While employers have handled whistleblower claims under various state and federal laws for many years, as a result of the confluence of several significant events, it is clear a new era in employment law has begun— the era of the whistleblower. On July 21, 2010, the Dodd- Frank Act (the “Act”) was signed into law. More than 2,000 pages long, the Act contains broad whistleblower provisions which, until recently, have largely gone unnoticed.
Section 922 of the Act provides that the Securities & Exchange Commission (“SEC”) can provide “rewards” to whistleblowers, while enhancing protections from retaliation for employees who blow-thewhistle. For example, the Act strengthens and expands whistleblower protections under Sarbanes Oxley (“SOX”), including the ability of litigants to go to federal court in connection with their claims. In fact, OSHA, the agency that investigates SOX whistleblower claims, has advised that this area is a top prioritiy. It also strengthens and expands the Federal False Claims Act (“FCA”) and provides an incentive to file claims under the Foreign Corrupt Practices Act (“FCPA”) by reason of the SEC’s application of the bounty provisions (discussed below) to claims under the FCPA.
Interestingly, whistleblowers do not need to be employees under the Act. Analysts, consultants and third-party vendors can all be protected “whistleblowers” and can file claims with the SEC and its new office, the “Office of Whistleblower,” created in August 2011. Such claims are anonymous, so existing employees can file such claims unbeknownst to their employer. Only upon 1) a claim being resolved and 2) the payment of the “bounty” is an individual's role in the investigation revealed.
Additionally, under Section 1057 of the Act, whistleblower claims are exempt from mandatory arbitration agreements. Employees in the financial services industry (and other industries covered by the Act) may now decide to avoid arbitration altogether under FINRA (Financial Industry Regulatory Authority) and proceed with retaliation claims (for blowing-the-whistle) directly in court.
Perhaps the most important provision in Act is the creation of a whistleblower incentive program that provides a monetary award (between 10%-30%) to whistleblowers who report securities violations if such information leads to the recovery of sanctions exceeding $1 million. Note: all related matters will be “aggregated” together to reach the $1 million threshold. Amounts received by the SEC include not only monies collected by it, but also any fines and penalties assessed by the Department of Justice (“DOJ”) or a State Attorney General. The Act also expands the scope of conduct covered by the bounty provisions to include worldwide FCPA violations.
To be eligible for a bounty, the Act requires the information provided by the whistleblower must be “original information,” i.e., information derived from “independent knowledge or analysis”, and it will include information reported internally by the whistleblower and given to the government. (Although individuals charged with enforcing a company’s whistleblower program will generally be ineligible to collect a bounty under the Act.) It must also be information not previously known to the SEC and cannot be derived from material uncovered in an existing investigation.
Under the final rule implementing the Act’s whistleblower provisions, a whistleblower does not have to exhaust internal procedures or report matters internally to collect a bounty, but not reporting a matter internally may be a basis for reducing the reward to the whistleblower. Given the proliferation of future claims under the Act, as discussed below, companies must have or must implement extensive internal controls and audits to identify potential issues. Failure to do so could potentially threaten the viability of a company.
In the SEC’s first report (October 2011) on the Act’s whistleblower provisions, more than 300 claims were filed in the first seven weeks of its program with more than $425 million being set aside for whistleblower payments. The SEC advised that the most common complaint categories were: (1) market manipulation; (2) corporate disclosure and financial statements; and (3) offering fraud.
The first settlements with the SEC under the Act's whistleblower provisions to be “revealed” in the near future, and we anticipate significant media attention—with this heightened focus on whistleblowers who have received awards, it is likely that whistleblower reporting will accelerate as the year progresses.
On top of such SEC investigations, there is an expectation of “followon” lawsuits by shareholders and other third-parties stemming from false or misleading information or false financial statements. We recommend companies provide executives with extensive training, with an update and review of whistleblower policies in connection with complaint and audit procedures (on both a national and global basis). Why? Because at the same time this phenomenon is occurring here in the United States, other countries are (or have already) enacting similar legislation, such as: the UK and China. In fact, DOJ officials are currently working internationally with their foreign counterparts to help stem worldwide corruption.
Unlike “run-of-the-mill” discrimination claims, law firms that file such whistleblower claims (either before the SEC or in Court) will be significant firms who have an understanding of the regulatory environment that a company operates within and an understanding of SEC rules. In fact, one leading law firm indicates it has recovered more than $7 billion in civil settlements and related criminal fines for clients in connection with whistleblower claims under the FCA and under federal securities law. (It predicts that 2012 will be the most significant year for whistleblowers in history.)
In defending such claims, it is important to retain a law firm (and other professionals) with a wide range of expertise, in both regulatory and administrative areas, a keen understanding of SEC law, and experience with FCPA and FCA matters. Companies should evaluate whether their insurance portfolio is adequate to 1) protect them, 2) their affiliates, and 3) their Board of Directors from these claims on both a national and international basis.