Supreme Court To Review Second Circuit Decision On Whistleblower Retaliation
On May 1, 2023, the United States Supreme Court granted a writ of certiorari filed by alleged whistleblower against his former employer, a financial institution, in a case that is expected to clarify when the termination of a whistleblower amounts to unlawful retaliation under the Sarbanes-Oxley Act.
SEC Brings Enforcement Action Over Company’s Alleged Failure To Track Information About Workplace Misconduct Relevant To Risk Factor Disclosures About Employee Retention
On February 3, 2023, the Securities and Exchange Commission (“SEC”) announced a settled enforcement action against video game maker Activision Blizzard Inc. (the “Company”) for an alleged failure to maintain procedures designed to collect employee complaints of workplace misconduct and analyze them for disclosure purposes. The SEC found that the lack of such procedures violated the Company’s obligation to maintain procedures designed to ensure that information required to be disclosed in the Company’s SEC reports was in fact timely reported. In addition, the SEC’s enforcement action alleged that the Company had improperly impeded former employees from communicating directly with the SEC staff about possible securities law violations by requiring those employees, through a clause in their separation agreements, to notify the Company of any requests from an administrative agency in connection with a report or complaint. Without admitting or denying the findings, the Company agreed to pay a $35 million civil penalty, but Commissioner Hester Peirce issued a spirited dissent arguing that the SEC’s allegations did not in fact amount to securities law violations.
SEC Announces Year-End Enforcement Results, Emphasizing Record-Setting Penalty Awards
On November 15, 2022, the Securities and Exchange Commission (“SEC”) released its summary of enforcement actions for the 2022 fiscal year, which ended on June 30, 2022. The SEC announced that it filed 760 enforcement actions, a nine percent increase over 2021. The actions resulted in orders of a record-breaking $6.439 billion to be paid to the SEC, including roughly $4.2 billion in penalties. The SEC noted that the high numbers reflect its “sense of urgency to protect investors, hold wrongdoers accountable and deter future misconduct in our financial markets.”
Second Circuit Overturns $1 Million Whistleblower Award For Improper Jury Instruction
On August 5, 2022, the United States Court of Appeals for the Second Circuit overturned a judgment of approximately $1 million awarded to a purported whistleblower after a jury determined in 2017 that the financial institution unlawfully terminated the employee in retaliation for his refusal to change certain aspects of his research reports related to commercial mortgage-backed securities. In narrowing the universe of alleged whistleblowers who may be entitled to relief for retaliation, the Second Circuit held that the trial judge failed to inform the jurors as to the critical burden whistleblowers bear under the Sarbanes-Oxley Act: namely, that a whistle-blower must prove that their employer intended the alleged employment action to be retaliatory.
SEC Commissioner’s Dissent Highlights Challenges In Responding To Whistleblowers
On Tuesday, April 12, the U.S. Securities and Exchange Commission (SEC) fined David Hansen, the former Chief Information Officer of NS8, Inc., a Las Vegas-based fraud detection and prevention software firm, approximately $100,000 for interfering with an employee’s ability to communicate with the SEC in violation of Rule 21F-17(a). The SEC alleged that Hansen violated the rule by restricting the employee’s access to NS8’s IT systems and monitoring his use of corporate computer systems following the employee providing a tip to the SEC about NS8’s corporate practices. In dissent, SEC Commissioner Hester Peirce said that the application of Rule 21F-17(a) was inappropriate in this case, arguing that restricting the tipster’s access to IT systems and monitoring their use did not impede their ability to communicate with the SEC and was a reasonable step in preventing unauthorized disclosure of NS8’s data to private parties and the media.
CFTC Awards Record $200 Million To Whistleblower
On October 21, 2021, the Commodity Futures Trading Commission (“CFTC”) announced it would be awarding a whistleblower its largest, publicly-announced single award under the Dodd-Frank whistleblower rewards program—nearly $200 million. The whistleblower—who sources say worked for a major financial institution—provided extensive information and documents in 2012 that prompted the CFTC, another US regulator, and a foreign regulator to bring sizable enforcement actions related to benchmark manipulation. The CFTC’s order stated that the whistleblower’s information provided “direct evidence of wrongdoing” and led to a successful enforcement action, and also assisted two other regulatory actions. The record payment, according to the CFTC, reflects recognition of “a ‘meaningful nexus’ between the information provided and the CFTC’s ability to successfully complete its investigation.”
