Uma análise dos recentes desenvolvimentos em matéria de denúncias
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:
- Eleventh Circuit Adopts “Totality of the Circumstances” Test for Showing Protected Activity Under SOX and Denies Whistleblower Petition for Review
- District Court Issues Mixed SOX Motion to Dismiss Decision Concerning Protected Activity Concerning Allegations Regarding Violations of SEC Internal Control Rules and Shareholder Fraud
- District Court Rejects Post-Trial Motions to Overturn Jury Verdict for Internal Auditor Turned SOX Whistleblower, Citing SEC Internal Controls Rules and Shareholder Fraud
- SEC Continues 2023 Streak of Large Rewards with over $130 Million Awarded to Nine Whistleblowers in Q3
- Eleventh Circuit Affirms SEC’s Denial of Whistleblower Award
- SEC Fines Three Entities for Violating Whistleblower Protection Rules
Eleventh Circuit Adopts “Totality of the Circumstances” Test for Showing Protected Activity Under SOX and Denies Whistleblower Petition for Review
In Ronnie v. Office Depot, LLC, — F.4th —-, 2023 WL 6210623 (11th Cir. 2023), the Eleventh Circuit denied a whistleblower’s appeal of an administrative finding that he did not engage in the protected activity required to maintain a SOX retaliation claim. The petitioner, Ronnie, reported a significant accounting discrepancy to his superiors, and he was tasked with finding the cause of the error. Later, having failed to find the error’s cause, he was terminated. To show “protected activity” under SOX, Ronnie had to show that a reasonable person in his position would believe that the retaliatory conduct was the result of reporting fraud under Section 1514A of SOX, a mixed question of subjective and objective reasonableness. The Eleventh Circuit adopted the totality of the circumstances test that asks whether (1) the employer acted with the requisite scienter, (2) the misstatement was material, (3) the misstatement was relied upon, and (4) it caused economic loss. While Ronnie alleged fraud in the form of manipulated sales data, the Eleventh Circuit found that she failed to establish scienter or materiality concerning the accounting error. Ronnie’s allegations, that the error was important and management had tried to cover it up, were insufficient.
District Court Issues Mixed SOX Motion to Dismiss Decision Concerning Protected Activity Concerning Allegations Regarding Violations of SEC Internal Control Rules and Shareholder Fraud
In Brinker v. Axos Bank, No. 22-cv-386-MMA (DDL), 2023 WL 4535529 (S.D. Cal. July 13, 2023), the district court granted in part and denied in part a motion to dismiss SOX retaliation claims. Plaintiff Brinker, a former employee of Axos Bank (the “Bank”), alleged he was terminated after reporting a “laundry list” of compliance, governance, and risk-management issues to management. The issue for the court was whether Brinker had identified violations of SOX § 1514A that would constitute protected activity. The court dismissed claims based on reporting violations of the SEC’s internal controls rules, including 17 C.F.R. §240.13a-15(a), because Brinker had not sufficiently pleaded she believed the rules had been violated. The court also dismissed the claim based on reporting a violation of the Foreign Corrupt Practices Act (FCPA) and SOX § 404. The court held that the FCPA is not an SEC “rule or regulation” under § 1514A. With respect to SOX § 404, a provision entitled “Management assessment of internal controls,” the court rejected Brinker’s argument that § 404 is a federal law relating to shareholder fraud. The court, however, denied defendant’s motion to dismiss based on reported violations of Section 10(b) of the Securities Act of 1934, Section 17(a) of the Securities Act of 1933, and Rule 10b-5, which pertain to shareholder fraud. Recounting the many allegations of financial wrongdoing, the court ruled it was plausible that Brinker reasonably believed the Bank’s financial statements could be materially misleading to shareholders.
District Court Rejects Post-Trial Motions to Overturn Jury Verdict for Internal Auditor Turned SOX Whistleblower, Citing SEC Internal Controls Rules and Shareholder Fraud
In 2022, a jury found in favor of Erhart, a former internal auditor at BofI Federal Bank, on his claims of unlawful retaliation under SOX and awarded him $1.5 million in damages and $2.4 million in attorneys’ fees. Post-trial, BofI sought judgment as a matter of law and, in the alternative, a new trial, both of which were denied. Erhart v. BofI Federal Bank, No. 15-cv-02287-BAS-NLS, 2023 WL 6377971 (S.D. Cal. Sept. 28, 2023). Among the issues before the court was whether Erhart showed that he reasonably believed BofI’s conduct violated one of the enumerated laws in Section 1514A of SOX. The jury found that Erhart reasonably believed BofI’s high deposit concentration risk and risky loans to criminals and/or politically exposed individuals constituted shareholder fraud and a violation of the SEC’s internal controls rule, 17 C.F.R. §240.13a-15(a). The Court rejected the motion to overturn the jury verdict, noting that Erhart is not a lawyer and that courts must not subject employees like Erhart to the same standard as attorneys; otherwise, “[SOX’s] anti-retaliation provision will be gutted.” Because the jury had sufficient evidence to find that Erhart satisfied the reasonable belief standard, the Court denied BofI’s motion.
