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:
On September 23, 2020, the U.S. Securities and Exchange Commission (SEC) announced the adoption of a final rule in Release 34-89963 that changes several aspects of its whistleblower program. The new rule is effective October 23, 2020.The SEC stated that the amendments are “intended to provide greater transparency, efficiency and clarity to whistleblowers, to ensure whistleblowers are properly incentivized, and to continue to properly award whistleblowers to the maximum extent appropriate and with maximum efficiency.” Below is a summary of the highlights of the final rule.
(1) Changes to the SEC’s Award-Setting Procedures
Perhaps one of the most important provisions of the final rule changes how the SEC sets whistleblower award amounts. Whistleblower awards must be between 10 percent and 30 percent of the total monetary sanctions recovered because of the information the whistleblower provided, subject to the criteria included in 17 C.F.R. § 240.21F-6.
Under the final rule, for awards where the statutory maximum of 30 percent totals $5 million or less, the whistleblower will presumptively receive the maximum award as long as none of the negative award-reducing criteria listed in Rule 21F-6(b) are present (which include whistleblower culpability and whether the whistleblower unreasonably delayed reporting).
The SEC’s original proposed rule included a separate review process that allowed the SEC to make additional downward adjustments to “exceedingly large awards.” This review process is not included in the final rule. Instead, in the case of whistleblower awards expected to exceed $5 million, the final rule notes the SEC’s existing, broad discretion to adjust award amounts under the existing criteria in Rule 21F-6. The SEC also clarified that while it will only evaluate the Rule 21F-6 criteria when setting whistleblower awards, its evaluation would not only consider the percentage of monetary sanctions recovered because of the information a whistleblower provided but also the total dollar amount of the award. The SEC explained that “actual dollar figures — not abstract percentages — are most likely to advance the whistleblower award program’s goal of incentivizing potential whistleblowers.”
The final rule also provides whistleblower awards for additional forms of dispute resolution. Originally, for a whistleblower to qualify for an award, the information the whistleblower provided needed to lead to the collection of monetary sanctions through a judicial or administrative enforcement action asserted by the SEC, or a related action brought by the U.S. Attorney General, another regulatory authority, a self-regulatory organization, or a state attorney general in a criminal case. Under the final rule, deferred prosecution agreements, non-prosecution agreements, and settlement agreements not linked to a judicial or administrative proceeding will now also be eligible for whistleblower awards determined through the standard award-setting process.
The final rule also introduced a provision that prohibits a whistleblower from obtaining multiple recoveries through other whistleblower programs. Under the new multiple-recovery rule, the SEC will have the authority to assess whether another whistleblower award program (including the Commodity Futures Trading Commission [CFTC] whistleblower program) should more logically apply to an action brought by another governmental authority. This new rule further prohibits whistleblowers previously denied awards from other whistleblower programs to re-adjudicate issues before the SEC that were resolved against them by the other program(s). Whistleblowers must also now affirmatively waive their claims to awards under other whistleblower programs before they can accept an SEC whistleblower award.
The final rule also endeavors to clarify the “independent analysis” portion of Section 21F limiting whistleblower awards to individuals who, among other requirements, submit “original information” derived from the individual’s independent knowledge or analysis. While “original information” may include a whistleblower’s individual analysis of publicly available information, the SEC already requires that the individual analysis reveal information that is not generally known or available to the public. Under the final rule, the SEC may determine that a whistleblower’s individual analysis of publicly available information reveals information that is not generally known or available to the public where: “(1) the whistleblower’s conclusion of possible securities violations derives from multiple sources, including sources that, although publicly available, are not readily identified and accessed by a member of the public without specialized knowledge, unusual effort, or substantial cost; and (2) these sources collectively raise a strong inference of a potential securities law violation that is not readily inferable by the [SEC] from any of the sources individually.” The SEC notes that this change was necessary to, among other things, reduce the volume of non-meritorious claims the whistleblower program receives, and to otherwise increase whistleblower program efficiency.