SEC Amends Its Whistleblower Award Program Rules
On September 23, 2020, the Securities and Exchange Commission (“SEC”) announced that it voted to amend the rules governing its whistleblower award program. According to the SEC, the amendments are intended to provide eligible whistleblowers with greater insight into the program as well as to improve efficiencies in reviewing and processing awards. The SEC’s Office of the Whistleblower also issued staff guidance for determining award amounts for eligible whistleblowers.
Issuer And CEO Charged By The SEC With Fraud And Whistleblower Protection Law Violations For Allegedly Impeding Investor Complaints
On November 4, 2019, the Securities and Exchange Commission (“SEC”) filed an amended complaint against Collectors Café, a Nevada-based company purportedly providing online auctions for collectibles (the “Company”), and its CEO, for making false and misleading statements to investors in connection with a $23 million securities offering. SEC v. Collector’s Coffee, Inc. & Kontilai, No. 10-CV-04355 (S.D.N.Y. Nov. 4, 2019). The amended complaint added charges against defendants for alleged violations of whistleblower protection laws by conditioning the return of investor money on investors signing agreements that included provisions prohibiting them from communicating with regulatory agencies, including the SEC, about anything related to the Company.
SEC Awards $3 Million To Two Whistleblowers Who First Made Internal Reports, Even Though Reporting To SEC Was Not “Voluntary”
On June 3, 2019, the U.S. Securities and Exchange Commission (“SEC”) announced a joint award of $3 million to two whistleblowers who the SEC stated provided information that led to a successful enforcement action aimed at protecting retail investors. SEC Press Release, SEC Awards $3 Million to Joint Whistleblowers, No. 2019-81 (June 3, 2019). According to the SEC, both whistleblowers reported the alleged violations internally before reporting to the SEC. Interestingly, the Commission found that neither whistleblower was legally entitled to the award because their submissions were not “voluntary,” but the SEC relied on its discretion to issue the award regardless in an apparently conscious effort to further incentivize whistleblowing. SEC Whistleblower Award Proceeding, File No. 2019-7 (June 3, 2019).
SEC Awards Total Of $50 Million To Two Whistleblowers In A Single Action, While Denying Five Other Claimants
On March 26, 2019, the SEC announced two multi-million dollar awards to whistleblowers who made reports of misconduct that led to a successful enforcement action after denying claims of five other whistleblowers in the same case (only two appealed the preliminary determination denying their application). SEC Press Release, SEC Awards $50 Million to Two Whistleblowers, No. 2019-42 (Mar. 26, 2019). One whistleblower received $37 million, which represents the third-largest SEC whistleblower award in history, while the other whistleblower received a $13 million award, a difference apparently based on the speed with which each reported the misconduct to the SEC and the relative value of their information. These significant awards continue a trend of rising awards by the SEC, and the number of whistleblowers in the action highlights the degree to which the SEC has successfully incentivized whistleblowers. Since 2012, the SEC has now awarded approximately $376 million to 61 whistleblowers, with an average award of over $6 million.
SEC, Under New Safe Harbor, Awards More Than $2.2 Million To Whistleblower Who First Reported To Another Federal Agency
On April 5, 2018, the Securities and Exchange Commission (“SEC”) announced a whistleblower award of more than $2.2 million in connection with a report of misconduct. The whistleblower, a former company insider, first reported information to a federal agency other than the SEC, which in turn referred the matter to the SEC, which promptly opened an enforcement investigation. Subsequently, within 120 days of the original reporting to the other federal agency, the whistleblower reported the same information directly to the SEC. The resulting SEC enforcement action resulted in monetary sanctions, and the whistleblower received a percentage of the sanctions as an award. Despite initially reporting to another federal agency, the whistleblower received an award because he or she reported the same information to the SEC within 120 days and subsequently cooperated with the enforcement investigation.
