A Review of Recent Whistleblower Developments – Q3 2024

内部告発者動向レポートは、内部告発者保護法に関連する重要な事例、判決、提案、立法動向、およびそれらが貴社に与える影響を網羅する定期報告書です。最近の動向は以下の通りです：

• DOJ Launches Corporate Whistleblower Awards Pilot Program
• Federal District Court Grants Employer’s Motion for Summary Judgment on Sarbanes-Oxley Act Retaliation Claim
• D.C. Circuit Court of Appeals Denies In-House Attorney’s Appeal of Denial of Whistleblower Award
• Fifth Circuit Rules Whistleblowers Not Entitled to Money Collected Through Bankruptcy Proceeding
• SEC Continues Aggressive Enforcement of Rule 21F-17
• After Slow First Half of 2024, SEC Awards Over $200 Million to Whistleblowers in Q3

DOJ Launches Corporate Whistleblower Awards Pilot Program

On August 1, 2024, the Department of Justice (DOJ) launched its Corporate Whistleblower Awards Pilot Program, first announced earlier this year. Through the pilot program, the DOJ may issue awards to whistleblowers who provide the DOJ’s Criminal Division original and truthful information about corporate misconduct that results in successful forfeitures. The DOJ underscored that such information must relate to one of the following areas: (1) certain crimes involving financial institutions, from traditional banks to cryptocurrency businesses; (2) foreign corruption involving misconduct by companies; (3) domestic corruption involving misconduct by companies; or (4) health care fraud schemes involving private insurance plans. Further, with the launch, the DOJ released official guidance about the program, which details eligibility for awards, considerations in issuing awards, procedures for submission of information, procedures for applying for awards, and other information about the program. See this Foley post for further details and analysis.

Federal District Court Grants Employer’s Motion for Summary Judgment on Sarbanes-Oxley Act Retaliation Claim

On August 6, 2024, in Architectural Granite & Marble, LLC v. Pental, No. 20-cv-295-L (N.D. Tex. Aug. 6, 2024), the federal district court for the Northern District of Texas granted an employer’s motion for summary judgment on the defendant (former) employee’s counterclaim for alleged retaliation, in violation of 18 U.S.C. § 1514A of the Sarbanes-Oxley Act (SOX), dismissing the claim with prejudice. The employer initially brought the case against the former employee for alleged breaches of confidentiality provisions of certain agreements. The employee counterclaimed, asserting a SOX retaliation claim, alleging he was “constructively discharged” for internally reporting concerns about a potential securities law violation. Though he was not terminated, he alleged the employer took materially adverse actions against him that he claimed eventually forced him to resign, such as excluding him from calls, threatening to reduce his salary and demote him, reassigning him to other tasks, and threatening to fire him. The court held the evidence did not allow the employee to meet his burden of establishing that he suffered a materially adverse action — a required element of a SOX retaliation claim. The court further held that, even if the employee had met his burden, the employer would have met its burden of showing it would have taken the same actions against the employee even in the absence of any protected whistleblowing activity.

D.C. Circuit Court of Appeals Denies In-House Attorney’s Appeal of Denial of Whistleblower Award

On August 16, 2024, in Doe v. S.E.C., No. 23-1044, the D.C. Circuit Court of Appeals denied an in-house attorney’s petition for review of the Securities and Exchange Commission’s (SEC) denial of a whistleblower award for reporting his client’s possible securities law violation. The whistleblower rules under the Dodd-Frank Act require that, to be eligible for an award, a whistleblower must “voluntarily provide[] original information to the [SEC].” 15 U.S.C. § 78u6(a)(1). “Original information” is defined as information “derived from the independent knowledge or analysis of a whistleblower.” Rule 21F-4 of the Securities Exchange Act states that “original information” does not include information obtained “in connection with the legal representation of a client on whose behalf” the whistleblower is providing services. 17 C.F.R. § 240.21F-4(b)(4)(ii). The Rule, however, carves out an exception where the disclosure “would otherwise be permitted” by the SEC’s attorney-conduct regulations or applicable state attorney ethics rules. Id.

In Doe, through his legal work for the company, the in-house attorney discovered an individual was misappropriating investors’ funds for his personal use. The attorney reported this information to the SEC, which resulted in an enforcement action against the individual as well as the company and its owner. In asserting the right to a whistleblower award, the attorney argued that the applicable Florida ethics rules permitted his disclosure because he “reasonably believe[d the disclosure was] necessary to … prevent [his] client from committing a crime” and that his disclosure would “serve [his] client’s interest.” The SEC disagreed, explaining in part that, while the disclosure might have prevented further misappropriation by the individual, such was in the interest of investors in the company, not the attorney’s client, the company. The D.C. Circuit agreed with the SEC, adding that, while the attorney’s disclosure could have benefitted the company, it was not necessary to serve his client’s interests. The court also emphasized that, at the time of his disclosure, the attorney suspected the company was implicated in the wrongdoing. The attorney was therefore reporting on his own client at the time, contradicting his alleged reasonable belief that he was acting in his client’s best interest.

