Whistleblower Claims Under SOX: Recent Developments
In 2002, Congress passed the Sarbanes-Oxley Act (“SOX”), which extends whistleblower protections to certain individuals who report conduct they reasonably believe constitutes a violation of federal mail, wire or bank fraud laws; any rule or regulation of the Securities and Exchange Commission (“SEC”); or any provision of federal law relating to shareholder fraud. In 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank prohibits employers from retaliating against employees for disclosing information as required or protected under SOX; the Securities Exchange Act of 1934; and any other law, rule or regulation subject to the jurisdiction of the SEC. Dodd-Frank also required the SEC to implement a new whistleblower program — the so-called bounty program — that pays to whistleblowers cash awards of between 10% and 30% of amounts the SEC recovers based on the whistleblower’s report.
As described in more detail below, to date in 2016, the SEC has awarded nine individuals a total of more than $28 million through its bounty program, and its Office of the Whistleblower has published its annual report for fiscal year 2015, which reveals that whistleblower tips continue to rise, as they have each year since the commencement of the program. In addition, a number of notable recent federal court decisions, including one issued by a circuit court, have provided helpful guidance regarding the standard for establishing causation under SOX.
SEC Issues More Bounty Awards in Early 2016
Thus far this year, the SEC has issued several bounty awards in an aggregate amount exceeding $28 million. On January 15, 2016, the SEC announced that it had awarded more than $700,000 to an unidentified whistleblower — an “industry expert” — who provided “detailed analysis” to the agency. Andrew Ceresney, director of the SEC’s Enforcement Division, explained that “[t]he voluntary submission of high-quality analysis by industry experts can be every bit as valuable as firsthand knowledge of wrongdoing by company insiders.”
Less than two months later, on March 8, 2016, the SEC awarded three whistleblowers a bounty of almost $2 million. The bulk of the award — $1.8 million — was issued to an individual for providing original information that prompted the SEC to open an investigation as well as providing valuable information to the agency throughout the investigative process. The other two whistleblowers were awarded more than $65,000 each for providing information after the SEC’s investigation had commenced. Sean McKessy, chief of the SEC’s Office of the Whistleblower, stated in an SEC press release, “We’re seeing a significant uptick in whistleblower tips over prior years, and we believe that’s attributable to increased public awareness of our program and the tens of millions of dollars we’ve paid to whistleblowers for information that helped us bring successful enforcement actions.”
In May 2016, the SEC made three announcements that it would make bounty awards totaling nearly $10 million to four whistleblowers. On May 13, 2016, the SEC awarded more than $3.5 million to a company employee whose tip bolstered an ongoing investigation with additional evidence that strengthened the case. “Whistleblowers can receive an award not only when their tip initiates an investigation, but also when they provide new information or documentation that advances an existing inquiry,” said Andrew Ceresney. On May 17, 2016, the SEC stated that it would award between $5 million and $6 million to a former company insider whose detailed tip led the agency to uncover securities violations that would have been nearly impossible for it to detect but for the whistleblower’s information. And on May 20, the SEC said it would jointly award more than $450,000 to two individuals for a tip that led the agency to open a corporate accounting investigation and for their assistance once the investigation was underway. “The recent flurry of awards reflects the high-quality nature of the tips the SEC is receiving as public awareness of the whistleblower program grows,” said Sean McKessy.
Most recently, on June 9, 2016, the SEC announced a whistleblower award of more than $17 million to a former company employee whose detailed tip substantially advanced the agency’s investigation and ultimate enforcement action. The award is the second-largest issued by the SEC since its whistleblower program began nearly five years ago. “Company insiders are uniquely positioned to protect investors and blow the whistle on a company’s wrongdoing by providing key information to the SEC so we can investigate the full extent of the violations,” said Andrew Ceresney.
The SEC’s whistleblower program has now awarded more than $85 million to 32 whistleblowers since the program’s inception in 2011.
Important Takeaways From the SEC’s 2015 Annual Whistleblower Report
On November 16, 2015, the SEC’s Office of the Whistleblower released its annual report for fiscal year 2015, reporting that it received nearly 4,000 whistleblower tips in the year ended September 30, 2015, a 30% increase from fiscal year 2012. The report states that for each full year that the SEC’s whistleblower program has been in operation, the SEC has received an increasing number of whistleblower tips.