(2) Adoption of Uniform Definition of “Whistleblower” in Light of U.S. Supreme Court’s Decision in Digital Realty Trust, Inc. v. Somers
In Digital Realty Trust, the U.S. Supreme Court held that individuals must report securities law violations to the SEC to qualify as a whistleblower under Dodd-Frank. The final rule, however, added that to be protected under the Dodd-Frank Act’s anti-retaliation provisions, not only must a whistleblower report securities law violations to the SEC, but that report must be in writing.
The final rule otherwise includes a uniform definition of “whistleblower” to be applied under the Dodd-Frank Act. A whistleblower is defined as “(i) an individual; (ii) who provides the [SEC] with information ‘in writing’” and “(iii) the information relates to a possible violation of the federal securities laws (including any law, rule, or regulation subject to the jurisdiction of the [SEC]) that has occurred, is ongoing, or is about to occur.”
(3) Other Noteworthy Changes to the Whistleblower Award Application Process
Also notably, the final rule provides that a whistleblower award applicant can be permanently barred from seeking an award if the applicant submits three or more frivolous applications to the Office of the Whistleblower, or if the applications lack a colorable connection between the tip and an action. According to this new rule, for the first three applications determined to be frivolous, the Office of the Whistleblower will notify an applicant of the Office’s conclusion and will give the applicant an opportunity to withdraw the corresponding application. The final rule also codified the SEC’s existing practice of permanently barring applicants who previously have submitted “materially false, fictitious, or fraudulent representations, statements, or documents” in a whistleblower award application, in interactions with the SEC, or in related actions involving other regulatory authorities. Whistleblower award applicants potentially subject to being permanently barred will be given notice and an opportunity to respond before the permanent bar is issued.
The new rule also includes a summary disposition procedure for the following categories of common denials: “(1) untimely award applications; (2) failure to submit a tip in compliance with Rule 21F-9; (3) where the staff handling the covered action or the underlying investigation (or examination) never received or used the claimant’s information and otherwise had no contact with the claimant; (4) failure to comply with Rule 21F-8(b), which encompasses [SEC] requests for supplemental information and for signed confidentiality agreements; and (5) failure to specify the tip on which the award claim is based.” For these types of denials, the SEC will now issue a preliminary summary disposition to the applicant, who will then be given 30 days to file a written response before the SEC issues a final determination.
Since the onset of the pandemic in the spring, the SEC whistleblower program steadily has announced whistleblower awards, with seven awards announced in September alone.
On August 31, 2020, the SEC announced an award in excess of $1.25 million to a whistleblower whose significant information prompted the SEC to initiate a cause examination and to bring an enforcement action that resulted in the return of millions of dollars to investors. The SEC emphasized that the whistleblower’s prompt reporting enabled the SEC to move quickly to protect investors.
On September 1, 2020, the SEC announced an award of over $2.5 million to joint whistleblowers whose tip led to several successful enforcement actions. The whistleblowers’ tip, the SEC noted, was based largely on highly probative independent analysis of a public company’s filings. The whistleblowers also provided helpful assistance early in the SEC’s investigation, which helped save time and resources.
On September 14, 2020, the SEC announced an award of more than $10 million to a whistleblower who provided information and assistance that the SEC noted were of crucial importance to a successful enforcement action. In its announcement, the SEC emphasized this whistleblower’s “persistent efforts…to expose serious financial misconduct,” and “extensive and ongoing assistance to the investigative team…including identifying witnesses and helping staff understand complex fact patterns and issues related to the matters under investigation.”
On September 17, 2020, the SEC announced a nearly $250,000 award to two whistleblowers whose tip caused the SEC to open an investigation that resulted in a successful enforcement action. The SEC noted that the whistleblowers raised their concerns internally before reporting to the SEC. While the enforcement action was largely built through the SEC staff’s investigative efforts, the SEC stated that this award highlights the importance of receiving the initial tip that “can break open the case.”
