After the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010, speculation abounded as to whether the ambitious whistleblower bounty program would succeed and about how the Securities and Exchange Commission would support the program. But, in the four years since the bounty program became effective, the SEC has proved that it will do what it takes to make the program successful, including awarding payments totaling over $50 million to whistleblowers; appearing as amicus curiae in support of whistleblowers seeking protection under Dodd Frank’s anti-retaliation provisions; and pursuing companies that retaliate against whistleblowers or attempt to prevent whistleblowers from bringing tips to the SEC. In fact in a recent speech, SEC Chair Mary Jo White dubbed the SEC “the whistleblower’s advocate.”
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Since its inception in 2011, the SEC’s Office of the Whistleblower has received thousands of tips from whistleblowers from across the United States and sixty foreign countries and has paid awards totaling more than $50 million to seventeen whistleblowers. SEC Chair White recently praised the quality of the tips, explaining that they “are of tremendous help to the [SEC] in stopping ongoing and imminent fraud, and lead to significant enforcement actions on a much faster timetable than we would be able to achieve without the information and assistance from the whistleblower.” She also commented that the program has “created a powerful incentive for companies to self-report wrongdoing to the SEC — companies now know that if they do not, we may hear about the conduct from someone else.” The fact that only seventeen whistleblowers have received bounty awards reveals that for most whistleblowers the possibility of a rich reward is remote, however, the SEC is encouraging whistleblowers to continue to provide information and through its actions and the statements of its officials is making clear that it will do its utmost to protect them.
The SEC’s first retaliation case, In the Matter of Paradigm Capital Management, Inc. and Candace King Weir, is an example of the extent of the SEC’s efforts on behalf of whistleblowers. The $600,000 award to the whistleblower in Paradigm constituted thirty percent of the amount collected from the Paradigm and its principal — the maximum award payable under the Dodd-Frank Act. The whistleblower, who was the fund’s head trader, reported to the SEC trading activity revealing improper principal transactions and immediately was demoted and had his job function changed from head trader to compliance associate. An April 28 SEC Release noted “[t]he whistleblower in this matter suffered unique hardships, including retaliation, as a result of reporting to the Commission.” In remarking on Paradigm during her April speech, White made clear that “the SEC take[s] these whistleblower protections very seriously and companies should too.” White further noted that it is “past time to stop wringing our hands about whistleblowers” and described the SEC not just as a government representative, but as an “advocate” for whistleblowers.
White also warned that the SEC’s Enforcement Division “has been focused on companies that use agreements or other mechanisms to improperly stifle whistleblowers from coming forward.” White referenced the SEC’s first enforcement action — announced on April 1 — against a company that required internal investigation witnesses to sign confidentiality statements that included language warning that employees who discussed the subject matter of the interviews with outside parties without prior permission could face discipline and suggested that companies ensure that their employees understand that “it is always permissible to report possible securities law violations to the Commission.” The case was even more significant given that the agreements the SEC found problematic reportedly had been in existence for years before the advent of the SEC’s whistleblower program.
Finally, White referred to the SEC’s advocacy on behalf of whistleblowers in the form ofamicus briefs that it has filed in cases pending before the Second and Third Circuit Courts of Appeals. Those cases, both of which were argued this month, involve whistleblowers terminated as a result of internally reporting suspected misconduct. In Berman v. Neo@Ogilvy LLC, the company’s Finance Director was terminated after internally reporting accounting irregularities. After his termination, the whistleblower reported the suspect conduct to the SEC. In Safarian v. American DG Energy Inc., the whistleblower also reported suspected misconduct internally but not to the SEC. In both these cases, the SEC “advocates” that a whistleblower who reports suspected misconduct only to his employer but not to the SEC is a “whistleblower” entitled to the protection of the Dodd-Frank Anti-Retaliation provision. The Safarian case raises multiple issues and Third Circuit may not reach the Dodd-Frank issue. The Bermancase, however, is likely to elicit much-needed guidance from the Second Circuit on the issue of the reach of Dodd-Frank’s anti-retaliation provisions.
Given the SEC’s focus on protecting whistleblowers, employers should proceed with caution and heed SEC Chair White’s warning that the SEC is “working hard to foster a safe environment for whistleblowers by investigating and charging those who retaliate as well as those who, whether inadvertently or not, take actions or use agreements that could chill the willingness of employees to report violations of law to the SEC.”
From The Insider Blog: White Collar Defense & Securities Enforcement.