SEC Continues 2023 Streak of Large Rewards with over $130 Million Awarded to Nine Whistleblowers in Q3
On July 12, 2023, the SEC announced an award of more than $9 million to a whistleblower who provided significant and detailed information that alerted the SEC to the underlying misconduct and prompted the opening of the investigation. The whistleblower further provided assistance throughout the investigation and repeatedly raised concerns internally. As a result of the whistleblower’s efforts, millions of dollars were returned to investors.
On August 4, 2023, the SEC announced awards of more than $104 million to seven whistleblowers. Several whistleblowers provided information that prompted the opening of the investigation, and others provided information that led to the successful SEC enforcement action and two related actions. The SEC also recognized that certain whistleblowers alleged retaliation and other hardships due to their reporting efforts. Notably, the SEC denied awards to certain other claimants. For example, the information from one such claimant, an attorney for the company’s subsidiary, was deemed potentially privileged by an enforcement filter team and was thus redacted or withheld from investigative staff.
On August 25, 2023, the SEC announced an award of more than $18 million to a whistleblower who voluntarily provided original information that led to the SEC’s enforcement action. The SEC denied an award to another claimant whose information did not cause the SEC to open the investigation and did not significantly contribute to the success of the action.
Eleventh Circuit Affirms SEC’s Denial of Whistleblower Award
In Granzoti v. SEC, No. 22-13332, 2023 WL 5193503 (11th Cir. 2023), the Eleventh Circuit affirmed the SEC’s denial of a whistleblower award. In 2013, Granzoti submitted to the SEC a tip that TelexFree, Inc. was engaged in a fraudulent pyramid scheme. The SEC opened an investigation and later pursued a successful action against TelexFree. Granzioti applied for a whistleblower award, but the SEC denied him, stating that his information “was never provided to or used by staff handling the Covered Action or underlying investigation.” Accordingly, Granzioti’s tip did not qualify for an award under 17 C.F.R. § 240.21F-4(c)(1), which requires actual use of a claimant’s information, not “potential or theoretical use.” The Eleventh Circuit found that the SEC properly applied this rule because Granzioti’s information did not “cause” the SEC to investigate, and the enforcement action was not based on conduct that was the subject of his information. The Court rejected Granzioti’s argument that the rule is an “objective test to determine whether the character of the information was sufficient” for the SEC to use, irrespective of whether the SEC used it. Citing declarations from SEC staff, the Court also rejected Granzioti’s argument that the SEC lacked substantial evidence to deny the award.
SEC Fines Three Entities for Violating Whistleblower Protection Rules
On September 8, 2023, the SEC announced settled charges against Monolith Resources LLC, a private energy and technology company, for using employee separation agreements that violated the SEC’s whistleblower protection rules. Specifically, Rule 21F-17 prohibits anyone from taking “any action to impede an individual from communicating with the [SEC] staff about a possible securities law violation.” The SEC found that Monolith violated this rule, because from February 2020 until March 2023, Monolith used separation agreements that required certain employees leaving the company to waive their rights to monetary whistleblower awards in connection with filing claims with or participating in investigations by government agencies. Monolith agreed to pay a civil penalty of $225,000.
On September 19, 2023, the SEC announced settled charges against CBRE, Inc., a commercial real estate services and investment firm, for using separation agreements that violated Rule 21F-17. Between 2011 and 2022, the agreements required employees receiving severance to affirm they had not filed complaints or charges against CBRE with any court or agency. CBRE agreed to pay a civil penalty of $375,000, which amount was influenced by CBRE’s cooperation. CBRE’s assistance and remedial actions also are detailed in the SEC’s order, including revising the separation agreements and global policy documents to be in compliance with Rule 21F-17; training compliance team members on Rule 21F-17; launching a mandatory “Standards of Business Conduct” re-certification process; and communicating with the more-than-800 employees who had signed the violative separation agreements, and advising them of the protections afforded them by Rule 21F-17.
On September 29, 2023, the SEC announced settled charges against registered investment adviser D. E. Shaw & Co., L.P. (“DESCO”) for violating Rule 21F-17. From 2011 through 2019, DESCO required employees to sign employment agreements prohibiting the disclosure of confidential information to anyone outside DESCO unless authorized by DESCO, without any exception for voluntary communications with the SEC concerning possible securities law violations. Until 2023, DESCO also required certain employees receiving severance to sign separation agreements affirming they had not filed any complaints with any government agency or official. In 2017, after certain SEC settlements concerning whistleblower protection, DESCO informed employees of their ability to communicate with regulators regarding possible violations of the law without notice to DESCO. And while DESCO revised its internal policies and employee handbook in accordance with this announcement, DESCO did not add whistleblower carve-out language to its employment agreements until 2019 or to its separation agreements until 2023. The SEC recognized DESCO’s remedial efforts, including revising its separation agreement and sending letters to former employees who signed violative agreements to inform them of their protections under Rule 21F-17. To settle the SEC’s charges, DESCO agreed to pay a civil penalty of $10,000,000.