The SEC received whistleblower tips and complaints from all 50 states, as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands. In the U.S., the largest number of whistleblower complaints and tips were from California (646), New York (261), Florida (220) and Texas (220). The SEC also received tips from individuals in 61 foreign countries, the majority of which originated in the U.K. (72).
In fiscal year 2015, the SEC awarded more than $37 million to eight whistleblowers, including one award for the maximum payment of 30% of amounts collected in connection with the SEC’s first anti-retaliation case. That whistleblower received more than $600,000. The SEC reported that in determining the award percentage, it considered the “unique hardships” the whistleblower suffered as a result of reporting, including being removed from his or her position, tasked with investigating the very conduct the whistleblower reported to the SEC and otherwise marginalized at the company.
The annual report provided interesting facts about the program’s whistleblower award recipients, including the following:
- Almost half of award recipients were current or former employees of the company on which they reported information of wrongdoing. Of those, approximately 80% raised their concerns internally to their supervisors or compliance personnel, or otherwise understood that the company knew of the violations before they reported the violations to the SEC. The remaining award recipients were investors who were victims of the alleged fraud, professionals working in a related industry or individuals who had a personal relationship with the alleged wrongdoer.
- Approximately 20% of award recipients submitted their tips to the SEC anonymously through counsel.
- Roughly half of the whistleblowers who have received awards to date “caused [the SEC] to open an investigation.” The other half received an award “because their original information significantly contributed to an existing investigation.”
The SEC also reported that one of its areas of focus in 2015 was whether employers were using confidentiality, severance or other types of agreements “to interfere with an individual’s ability to report potential wrongdoing to the SEC.” Exchange Act Rule 21F-17(a) provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.” On April 1, 2015, the commission brought its first enforcement action regarding this issue. When KBR Inc. interviewed employees in connection with internal investigations, it required them to sign an agreement prohibiting them from discussing the substance of the interview without prior approval by KBR’s legal department. The agreement indicated that an unauthorized disclosure could lead to disciplinary action, including termination of employment. The SEC found that this confidentiality agreement “impeded whistleblowers,” in violation of Rule 21F-17(a). According to the report, the Office of the Whistleblower will continue to focus on confidentiality, severance and other agreements in 2016.
California District Court Confirms Internal Whistleblowers’ Protection Under Dodd-Frank
On October 23, 2015, the United States District Court for the Northern District of California ruled in Wadler v. Bio-Rad Labs., Inc. that the anti-retaliation provisions of Dodd-Frank apply to whistleblowers who report information to the employer without the requirement of also reporting to the SEC. The court found that a conflict in the language of the statute rendered it ambiguous: While the statute defines “whistleblower” to mean only one who reports violations to the SEC, the substantive anti-retaliation provision applies to all whistleblowers who provide information as required or protected under SOX, which extends protection to internal whistleblowers even if they do not report alleged wrongdoing to the SEC. Based on this ambiguity, the court afforded deference to the interpretation of the SEC’s Rule 21F-2(b)(1), which provides protection under Dodd-Frank for individuals who provide information internally.
By the same decision, the district court held that directors may be held individually liable for retaliating against whistleblowers under both SOX and Dodd-Frank. Plaintiff Sanford Wadler, the former general counsel of defendant Bio-Rad Laboratories Inc., filed suit against the company and its individual board members after his employment was terminated by the board, asserting a variety of claims, including retaliation, under SOX and Dodd-Frank. The district court ruled that (a) although the language of SOX is ambiguous, the legislative intent and context of SOX suggest that board members may be held individually liable as agents, and (b) Congress intended that Dodd-Frank provide for such liability, and therefore board members may be held individually liable for retaliation against whistleblowers.
