A Review of Recent Whistleblower Developments

29 October 2019 Legal News: Whistleblower Developments Publication
Author(s): Lisa M. Noller Pamela L. Johnston 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:

Senate Proposes Whistleblower Programs Improvement Act

In late September, Senators Chuck Grassley (R-Iowa), Tammy Baldwin (D-Wis.), Joni Ernst (R-Iowa), and Dick Durbin (D-Ill.) introduced the Whistleblower Programs Improvement Act, which would protect financial whistleblowers who report internally from retaliation. This bill, which mirrors the Whistleblower Protection Reform Act of 2019 and passed in the House of Representatives in May, appears similarly aimed at clarifying that the Dodd-Frank Act’s anti-retaliation provision applies equally to employees who report alleged misconduct directly to the SEC and to employees who only report alleged misconduct internally to their employers. In 2018, the United States Supreme Court ruled in Digital Realty Trust, Inc. v. Somers, 583 U.S. __, 138 S.Ct. 767 (2018) that the plain language of Section 922 extends anti-retaliation protection to employees who report misconduct directly to the SEC.

SEC’s Most Recent Whistleblower Awards Total More than $2 Million

Over the summer, the SEC announced two separate whistleblower awards that, together, total more than $2 million.

In late July 2019, the SEC announced its award of a half-million dollars to an overseas whistleblower whose “expeditious reporting helped the SEC bring a successful enforcement action.” As is its custom, the SEC declined to provide information about the enforcement action or the identity of the whistleblower who provided the helpful information.

In late August 2019, the SEC announced a second award of $1.8 million to a whistleblower whose information and assistance were “critically important” to the success of an SEC enforcement action involving misconduct committed overseas. According to the SEC’s press release announcing this award, the whistleblower provided “extensive and ongoing cooperation” during the course of its investigation, including reviewing documents and providing sworn testimony. The whistleblower also continued to provide additional and new information that advanced the agency’s investigation. The SEC specifically pointed out that, because the misconduct in this case occurred overseas, without this whistleblower’s tip and assistance, the violations at issue would have been difficult for the SEC to identify.

After these most recent awards, the SEC’s whistleblower program has awarded a total of approximately $387 million to 66 individual whistleblowers since beginning the program in 2012.

Third Circuit Decides Former Citigroup Executive Not Required to Arbitrate SOX Claims

In August 2019, the federal Third Circuit Court of Appeals held that a former executive of Citigroup was not required to arbitrate his SOX whistleblower retaliation claim. According to the Third Circuit’s opinion, the former executive’s arbitration agreement with the company allows SOX claims to proceed in court, rather than in arbitration.

The federal trial court in Pennsylvania initially decided the former executive’s SOX whistleblower retaliation claims fell within the arbitration provision at issue, which directed all employment-related disputes to arbitration. The Third Circuit disagreed with the trial court, deciding the arbitration provision, which was included in a 2009 agreement, was reformed by a 2011 revision that carved out SOX claims to comply with the 2010 Dodd-Frank Act. The 2010 Dodd-Frank Act prohibits financial firms from requiring employees to arbitrate whistleblower claims. The Third Circuit did, however, agree with the trial court that part of the former executive’s lawsuit must proceed in arbitration (a related Racketeer Influenced and Corrupt Organizations Act claim) because the Dodd-Frank Act does not prevent RICO claims from being arbitrated.

The former executive’s claims arose out of allegations that the company had demoted and eventually fired him in 2013, after he reported that the company misclassified customer complaints to avoid triggering reporting obligations. Citigroup petitioned the trial court to compel the former executive’s claims to arbitration under his 2009 agreement. The former executive argued the 2009 agreement was superseded by the company’s 2011 agreement, which specifically exempted SOX whistleblower claims from arbitration. When the trial court compelled his claims to arbitration, the former executive appealed that decision to the Third Circuit. He argued that the company’s 2011 agreement should apply based on language in an accompanying employee handbook that stated the revision to the arbitration provision “supersedes any employee handbooks or human resources policies, practices or procedures . . . that are inconsistent with and prior to th[e] handbook’s distribution.” Citigroup argued on appeal that the employee handbook was “entirely separate” from the arbitration agreements and that the 2011 agreement did not otherwise indicate it superseded the earlier policy.

