Review of Recent Whistleblower Developments

13 April 2022 Legal News: Whistleblower Developments Publication
Author(s): Lisa M. Noller Pamela L. Johnston Bryan B. House Thomas P. Hansfield

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:

SEC’s Proposed Rule Amendments Further Incentivize Reporting

On February 10, 2022, the SEC proposed two amendments to the whistleblower program rules. The first amendment would allow the SEC to make awards to whistleblowers in connection with related actions that might otherwise be covered by an alternative whistleblower program, even where that alternative program has the more direct or relevant connection to the related action. The second amendment would affirm the SEC’s authority to consider the dollar amount of a potential award (as added to the rules in 2020) but would limit that discretion to increasing the amount; the SEC would not be able to decrease it. Per SEC Chair Gary Gensler, the amendments “would help ensure that whistleblowers are both incentivized and appropriately rewarded” for their reporting efforts.

D.C. Circuit Court Finds SEC Rule 21F-4(c) “Genuinely Ambiguous”

On March 25, 2022, the D.C. Circuit Court of Appeals issued an opinion denying the appeal of two claimants who were denied whistleblower awards. The subject SEC enforcement action was against Novartis for violations of the Foreign Corrupt Practices Act. The SEC’s investigation spanned from 2012 to 2016, during which time these two hopeful claimants, both of whom were employees of Novartis’ competitors, argued they were entitled to an award for informing the SEC and the news media of what they viewed as illegal behavior of their employers. Media outlets subsequently ran stories about the allegations which, argued the claimants, caused Novartis to review its practices and settle with the SEC. The SEC denied their claims because their conduct did not fall under any of the three fact patterns described in Rule 21F-4(c):

  1. Their information did not prompt the opening of the SEC investigation because it related to Novartis’ competitors, not Novartis;

     

  2. Their information did not relate to conduct already under investigation and did not significantly contribute to the success of the action, because the connection between their information and the charges against Novartis were “tenuous at best;” and

     

  3. Their information did not spark an internal investigation at Novartis because they gave the information about the competitors to media outlets, not to Novartis itself as required by the Rule.

The claimants unsuccessfully argued to the SEC that the three fact patterns under the Rule are not the exclusive circumstances by which a whistleblower could merit an award. The SEC responded that expanding the Rule beyond the three fact patterns would introduce unnecessary speculation and complexity into the award analysis.

The D.C. Circuit Court deferred to the SEC’s ruling, finding the Rule was ambiguous as written, even absent any proposed expansion. On the one hand, the Court was unconvinced that there are, conclusively, no alternative routes to obtaining a whistleblower award other than the prescribed fact patterns. On the other hand, the Court was equally unconvinced that the three fact patterns are the exclusive routes to an award. Ultimately, the Court concluded that Rule 21F-4(c) is genuinely ambiguous and therefore deferred to the SEC’s finding.

Doe v. SEC, Nos. 21-1097 & 21-1098, 2022 WL 880243 (D.C. Cir. Mar. 25, 2022).

Bipartisan Bill Would Help Whistleblowers Recover More Quickly and Encourage Reporting

On March 31, 2022, Senators Chuck Grassley (R-Iowa) and Elizabeth Warren (D-Mass.) introduced a bipartisan bill entitled the SEC Whistleblower Reform Act of 2022. The bill, if passed, would provide three key benefits to whistleblowers: (1) more timely processing of claims by the SEC, (2) extension of anti-retaliation protections to whistleblowers who report violations internally to supervisors, and (3) prohibition of predispute arbitration agreements that require a whistleblower to waive his or her rights. With specific respect to the first benefit — timely processing of claims — the bill would require the SEC to issue awards no later than one year after the deadline to file a claim or one year after the final resolution of all litigation concerning the action, whichever is later.

SEC Awards over $75 Million to Whistleblowers in Q1 2022

On January 6, 2022, the SEC announced an award of more than $13 million to a whistleblower who provided information and assistance that led the SEC to open an investigation and who contributed to the resulting enforcement action. The SEC considered the whistleblower’s prompt alert of ongoing fraud.

On January 10, 2022 the SEC announced two awards totaling more than $4 million to whistleblowers who provided information and assistance in separate covered actions.

  • In the first order, the SEC awarded approximately $2.6 million to one whistleblower who first reported internally and then to the SEC. The whistleblower provided new information during an existing investigation regarding hard-to-detect overseas misconduct.

     

  • In the second order, the SEC awarded about $1.5 million to joint whistleblowers who provided substantial assistance throughout an investigation that led to the success of the covered action, including providing information about key witnesses.

On January 21, 2022, the SEC announced three awards totaling more than $40 million to four whistleblowers who provided information and assistance in three separate covered actions.

  • In the first order, the SEC awarded approximately $37 million to two whistleblowers who provided key evidence and helped the SEC to understand the evidence, which contributed to the success of the covered action.

     

  • In the second order, the SEC awarded approximately $1.8 million to a whistleblower who provided important information that prompted the SEC to open an investigation. The whistleblower also provided voluntary interviews and additional documents. The SEC noted that the whistleblower “suffered hardships” as a result of this reporting.

     

  • In the third order, the SEC awarded approximately $1.5 million to a whistleblower who provided information that helped the SEC form their investigative strategy and understand the issues.

On March 8, 2022, the SEC announced an award of more than $3.5 million to a whistleblower who provided critical information that significantly contributed to the success of two SEC enforcement actions. The whistleblower provided new information that saved the SEC time and resources and helped advance settlement discussions.

On March 11, 2022 the SEC announced an award of approximately $14 million to a whistleblower who was an outsider to the company involved in the covered action. Using public and non-public information, the whistleblower had published an online report exposing an ongoing fraud and shared the same information with the SEC. Despite that the whistleblower did not submit the required Form TCR until four years after publishing the report, the SEC waived that requirement in light of the “unusual facts and circumstances,” including that the whistleblower emailed a copy of the report to an enforcement attorney just three days after posting it online. A second claimant was denied an award largely because he did not provide information directly to the SEC. Although the second claimant was a principal author of the same report published by the first claimant described above, he/she did not share the report with the SEC like the first claimant did.

On March 18, 2022, the SEC announced three awards totaling about $3 million to whistleblowers who provided information and assistance in three separate covered actions.

  • In the first order, the SEC awarded approximately $1.5 million to a whistleblower who provided new information that prompted the SEC to commence an examination and then open an investigation, and who then assisted in that investigation.

     

  • In the second order, the SEC awarded more than $1 million to a whistleblower who provided information that prompted the SEC to open an investigation, reported their concerns internally, and provided continuing assistance to the SEC such as participating in multiple interviews.

     

  • In the third order, the SEC awarded more than $400,000 to a whistleblower whose tip led the SEC to open an investigation and who provided substantial cooperation throughout. The whistleblower also reported internally, causing the misconduct to cease.
On March 25, 2022, the SEC announced an award of about $1.25 million to a whistleblower who provided information that prompted the SEC to open an investigation that resulted in a successful covered action. However, because the whistleblower unreasonably delayed in reporting to the SEC — about one-and-a-half years after reporting internally and about three years after first having concerns — the SEC did not apply the presumption of a statutory maximum award of 30%.

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