Kevin B. Leblang Robert N. Holtzman May 6 2015 Whistleblower claims under Sarbanes-Oxley and Dodd-Frank: recent developments Kramer Levin Naftalis & Frankel LLP | Employment & Immigration - USA Kevin B. Leblang, Robert N. Holtzman Employment & Immigration IntroductionDefinition of 'whistleblower' under Dodd-FrankSecond Circuit finds Dodd-Frank whistleblower protections do not apply extraterritoriallySEC announces $30 million-plus whistleblower award SEC prosecutes first whistleblower retaliation claimSecond Circuit rejects 'definitively and specifically' standard for protected activityARB decision clarifies burdens of proof applicable to SOX whistleblower claimsFifth Circuit finds disclosure of whistleblower's identity may constitute adverse actionIntroductionSection 806 of the Sarbanes-Oxley Act and Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act both extend whistleblower protection to certain individuals who report conduct which 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 programme – the so-called 'bounty' programme – 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.The SEC recently announced that it would make a massive award to a foreign tipster pursuant to its whistleblower programme. 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 have addressed the standard for establishing 'protected activity' under Sarbanes-Oxley, the burdens of proof applicable to Sarbanes-Oxley and whether disclosure of the identity of a whistleblower could constitute adverse action under Sarbanes-Oxley.Definition of 'whistleblower' under Dodd-FrankOn December 5 2014 Judge Gregory Woods held in Berman v [email protected](1) 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'. However, the judge stated his disagreement with such decisions and adopted the rationale used by the Fifth Circuit in Asadi v GE Energy (USA), LLC,(2) 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(3) 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 finds Dodd-Frank whistleblower protections do not apply extraterritoriallyThe Second Circuit ruled in Liu v Siemans AG(4) 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 that 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 award to date under the SEC's whistleblower programme. The SEC noted that it does not regard the decision in Liu v Siemans as controlling with respect to the bounty programme 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 programme in 2012, this latest award is more than double the previous highest award of $14 million.SEC prosecutes first whistleblower retaliation claimIn June 2014 the SEC brought its first administrative action under the anti-retaliation provision of Dodd-Frank. In In the Matter of Paradigm Capital Mgmt, Inc(5) 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 programme, 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 activityOn August 8 2014 the Second Circuit rejected the strict standard previously used by lower courts in the circuit, which examined whether the employee's protected communications "definitively and specifically" related to one of the categories of securities laws violations enumerated in Sarbanes-Oxley. In Nielsen v AECOM Tech Corp(6) the court held that the standard adopted by the Department of Labour's Administrative Review Board (ARB) – which focuses instead on whether the plaintiff "reasonably believed" that the conduct which he or she reported constituted a violation of one or more of the categories of laws set forth in Sarbanes-Oxley – 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 claimsThe ARB recently issued a decision that addresses in detail how investigators at the Department of Labour and administrative law judges should apply the burdens of proof required under Sarbanes-Oxley. Fordham v Fannie Mae(7) 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 addressed the treatment of evidence supporting the employer's affirmative defence that it would have taken the same action against the employee even if the employee had not engaged in protected activity under Sarbanes-Oxley, which must be shown by a higher, "clear and convincing" burden by the employer. The ARB held that the administrative law judge improperly weighed evidence offered by the employer in support of its affirmative defence against the complainant's causation evidence as to how the Sarbanes-Oxley 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 finds disclosure of whistleblower's identity may constitute adverse action In Halliburton, Inc v Administrative Review Board(8) the Fifth Circuit affirmed the ARB's decision that disclosing the identity of a whistleblower could constitute an adverse action under Sarbanes-Oxley. 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 a retaliatory motive.For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100) or email ([email protected] or [email protected]). The Kramer Levin Naftalis & Frankel LLP website can be accessed at www.kramerlevin.com.Endnotes(1) No 14-cv-523- GWN-SN, 2014 WL 6860583 (SDNY December 5 2014).(2) 702 F 3d 620 (5th Cir 2013).(3) 20 F Supp 3d 719 (D Neb 2014).(4) 763 F 3d 175 (2d Cir 2014).(5) Case No 3-15930, Exchange Act Release No 72393 (June 16 2014).(6) 762 F 3d 214 (2d Cir 2014).(7) No 12-061 (ARB October 9 2014).(8) 771 F 3d 254 (5th Cir 2014).