’s current requirements for a whistleblower award. Specifically, the potential bounty award program could be used to make awards to individuals who provide tips that lead to an action below the SEC’s $1 million minimum for a whistleblower award, or for instances where the tip is based on publicly available information.
On June 27, 2018, the federal Third Circuit Court of Appeals affirmed the trial court’s entry of summary judgment dismissing a SOX whistleblower retaliation claim. The basis for the trial court’s decision, which the Third Circuit upheld, was that the whistleblower’s belief that the employer had committed fraud was not objectively reasonable.
The plaintiff was a research analyst at Merck & Co. who was assigned the task of managing a diabetes-related study for a business and its health insurance benefits administrator. Merck hired a third-party market research firm to conduct the research needed for the study, and the plaintiff complained that the market research firm was more expensive than other research firms. The plaintiff also complained that Merck had only hired that particular firm because one of Merck’s scientists was close with executives of the health insurance benefits administrator. Merck later underwent a restructuring, which resulted in the plaintiff’s termination. The plaintiff thereafter filed a whistleblower retaliation lawsuit under the anti-retaliation provisions of SOX.
The Third Circuit, in its decision, noted that even assuming Merck selected the market research firm and paid it a premium to conduct a study so that Merck could improve its business relationship with the health insurance benefits administrator, the plaintiff had not articulated how that behavior amounted to fraud. The plaintiff had only asserted that the payments to the market research firm were bribes, inducements, or quid pro quo payments, and the Third Circuit considered those assertions vague and insufficient to demonstrate that her complaints related in any way to the forms of fraud enumerated in SOX.
The case is Westawski v. Merck & Co., No. 16-4075, 2018 WL 3159093 (3d Cir. June 27, 2018).
The U.S. Commodity Futures Trading Commission (CFTC) announced on July 12, 2018, that it had issued its largest-ever whistleblower award of approximately $30 million as part of its Dodd-Frank whistleblower program. This marks the first whistleblower award that the CFTC has issued during President Trump’s administration and only the fifth award the CFTC has made since it started its whistleblower award program. The CFTC’s next highest award, made in April 2016, was $10 million.
In its press release, the CFTC’s chairman stated that it was the CFTC’s hope that this large award would incentivize other whistleblowers to provide the CFTC with valuable information. The CFTC chairman also stated that the CFTC’s award should notify market participants that individuals are reporting high quality information about violations of the Commodity Exchange Act. As is the CFTC’s custom, it did not provide any details about the whistleblower who received this award, or about the information that led to the successful enforcement action. Press outlets, however, including Bloomberg, have reported that the award relates to a 2015 JPMorgan conflict of interest settlement and that the award was made to Edward Siedle, a former SEC lawyer-turned-forensic-investigator.