Section 806 of the Sarbanes-Oxley Act (“SOX”) and Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) both extend whistleblower protection to certain individuals who report conduct they reasonably believe constitutes a violation of federal law relating to financial, securities, or shareholder fraud. Dodd-Frank also required the Securities and Exchange Commission (“SEC”) to implement a new whistleblower program — the so-called “bounty” program — that pays awards to whistleblowers who provide the SEC with information about violations of securities laws that lead to a successful enforcement action resulting in monetary sanctions exceeding $1 million.
As described in more detail below, the SEC recently announced that it would make a massive award to a foreign tipster pursuant to its whistleblower program. In addition, the SEC filed its first-ever enforcement action under Dodd-Frank. Moreover, a number of recent federal court decisions have addressed the extraterritorial reach of Dodd-Frank, as well as the definition of “whistleblower.” Finally, other recent decisions address the standard for establishing “protected activity” under SOX, the burdens of proof applicable to SOX, and whether disclosure of the identity of a whistleblower could constitute adverse action under SOX.
Definition of “Whistleblower” Under Dodd-Frank
On December 5, 2014, Judge Gregory Woods held in Berman v. Neo@Ogilvy, No. 14-cv-523- GWN-SN, 2014 WL 6860583 (S.D.N.Y. Dec. 5, 2014) that an employee who complains internally about securities law violations is not considered a “whistleblower” under the Dodd-Frank anti-retaliation provision because that statute protects only individuals who report violations to the SEC. The court noted that, despite “clear statutory language,” a number of district courts, including courts within the Southern District of New York, have crafted a “narrow exception” to Dodd-Frank’s definition of a whistleblower. Judge Woods, however, stated his disagreement with such decisions and adopted the rationale used by the Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C., 702 F.3d 620 (5th Cir. 2013), the only Circuit Court decision to address the definition of “whistleblower” under Dodd-Frank: “[I]n Asadi the Fifth Circuit held that ‘the plain language of the Dodd-Frank whistleblower protection provision creates a private cause of action only for individuals who provide information relating to a violation of the securities laws to the SEC.’” The court dismissed the Dodd-Frank claim on the grounds that the plaintiff did not provide information to the SEC and therefore did not qualify as a whistleblower under the Act.
The contrary conclusion was reached by a Nebraska district court in May 2014. In Bussing v. COR Clearing, LLC, 20 F. Supp. 3d 719 (D. Neb. 2014), the court held that the federal whistleblower protection under Dodd-Frank applies to tipsters who report alleged violations internally, and there is no requirement that a complaint be made to the SEC. The judge decided that although the bounty provision of Dodd-Frank defines a whistleblower as someone who reports illegal activity to the SEC, the retaliation provision of Dodd-Frank should apply to all tipsters, even those who report illegal activity only to the company, reasoning that “[t]his interpretation gives effect to the full range of disclosures protected by the anti-retaliation provision, while reserving rewards under the bounty program for whistleblowers who report to the SEC.”
While the Fifth Circuit’s decision in Asadi conflicts directly with Bussing and other district court decisions, the Supreme Court may await further circuit court decisions before taking up the question as to whether individuals who report internally (without going to the SEC) can be protected under Dodd-Frank.
Second Circuit Rules That Dodd-Frank Whistleblower Protections Do Not Apply Extraterritorially
The Second Circuit ruled in Liu v. Siemans A.G., 763 F.3d 175 (2d Cir. 2014), that Dodd-Frank’s anti-retaliation provisions do not apply to conduct abroad. The court affirmed dismissal of a suit brought by a former employee of a Siemans subsidiary in China who claimed he was fired after reporting potential corruption. Significantly, the plaintiff had not alleged that any of the events related to his termination occurred within the United States. “There is no indication Congress intended the whistleblower protection provision to have extraterritorial application,” wrote the court.