On September 21, 2020, the SEC announced an award of $2.4 million to a whistleblower whose quick submission of “critical information” prompted the SEC to start an investigation and bring an enforcement action that stopped ongoing misconduct. The whistleblower also assisted the SEC throughout its investigation, which contributed to all of the charges the SEC asserted.
On September 25, 2020, the SEC announced two separate whistleblower awards that together totaled over $2.5 million. Both awards pertained to “high-quality information regarding overseas conduct.” In its first award, the whistleblower received more than $1.8 million for taking both personal and professional risks to report information through the internal compliance system at a company. The tip revealed overseas conduct that would otherwise have been hard to detect. The tip resulted in an internal investigation by the company, which subsequently reported its findings to the SEC. The whistleblower also provided the information to the SEC. Ultimately, the company agreed to pay more than $14 million to settle allegations of financial wrongdoing, $6 million of which the company paid to settle allegations that it violated the Foreign Corrupt Practices Act. Notably, since the SEC announced this award, the attorneys for the first whistleblower publicly disclosed that the SEC initially set the award percentage at 15% of the company’s FCPA settlement payment. Consistent with the updated whistleblower program rules, however, the SEC later increased the first whistleblower’s award to 30% of the company’s FCPA settlement payment. The second whistleblower received $750,000 for reporting securities violations internally and directly to the SEC that happened outside of the U.S. That tip led the SEC to start an investigation that ended in a successful enforcement action.
On September 28, 2020, the SEC announced it was awarding over $1.8 million to a company outsider who quickly reported significant information to the SEC about ongoing securities law violations. This whistleblower was also the 100th individual to receive an award under the SEC’s whistleblower program since its inception.
On September 30, 2020, the SEC announced an award of nearly $30 million to two insider whistleblowers whose tips led to an SEC investigation. One of the whistleblowers, who was the first to report to the SEC regarding potential wrongdoing and who also provided “substantial, ongoing assistance” to the SEC received about $22 million. The second whistleblower provided additional valuable information and received an award of $7 million. The information provided by both whistleblowers helped the SEC return tens of millions of dollars to harmed retail investors.
The SEC announced four additional whistleblower awards on September 30, 2020, which together totaled almost $5 million. These awards capped the end of the whistleblower program’s fiscal year, which included 39 total individual awards of approximately $175 million (more than in any prior fiscal year). The first whistleblower received $2.9 million for alerting the SEC to “hard-to-detect violations” and for providing critical information and supporting evidence that conserved SEC time and resources. The second whistleblower, a former company insider, received more than $1.7 million and provided extensive and ongoing assistance to the investigative team. The third award, of almost $400,000, was made to two whistleblowers for jointly providing a tip and giving continuing assistance during the SEC’s investigation, including meeting with SEC staff and helping them understand key documents. The SEC emphasized that these two whistleblowers reported their concerns internally and suffered “personal hardships as a result of the reporting.”
The SEC started its new fiscal year with an October 15, 2020, announcement that it awarded more than $800,000 to a whistleblower whose information prompted the agency to start an investigation that led to two successful enforcement actions. According to the SEC’s announcement, the whistleblower provided a detailed analysis that alerted SEC staff to the underlying securities violations.
The CFTC has also announced awards in the last quarter.
On July 27, 2020, it announced an award of approximately $9 million to a whistleblower whose “specific, credible, and timely tip” led the CFTC to start an investigation and ultimately bring a successful enforcement action. The CFTC announcement noted that this is one of the five largest whistleblower awards in the history of its whistleblower program.
On September 4, 2020, the CFTC announced it issued an award to an individual whose information prompted an investigation into “ongoing fraudulent activity” and ultimately a successful enforcement action. The whistleblower provided the CFTC with extensive assistance, including documents that were essential to establishing wrongdoing and saving CFTC time and resources. The CFTC’s Order redacted information regarding the amount of the award, presumably to protect the identity of the whistleblower.
