Dodd-Frank whistleblower features: hot in 2013 and likely hotter in 2014
February 2014 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
Though it’s just a few years old, Dodd-Frank’s whistleblower provision already has been the subject of high-stakes, headline-grabbing litigation and major bounty payouts. This provision (Section 922) affords whistleblowers complaining of violations of securities laws exceedingly generous protections against retaliation, and also offers tipsters potentially enormous financial bounties. Federal courts are now defining the contours of the anti-retaliation provision – wrestling with issues ranging from whether it applies overseas to whether an employee needs to complain directly to the SEC to receive protection – and the SEC has received a substantial volume of tips from around the globe and recently issued a massive award.
Bounty provision. Under Section 922, whistleblowers who voluntarily provide original information to the SEC that leads to a successful enforcement action are eligible to receive an award of not less than 10 percent, but not more than 30 percent, if the monetary sanctions collected exceed $1m. In 2013, the SEC issued several bounty awards, including a record-breaking $14m, in a year when it received more than 3000 tips (a nearly 10 percent increase from the prior year) from all 50 states and 55 countries. Complaints primarily centred on corporate disclosures and financials, offering fraud and manipulation.
While the SEC purports to consider whether whistleblowers reported internally before heading to the government in fashioning awards – an apparent response to the criticism that the bounty program encourages employees to circumvent internal compliance channels – the SEC does not reveal whether whistleblowers have complained internally when issuing awards. Employers thus remain concerned that employees will not give their compliance programs a chance to function, and thereby cause delays in investigations and effectively allow fraudulent schemes to mature. Now more than ever, employers have a very real need to step up their compliance programs and implement measures that will heighten the likelihood that employees will raise their complaints promptly through the appropriate corporate channels.
It is quite likely that the $14m award will cause a spike in the number of whistleblower tips to the SEC in 2014. Tips beget investigations and litigation. Indeed, it is likely the SEC will continue to pursue intense investigations and enforcement actions based on information gleaned from whistleblower tips.
Anti-retaliation provision. Section 922 also prohibits retaliation against employees for: (i) providing protected information to the SEC (i.e., where the employee reasonably believes there has been a violation of securities laws); (ii) assisting in any SEC investigation or judicial or administrative action based upon or related to such information; or (iii) making required or protected disclosures under the Securities Exchange Act or Sarbanes-Oxley Act (SOX). Section 922 affords employees the right to sue in federal court and obtain a broad range of relief, including reinstatement, double backpay and litigation costs, expert witness fees and reasonable attorney’s fees.
In 2013, we saw the anti-retaliation provision take shape with a flurry of cases. To begin, the very definition of a ‘whistleblower’ has been a source of debate among courts. The majority of federal courts that have entertained this question have embraced a broad definition. According to federal district courts in Colorado, Connecticut, Massachusetts, New York and Tennessee, as well as the SEC itself, for a whistleblower to qualify for protection under the anti-retaliation protection, he or she need not report the alleged misconduct directly to the SEC. However, the Fifth Circuit Court of Appeals recently imposed a far stricter standard, requiring an employee to report directly to the SEC in order to receive protection. Given the substantial disagreement on this issue, we may see a circuit split, which ultimately may need to be resolved by the US Supreme Court.
In contrast to the expansive approach employed by several district courts in defining the term ‘whistleblower’, district courts in New York and Texas have limited the scope of the anti-retaliation provision by ruling that it does not apply extraterritorially. Nevertheless, there remains some debate as to whether an improper extraterritorial application is invoked in cases where there is a mix of foreign and domestic conduct, particularly where the allegedly unlawful conduct occurs in the United States. Of course, this issue is of particular importance to multinational employers confronted with alleged violations of the Foreign Corrupt Practices Act.
Speaking of limitations on the anti-retaliation provision, it also bears mentioning that, in 2013, a Georgia district court ruled that Dodd-Frank whistleblowers are not entitled to a jury trial or punitive damages. The court emphasised that the principal relief available under Section 922 (reinstatement, hiring and backpay) is equitable in nature – i.e., remedies that juries do not customarily consider. Indeed, the anti-retaliation provision does not allow for the type of discretion that juries tend to exercise when awarding monetary damages, said the court. For instance, there is automatic doubling of backpay. And, unlike other statutory doubling provisions, Section 922 does not require a court to decide whether the defendant’s actions were ‘willful’. The ruling guards employers against the unpredictable nature and expense of a jury trial, which, in turn, may lead to more reasonable settlements.
Minimising the risks. The price for non-compliance with these whistleblower protection provisions is awfully steep. Thus, to avoid protracted litigation and reputational risks, employers should consider the following steps: survey the workforce to gauge employees’ perspectives on whistleblowing and the reporting process; modernise whistleblower policies and codes of conduct; train managers on how to effectively respond to and escalate whistleblower complaints; encourage the legal department, human resources and compliance personnel to work in concert and to take a comprehensive approach to effectively responding to whistleblower complaints; promptly appoint a liaison to the whistleblower as part of a rapid response system; incentivise whistleblowers to make complaints internally; ensure objective oversight of evaluations of whistleblowers who remain employed so that they are not subject to reprisals for engaging in protected activity; and focus on developing a culture of compliance and accountability.
Steven J. Pearlman is a partner and Daniel L. Saperstein is an associate at Proskauer Rose LLP. Mr Pearlman can be contacted on +1 (312) 962 3550 or by email: firstname.lastname@example.org. Mr Saperstein can be contacted on +1 (973) 274 3200 or by email: email@example.com.
© Financier Worldwide
Steven J. Pearlman and Daniel L. Saperstein
Proskauer Rose LLP