SEC Announces $30 Million-Plus Whistleblower Award
In September 2014, the SEC announced that it would make an award of more than $30 million to a foreign whistleblower who provided “key original information” that led to a successful enforcement action by the SEC. Although the whistleblower is a foreign resident, the SEC stated that “there is a sufficient U.S. territorial nexus whenever a claimant’s information leads to the successful enforcement of a covered action brought in the United States, concerning violations of U.S. securities laws.” The award will be the largest to date under the SEC’s whistleblower program. The SEC noted that it does not regard the decision in Liu v. Siemans (discussed just above) as controlling with respect to the bounty program because Dodd-Frank’s bounty provisions “have a different Congressional focus than the anti-retaliation provisions.” While the SEC has issued awards to more than a dozen whistleblowers since the inception of its bounty program in 2012, this latest award is more than double the previous highest award of $14 million.
SEC Prosecutes Whistleblower Retaliation Claim for First Time
In June 2014, the SEC brought its first administrative action under the anti-retaliation provision of Dodd-Frank. In In re Paradigm Capital Mgmt, Inc., Case No. 3-15930, Exchange Act Release No. 72393 (June 16, 2014), the SEC alleged that a hedge fund stripped the company’s head trader of his title and authority for reporting improper transactions between the firm and an affiliated broker- dealer. The firm ultimately agreed to pay $2.2 million to settle the SEC’s charges and the related trading violations without admitting wrongdoing. The action is a reminder to employers that in enacting its whistleblower program, the SEC gave itself the power to bring enforcement actions against employers based upon alleged retaliation against employees who report potentially illegal activity to the SEC.
Second Circuit Rejects “Definitively and Specifically” Standard for Protected Activity Under SOX but Upholds Dismissal of SOX Complaint
On August 8, 2014, the Second Circuit rejected the strict standard previously used by lower courts in the Circuit, which examines whether the employee’s protected communications “definitively and specifically” relate to one of the categories of securities laws violations enumerated in SOX. In Nielsen v. AECOM Tech. Corp., 762 F.3d 214 (2d Cir. 2014), the court held that the standard adopted by the Department of Labor’s Administrative Review Board (the “ARB”), which focuses instead on whether the plaintiff “reasonably believed” that the conduct he/she reported constitutes a violation of one or more of the categories of laws set forth in SOX, is persuasive and more closely aligns with the text of the statute. However, the court upheld the district court’s dismissal of the suit, concluding that the plaintiff’s complaints — that an employee was signing off on fire safety designs without proper review — were “trivial” and “simply too tenuous” in relation to any alleged shareholder fraud. Thus, the court concluded that the plaintiff failed to plausibly allege that he had an objectively reasonable belief that shareholder fraud existed.
ARB Decision Clarifies Burdens of Proof Applicable to SOX Whistleblower Claims
The ARB recently issued a decision that addresses in detail how DOL investigators and ALJs should apply the burdens of proof required under SOX. The decision, Fordham v. Fannie Mae, No. 12-061 (ARB Oct. 9, 2014), focused on one of the elements of a whistleblower’s prima facie burden — the requirement to prove that the protected activity was a “contributing factor” in the employer’s adverse decision, which must be shown by a preponderance of the evidence. The principal holding of the decision addresses the treatment of evidence supporting the employer’s affirmative defense that it would have taken the same action against the employee even if the employee had not engaged in protected activity under SOX, which the employer must prove by “clear and convincing” evidence. The ARB held that the ALJ improperly weighed evidence offered by the employer in support of its affirmative defense against the complainant’s causation evidence as to how the SOX- protected activity was a contributing factor in the adverse treatment. According to the ARB, weighing the evidence in this way impermissibly resulted in application of the lower preponderance of the evidence standard that is applicable only to the complainant’s proof, rather than applying the more onerous clear and convincing evidence standard required to be applied to the employer’s evidence.
Fifth Circuit Rules That Disclosure of a Whistleblower’s Identity May Constitute Adverse Action
In Halliburton, Inc. v. Administrative Review Board, 771 F.3d 254 (5th Cir. 2014), the Fifth Circuit affirmed the ARB’s decision that disclosing the identity of a whistleblower could constitute an adverse action under SOX. The court stated that when a whistleblower’s identity is disclosed, “the boss could be read as sending a warning, granting his implied imprimatur to differential treatment of the employee, or otherwise expressing a sort of discontent from on high.” Notably, the court ruled that a whistleblower need not show that the employer’s adverse action was motivated by retaliation.