The Third Circuit panel agreed with the former executive’s arguments, noting the company’s attempt to distance the arbitration agreements from the employee handbook was “unpersuasive because the handbooks explicitly integrate the arbitration agreements.”

The case is Abdul Jaludi v. Citigroup, Case No. 16-3577, in the U.S. Court of Appeals for the Third Circuit.

The CFTC Seeks Whistleblower Tips as its Enforcement Program Continues to Develop

The U.S. Commodity Futures Trading Commission (CFTC) recently issued another installment in its campaign aimed at potential whistleblowers who may have information about misconduct outside of the CFTC’s usual jurisdiction, as it increases enforcement efforts in areas typically dominated by the Financial Crimes Enforcement Network and the U.S. Department of Justice.

The CFTC’s most recent alert is geared toward prospective whistleblowers who may have information about money laundering, insider trading, foreign bribery, and virtual currency fraud. According to the CFTC, its whistleblower alerts have increased the agency’s visibility to the public, as evidenced by its whistleblower website’s increased traffic in recent months. The CFTC’s whistleblower office’s website has received more than 200,000 page views this fiscal year, as compared to the roughly 41,000 total page views it received in fiscal year 2016.

The CFTC’s first whistleblower alert was published in May 2019, a few months after the CFTC announced a record 14 lawsuits brought alongside criminal charges in 2018. So far this year, the CFTC has continued to push its enforcement capabilities, investigating at least one company for foreign corruption and working with the Department of Justice on spoofing cases. In September, the CFTC also brought a lawsuit against JPMorgan traders, who were also the subject of criminal charges related to an allegedly years-long spoofing scheme.

Since its whistleblower program launched in 2011, the CFTC has awarded whistleblowers more than $90 million for their assistance to the agency. The CFTC received 760 total whistleblower tips in 2018, which increased from 465 total tips in 2017.

Two Recent Federal Court Decisions Underscore SOX’s Requirement that Whistleblowers Have an “Objectively Reasonable Belief” of Violation to Sustain a Lawsuit

On July 18, 2019, the U.S. District Court for the Eastern District of Pennsylvania granted summary judgment in favor of a company on a former employee’s SOX whistleblower retaliation claim because the whistleblower did not have an objectively reasonable belief that the company had violated any SEC regulation. The whistleblower worked in the company’s information technology department as part of the team responsible for the company’s computer operating system. That operating system hosted manufacturing and financial applications for portions of the company’s business. The whistleblower, in late 2011, noticed that the company’s computer servers were showing signs of performance issues, which the whistleblower attributed to a colleague’s decision to uncap processors on the company’s operating system. Uncapping processors allows a server to use available computer capacity from other servers, which can increase a server’s vulnerability to cyberattacks.

The whistleblower claimed that from 2012 until 2015, he repeatedly complained to his supervisor about security risks associated with the server’s performance problems, which could potentially implicate a SOX audit. Eventually, the whistleblower elevated his complaints up the company’s chain of command, including complaining to the CEO. The whistleblower included, in his complaints, that he believed the company’s 2013 report to the SEC omitted reference to any of the performance and security concerns he had raised regarding company server performance. The company responded to these complaints by conducting an internal investigation. Through that investigation, the company concluded that the whistleblower’s complaints were unsubstantiated.

In Spring 2014, the company announced its plan to outsource all but two of the positions relative to the company’s operating system, and invited the whistleblower to apply for one of those two positions. The whistleblower decided not to apply for one of those positions because a memorandum he received during the company’s internal investigation said that the company would get back to him following the outcome of the investigation about the status of his employment. Ultimately, the whistleblower’s termination date was delayed until Summer 2015. The whistleblower filed his SOX whistleblower retaliation lawsuit soon thereafter.