On September 11, 2020, the CFTC announced awards to two whistleblowers, one based in the U.S. and the other based overseas. The U.S.-based whistleblower was the first to alert the CFTC to the fraudulent activity and continued to provide the CFTC with helpful information and documents during its investigation that the agency noted it may not have otherwise obtained. The overseas whistleblower also alerted the CFTC to an ongoing fraud by the same perpetrators and also provided the agency with information about their efforts to avoid detection by the CFTC. The CFTC also did not publicly disclose the amounts of these awards.
On September 29, 2020, the CFTC announced an award of approximately $250,000 to a whistleblower who provided information that prompted an investigation, and assistance to the CFTC during that investigation. The CFTC noted that it reduced this award because the whistleblower delayed in reporting the violations, although the information the whistleblower provided led to multiple enforcement actions. Neither the CFTC’s announcement nor its Order provided additional information related to how long the whistleblower delayed in reporting.
In a non-precedential opinion issued on July 16, 2020, the Third Circuit Court of Appeals affirmed a trial court’s dismissal of a former employee’s SOX whistleblower retaliation claim against a publicly traded company. In doing so, the Third Circuit held that the former employee lacked an objectively reasonable belief that his complaints involved one of the forms of fraud listed in SOX’s whistleblower provision.
The plaintiff was an IT analyst whose job duties included maintaining the company’s computer servers, as well as any security issues related to the operation of those computer servers. Beginning in 2011, the plaintiff complained to his supervisor about security and performance issues with the relevant servers allegedly caused by the decision to “uncap” the servers’ processors. The plaintiff believed that uncapping the servers’ processors could cause bad performance and corrupted data. The plaintiff also later expressed a concern to his supervisor that the servers’ access management plan gave some users more access authority than they should have. The plaintiff’s supervisor initially tasked the plaintiff with resolving both sets of issues.
Dissatisfied with the response to his complaints, the plaintiff escalated those complaints to the company’s compliance office. A year later, the plaintiff further escalated his complaints to the company’s CEO. In his email to the CEO, the plaintiff stated he was concerned these issues could lead to “financial data irregularities,” among other problems. The plaintiff also noted that the risks he complained about should have been, but were not, disclosed in the company’s 2013 annual report to the SEC. The company conducted two internal investigations in response to the plaintiff’s complaints, which found those complaints to be unfounded or otherwise unsubstantiated.
In 2014, the company decided to outsource management of the relevant servers to a third party, and the plaintiff was notified his department was being downsized. The plaintiff believed his earlier complaints protected him from being terminated, so he did not apply for one of the available positions in his department. The plaintiff was terminated in 2015. A month later, he filed a SOX whistleblower retaliation complaint in federal district court in Pennsylvania. The district court ultimately granted summary judgment for the company and dismissed the plaintiff’s claims.
In affirming the trial court’s decision, the Third Circuit reiterated that SOX’s whistleblower provisions protect an employee from retaliation for providing information regarding conduct that the employee “reasonably believes constitutes” mail fraud, wire fraud, bank fraud, securities fraud, a violation of any rule or regulation of the SEC, or fraud against shareholders. The Third Circuit went on to hold that the plaintiff failed to show that he had an objectively reasonable belief that the company had engaged in any such conduct. The Third Circuit found that the plaintiff’s complaints about uncapped processors were nothing more than workplace disagreements about routine IT issues that did not relate to illegal conduct or fraud. The Third Circuit further found that, considering the plaintiff was tasked with resolving the issues he complained about, it was not objectively reasonable for the plaintiff to believe that his supervisor would task him with fixing those issues at the same time the company was perpetuating a cover-up or a fraud. The Third Circuit also held that the company sufficiently disclosed risks to cybersecurity and its computer systems in its annual reports to the SEC, and that the plaintiff’s complaints about those risks did not relate to any of the types of fraud enumerated in SOX’s whistleblower provision. As such, the plaintiff failed to establish he had engaged in protected activity within the scope of SOX’s whistleblower provision.
The case is Reilly v. GlaxoSmithKline, LLC, No. 19-2897, in the U.S. Court of Appeals for the Third Circuit.