The Dodd Frank Reform and Consumer Protection Act brought significant financial reform measures to the United States in the wake of the financial crisis of 2008. Among its measures were financial incentives for whistleblowers to report corporate misconduct and employment protections for such whistleblowers. As we approach the 5-year anniversary of the Act, it is appropriate to examine how these provisions have been applied in practice and how courts have interpreted them.
The reward provision gives whistleblowers a share of any recovery exceeding $1 million in an action brought by the SEC “under the securities laws.” 15 § 78u-6(a)(1). A whistleblower must voluntarily provide the SEC with original, legally obtained information to qualify for recovery. § 78u‑6(b)(1); 17 C.F.R. 240.21F-4(b)(4)(iv).
When determining the amount of the award a whistleblower may receive, the SEC considers:
- the significance of the information provided;
- the degree of assistance provided;
- the interest of the Commission in deterring violations of the securities laws;
- and additional factors the Commission may establish by rule or regulation.
- § 78u-6(c)(1)(B).
As of April 28, 2015, the SEC has paid more than $50 million to 17 whistleblowers, the largest award being $30 million. As of the end of FY 2014, the Office of the Whistleblower had received more than 10,000 whistleblower tips.
The SEC’s rules implementing the Act are designed not to dissuade employees from pursuing internal compliance channels. A whistleblower who raises an issue internally will have the date of that internal report substitute as the date of reporting to the SEC so long as the whistleblower follows up with a report to the SEC within 120 days. 17 C.F.R.240.21F‑4(b)(7). This preserves the whistleblower provisions also incentivize companies to investigate and voluntarily disclose misconduct, lest a whistleblower report first and deprive the company of the benefits of voluntary disclosure.
The Act prohibits employers from discharging, demoting, harassing, threatening, disclosing the identify of, or otherwise discriminating against whistleblowers because they provided information to the government or assisted in a government investigation. § 78u‑6(h)(1)(A). For the protections of the Act to apply, the whistleblower’s report must relate to violations of the securities laws. It is unclear, however, whether internal claims are sufficient to trigger protection, with courts having split on that issue.
Application to Compliance Professionals and Attorneys
Compliance professionals and attorneys can be rewarded and protected for whistleblowing. However, their share, if any, of an SEC recovery may be limited as a result of their compliance responsibilities and the possibility that privileged information may be needed to support a claim. For example, attorneys cannot recover as whistleblowers if they obtained the information through a communication subject to the attorney client privilege or in connection with the legal representation of a client, unless disclosure would be permitted under state ethical rules or SEC rules. 17 C.F.R. 240.21F‑4(b)(4)(i).
When lawyers bring retaliation claims, courts look for ways to minimize the harm resulting from disclosure of privileged information necessary to support the claim. If compliance professionals raise retaliation claims, they may be required to show that their whistleblowing activities went above and beyond normal compliance duties
Application to Foreign Nationals
Foreign nationals can receive a whistleblower reward payment under the Act so long as they meet the legal requirements. The retaliation protection provisions of the Act, however, have been held not to apply abroad. See, e.g. Liu Meng-Lin v. Siemens AG, 763 F.3d 175 (2d Cir. 2014); Asadi v. G.E. Energy (USA), LLC, F.Supp.2d , 2012 WL 2522599 (S.D. Tex. June 28, 2012); Ulrich v. Moody's Corp., No. 13-CV-00008 VSB, 2014 WL 4977562 (S.D.N.Y. Sept. 30, 2014). There is no precise rule for determining what constitutes the relevant events, where the allegedly illegal conduct occurred, and where the retaliation occurred. Where the plaintiff was employed outside of the United States at the time of the relevant conduct, courts have dismissed retaliation claims even if the conduct complained of allegedly violated U.S. law, even if the plaintiff was a U.S. citizen, and even if the employer was headquartered and the termination notice originated in the United States. This means that an employee who alleges whistleblower retaliation is unlikely to succeed in a lawsuit if the employee worked and resided abroad and the events complained of occurred abroad.
The Act also prohibits companies from impeding whistleblowers from reporting possible securities violations to the SEC. 17 C.F.R. 240.21F-17(a).Earlier this year, the SEC announced charges against a company for using improperly restrictive language in confidentiality agreements that prohibited employees from discussing internal investigations with third parties. The compa ny agreed to modify its confidentiality agreements, and the agreed provides guidance to companies seeking to ensure that their confidentiality agreements conform to the Act’s restrictions.
Judicial interpretation concerning these and other issues arising under the Dodd Frank Act can be expected to continue for the foreseeable future, and the number and size of whistleblower awards can be expected to grow. For companies subject to the Act, it is more important than ever that internal complaints be taken seriously and that whistleblowers be treated with respect and caution.