In its motion for summary judgment, the company argued (1) the whistleblower’s complaint was untimely because it was not filed within 180 days from the date the whistleblower first received notice of his termination, and (2) the whistleblower did not have an objectively reasonable belief that the company’s conduct violated the SEC rules covered by SOX. The court denied summary judgment on the company’s first argument because it was unclear from the record whether the whistleblower received sufficient notice of his termination to trigger the running of the statute of limitations. The court did grant summary judgment as to the company’s second argument. Citing to the company’s report to the SEC. the court ruled that the company sufficiently disclosed the risks associated with the poor performance of its computer systems. The company specifically stated in its SEC report that the failure to “adequately protect critical and sensitive systems and information . . . could materially and adversely affect [the company’s] financial results.” As such, the court further ruled that no reasonable person in the whistleblower’s position, with his training and experience, could have believed that the company’s behavior violated SOX.

The case is Reilly v. Glaxosmithkline, LLC, No. 17-cv-2045 in the U.S. District Court for the Eastern District of Pennsylvania.

The second case, decided on July 19, 2019 by the U.S. District Court for the District of Rhode Island, involved the dismissal of a purported SOX whistleblower retaliation claim brought by a company’s former in-house attorney. The company in that case moved to dismiss the whistleblower’s complaint because the former in-house counsel failed to allege sufficient facts showing that he had an objectively reasonable belief that the company engaged in fraud.

The whistleblower in this case was a former in-house patent and trademark attorney. Between 2013 and 2016, the company allegedly asked the whistleblower several times to review royalty payments to a patent-holder pursuant to a patent license and advise when those payments no longer needed to be made. In April 2014, in response to one of those requests, the whistleblower provided the expiration date of the relevant patent but did not calculate the end date for the company’s royalty payment obligation. In February 2016, the whistleblower informed the company that its obligation to pay royalties on the patent ended when the royalty agreement expired on March 1, 2014. The company thereafter discovered that this oversight caused it to pay between $800,000 and $1,000,000 in royalty overpayments.

The whistleblower claimed that he engaged in his first act of protected whistleblowing activity in February 2016, when he informed the company of the overpayments. After discovering the overpayments, the company engaged an accounting firm to conduct an independent internal audit. The whistleblower further claimed that he engaged in additional protected whistleblowing activity when he emailed the company’s senior management to inform them his original analysis was correct, but the company had misconstrued the termination date of the royalty payment obligation. The whistleblower also claimed in this communication that the company’s contract management system had become a “significant risk” to the business and contributed to the oversight that led to the royalty overpayments. The whistleblower’s last act of alleged protected whistleblowing activity occurred when, in November 2016, he spoke with the company’s compliance officer about the royalty overpayments. When the compliance officer told him that he had not heard about any issues relating to royalty overpayments, the whistleblower sent him the internal auditor’s draft report. The whistleblower was fired shortly thereafter. In his SOX whistleblower retaliation lawsuit, the whistleblower claimed that the company’s “failure to accurately and properly keep track of or pay royalties that were due and owing resulted in a material misrepresentation of such royalties to [the company’s] shareholders and in any Securities and Exchange Commission filings.”

In granting the company’s motion to dismiss, the court noted the whistleblower’s particular educational background and sophistication, which were relevant to the court’s analysis. The court concluded that the whistleblower’s complaint lacked facts establishing or permitting an inference that a person with the whistleblower’s legal training and experience could reasonably believe that the conduct he complained of to his superiors involved deceit or misrepresentation that implicated fraud, or that demonstrated wrongdoing covered by the fraud-prevention purposes of SOX.

The case is Colesanti v. Dickinson, No. 18-491, U.S. District Court for the District of Rhode Island.

Both of these cases stress the need for would-be whistleblowers to plead and prove that they held an objectively reasonable belief of a violation of one of the provisions enumerated in SOX in order to sustain a SOX whistleblower retaliation lawsuit. The Colesanti case further demonstrates the principle that sophisticated employees, like in-house attorneys, will be held to a higher pleading standard for SOX whistleblower retaliation claims in light of their educational training and experience.