Fifth Circuit Rules Whistleblowers Not Entitled to Money Collected Through Bankruptcy Proceeding

On August 30, 2024, in Barr v. S.E.C., No. 23-60216, the Fifth Circuit Court of Appeals denied two whistleblowers’ (“petitioners”) petition for review of their awards, which they claimed were too low. The awards related to the SEC’s enforcement action against Life Partners Holdings, Inc., in which a district court ordered Life Partners to pay $38.7 million in disgorgement and penalties. As a result of providing information to and assisting the SEC, the petitioners respectively received awards of 5% and 20% of the amount “collected or to be collected” from Life Partners. The SEC, however, was only able to collect a relatively small portion of the ordered amount before Life Partners filed for bankruptcy, resulting in only $26,000 in total awards to the petitioners. Through the bankruptcy action, over $1 billion was collected and paid to investors as part of the distribution plan. The petitioners argued that their award percentages should be based on that additional amount obtained in bankruptcy, and they asked the Fifth Circuit to review the SEC’s decision. (Certain of these underlying facts were not detailed in the Fifth Circuit’s opinion and can instead be found here, in a summary by Bloomberg Law.)

The petitioners argued the underlying bankruptcy case was a “covered action” and/or “related action” under the Dodd-Frank whistleblower rules. Under the rules, a covered action is “any judicial or administration action brought by the [SEC] under the securities laws that results in monetary sanctions exceeding $1,000,000.” 15 U.S.C. § 78u-6(a)(1). The petitioners argued the SEC’s motion to appoint a Chapter 11 trustee constituted bringing a covered or related action. The Fifth Circuit disagreed on several grounds, including that bankruptcy cases are commenced by filing a petition, not a motion to appoint a trustee. The court also rejected the petitioners’ argument that “proceeding” was synonymous with “action,” and thus any proceeding in a bankruptcy case was not an “action” under § 78u-6. For these and other reasons, the court denied the petitions for review.

SEC Continues Aggressive Enforcement of Rule 21F-17

On September 4, 2024, the SEC announced a settlement with broker-dealer Nationwide Planning Associates, Inc. and two affiliated investment advisers, NPA Asset Management, LLC and Blue Point Strategic Wealth Management, LLC, for alleged violations of Securities Exchange Act Rule 21F-17. Rule 21F-17 prohibits “any action to impede an individual from communicating directly with the [SEC] about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.” The SEC alleged the firms required clients to sign confidentiality agreements that prohibited them from reporting potential securities law violations to the SEC or state regulators. The registrants agreed to pay a combined civil penalty of $240,000.

Less than a week later, on September 9, 2024, the SEC announced settlements with seven public companies for similar violations of Rule 21F-17. According to the SEC, these companies’ employment, separation, and other agreements restricted employees’ abilities to communicate with the SEC about potential securities law violations, including by prohibiting the employees from collecting whistleblower awards for reporting such violations. The seven companies agreed to pay more than $3 million in combined civil penalties.

Also, on September 26, 2024, the SEC announced a settlement with GQG Partners LLC (“GQG”), a registered investment adviser, for violating Rule 21F-17. The SEC asserted GQG entered into non-disclosure agreements with 12 potential employees that prohibited them from disclosing that they had confidential information about GQG. Although the NDAs permitted the candidates to respond to requests for information from the SEC, the NDAs required the candidates to notify GQG of such requests. The NDAs also prohibited the candidates from responding to requests arising from a candidate’s voluntary disclosure. GQG agreed to pay a civil penalty of $500,000.

Penalties for Rule 21F-17 violations can range greatly and depend on the context. Although the SEC rules contain no express guidelines concerning penalty amounts, two significant factors seem to be the level of restriction imposed by the violative agreements and the number of individuals potentially impacted. For example, in a recent settlement imposing a penalty of $19,500, the SEC referenced only two allegedly violative agreements. In a settlement imposing a penalty of $1.39 million, on the other hand, the SEC referenced more than 150 allegedly violative agreements. Remedial actions, including proactive removal of the offending language and outreach to previously affected individuals, also appears to reduce the severity of a sanction.

For more information on Rule 21F-17 violations and settlements, please see our recently published client alert here.

After Slow First Half of 2024, SEC Awards Over $200 Million to Whistleblowers in Q3

On July 17, 2024, the SEC announced an award of more than $37 million to a whistleblower who provided original information that led to a successful enforcement action and saved the SEC time and resources. The whistleblower contested the amount of the award, but the SEC rejected this challenge and affirmed the award.

On July 26, 2024, the SEC announced another $37 million award, this time to a whistleblower who provided significant information and sworn testimony that aided the SEC’s investigation and significantly contributed to a successful enforcement action. The whistleblower persistently reported the misconduct internally, which led to an internal investigation and self-report to the SEC. The SEC denied awards to other claimants whose information did not cause the opening of the investigation or significantly contribute to it.

On August 23, 2024, the SEC announced awards of more than $98 million to two whistleblowers whose information and assistance led to a successful SEC enforcement action and a related action brought by another agency. The whistleblower whose tip prompted the opening of the investigation and provided assistance during the investigation received more than $82 million. The other whistleblower received more than $16 million. This whistleblower contested the award, based largely on the relative importance of the information provided. The SEC rejected these arguments and affirmed the awards.

On August 26, 2024, the SEC announced awards of more than $24 million to two whistleblowers whose information and assistance led to a successful SEC enforcement action and a related action brought by another agency. One of the whistleblowers was awarded approximately $4 million, which reflected the limited information provided and the fact that it was unreasonably delayed. The other whistleblower was awarded more than $20 million, reflecting that their information played a more significant role in the SEC’s investigation.

The SEC also awarded other smaller awards — between $500,000 and $2 million — to several additional whistleblowers, bringing the total amount awarded in Q3 to over $200 million. The orders granting these awards can be found here, here, here, and here.