Record-Breaking Whistleblowing Awards Continue Incentives To Report Misconduct To The SEC
On March 19, 2018, the SEC announced three multi-million dollar awards to whistleblowers in connection with reports of misconduct. SEC Press Release, SEC Announces Its Largest-Ever Whistleblower Awards
, No. 2018-44 (Mar. 19, 2018). One whistleblower received $33 million, which represents the largest SEC whistleblower award in history; the two other whistleblowers will split a $50 million award. These significant awards continue a trend of rising awards by the SEC, which continues to focus on publicly incentivizing and protecting whistleblowers.
Supreme Court Finds Dodd-Frank Does Not Protect Internal Whistleblowers
On February 21, 2018, the Supreme Court unanimously held that the anti-retaliation provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) do not cover individuals who do not report violations of the securities laws to the Securities and Exchange Commission (“SEC”). Digital Realty Trust, Inc. v. Somers
, No. 16-1276 (Feb. 21, 2018). Writing for the Court, Justice Ginsburg explained that Dodd-Frank explicitly defined the term “whistleblower” to include only individuals who report to the SEC and that, when a statute explicitly defines a term, courts must follow that definition. See
15 U.S.C. § 78u–6(a)(6). Respondent Paul Somers, who had only reported within his company, was therefore ineligible for Dodd-Frank’s whistleblower protections. We previously covered the Court’s skepticism of Somers’ position at oral argument. See
Shearman & Sterling LLP: Government/Regulatory Enforcement, Supreme Court Oral Argument Suggests Skepticism Over SEC Rule Protecting Internal Whistleblowers from Retaliation under Dodd-Frank
(Dec. 5, 2017).
Supreme Court Oral Argument Suggests Skepticism Over SEC Rule Protecting Internal Whistleblowers From Retaliation Under Dodd-Frank
On November 28, 2017, the Supreme Court heard oral arguments in Digital Realty Trust, Inc. v. Somers
, No. 16-1276, a case that raises the question whether an employee who reported alleged misconduct internally, but did not make a report to the Securities and Exchange Commission (“SEC” or the “Commission”), is eligible for protections against retaliation afforded to whistleblowers by the Dodd-Frank Act of 2010 (“Dodd-Frank”). In 2011, the SEC issued a rule stating that internal whistleblowers were subject to protections under Dodd-Frank, even though the text of the statute defines “whistleblowers” as only those who reported information to the SEC. 16 C.F.R. 240.21F-2(b)(1). While a decision may remain months away, the questions from the Justices suggested considerable skepticism as to the SEC’s statutory interpretation and rulemaking process.
California Jury Finds That Bio-Rad Violated The Whistleblower Protections Of The Sarbanes-Oxley Act By Terminating Its General Counsel
On February 6, 2017, a federal jury in San Francisco, California found that Bio-Rad Laboratories, Inc., a life sciences and clinical diagnostics company, violated the Sarbanes-Oxley Act’s whistleblower protections. The violation stemmed from Bio-Rad’s decision to terminate its former General Counsel, Sanford Wadler, after he internally reported potential Foreign Corrupt Practices Act (“FCPA”) violations to the company’s audit committee. See Wadler v. BioRad Laboratories, Inc. et al.
, No 3:15-cv-2356 Final Verdict Form.
SandRidge Energy Settles Claims Of Whistleblower Retaliation And Overly Restrictive Settlement Agreements
On December 20, 2016, the Securities and Exchange Commission (“SEC”) filed a settled administrative proceeding against SandRidge Energy, Inc. (“SandRidge”) for allegedly using inappropriately restrictive language in employee separation agreements and for retaliating against a whistleblower, the fifth such claim the SEC brought in 2016. SandRidge, without admitting or denying the SEC’s findings, agreed to pay a $1.4 million penalty, subject to the company’s ongoing bankruptcy proceedings, to resolve the SEC’s claims. In the Matter of SandRidge Energy, Inc.
, Admin. Proc. File No. 3-17739 (Dec. 20, 2016).
German Financial Regulator’s Decision To Open Whistleblower Office Highlights International Focus On Protecting Whistleblowers
On July 1, 2016, Germany’s Federal Financial Supervisory Authority (“BaFin”) announced the creation of a centralized office for whistleblowers to report regulatory violations. BaFin also noted in its announcement that it believed that protecting whistleblowers was a top priority. Numerous regulators throughout the world have now created dedicated whistleblower offices, and BaFin’s efforts seem fully in line with this growing and impactful trend.