Southern District of New York Court Dismisses SOX and Dodd-Frank Claims
The United States District Court for the Southern District of New York recently dismissed a plaintiff’s SOX and Dodd-Frank whistleblower claims on the grounds that the plaintiff did not offer any evidence establishing that a protected complaint she made concerning the defendant’s SEC proxy statements contributed to her termination. In Yang v. Navigators Group, Inc., plaintiff Jennifer Yang was employed with defendant Navigators Group Inc. as its chief risk officer. She alleged that, in fulfilling her responsibilities, she discovered a variety of risk assessment issues and claimed that the company’s SEC filings inaccurately reflected its risk management. Yang alleged that shortly after she communicated her concerns to Navigators’ leadership, the company terminated her employment, in violation of SOX and Dodd-Frank. Although Yang was terminated only two weeks after a protected complaint, the court held that “[t]emporal proximity does not … compel a finding of causation, particularly when there is a legitimate intervening basis for the adverse action.” The court concluded that a “purportedly terrible presentation” by Yang, which “occurred in the intervening time between her complaint and her termination,” weakened any inference of retaliation that could be drawn from Yang’s complaint.
Third Circuit Rejects SOX Whistleblower Claims, Finding Plaintiff Could Not Show Causation
The Third Circuit issued an important decision concerning causation under SOX in Wiest v. Tyco Electronics Corp. The plaintiff, Jeffrey Wiest, a 30-year employee who worked in Tyco’s accounts payable department, claimed that he was fired because he raised concerns about requests to process certain expenses submitted in connection with company events, including a $350,000 event at a Bahamas resort with mermaid greeters and costumed pirates and wenches. Tyco asserted that more than eight months after Wiest engaged in what he contended was protected activity, a professional within Tyco’s human resources department, who had no involvement with or knowledge of Wiest’s alleged protected activity, conducted an investigation after she received multiple complaints that Wiest made inappropriate sexual comments to several Tyco employees and had engaged in improper sexual relationships with subordinates. Tyco contended that the findings from this investigation led to the termination decision and that the decision was unrelated to the accounting issues Wiest had raised.
The Third Circuit affirmed the district court’s grant of summary judgment in favor of the company, concluding that the plaintiff did not present evidence to establish a causal connection between his protected activity and the termination decision. The court noted that SOX requires a plaintiff to provide evidence showing, among other things, that his protected activity was a “contributing factor in the adverse action alleged in the complaint.” The court concluded that a reasonable jury could not find that the alleged protected activity was a contributing factor in the termination decision because (a) any inference of causation due to temporal proximity was “minimal” because of the 10-month gap in time, and (b) the record “overwhelmingly demonstrate[d]” legitimate intervening events between the protected activity and the termination decision. Moreover, the court noted that the company praised the plaintiff before and after his protected activity, the human resources employee who investigated the sexual harassment complaints against the plaintiff was unaware of his alleged protected activity, and the plaintiff’s colleagues who engaged in similar activity were not subjected to negative treatment.
In addition, the court determined that Tyco presented ample evidence showing that it would have terminated the plaintiff’s employment even in the absence of protected activity. Importantly, the court stated that “it is not our role to second-guess a human resources decision that followed a thorough investigation,” noting the absence of any evidence casting doubt on the integrity of the investigation.
Implications for Employers
The Supreme Court may soon be asked to consider the question of whether whistleblowers must report wrongdoing to the SEC in order to be protected under Dodd-Frank. In the meantime, employers should be aware that whistleblowers who report concerns only to their employers may be covered by the anti-retaliation provisions of Dodd-Frank within the Second Circuit and other jurisdictions. Furthermore, board members and other decision-makers must consider that they may be held individually liable for any actions that could be perceived as retaliatory.
The statistics set out in the SEC’s 2015 annual report confirm that whistleblower tips continue to escalate and that the vast majority of tipsters who are current or former employees of the target company first report their concerns internally to supervisors or compliance personnel or assume that the company has knowledge of violations. In light of these facts, employers must maintain strong compliance practices with the goal of preventing misconduct. Training should be provided to those responsible for receiving reports about improper conduct, and care should be taken to prevent retaliation against employees who make a report. And when employers learn of actual misconduct, appropriate disciplinary and remedial action must be taken.
In addition, the statistics in the 2015 annual report, together with the Yang and Wiest cases, underscore the value of documenting the reasons for termination and conducting thorough investigations when employees raise concerns relating to potential violations of securities laws.
Finally, employers should review their employment agreements, confidentiality and nondisclosure agreements, handbooks, and separation agreements to ensure that the provisions in these documents do not run afoul of the SEC’s dictates.