Based on numbers alone, the SEC’s Whistleblower Program grew significantly in 2013. According to the Annual Report to Congress on the Dodd-Frank Whistleblower Program, released late last year, the number of whistleblower tips and complaints the Commission received increased from 3,001 in the 2012 fiscal year to 3,238 in the 2013 fiscal year. The Commission also made its largest whistleblower award to date in 2013, issuing a record $14 million.
However, behind these numbers lies another story. Over the last year, the scope of the Whistleblower Program has been curtailed by judicial rulings narrowing the definition of a protected “whistleblower.” On the home front, companies have been experimenting with ways to encourage internal reporting, attempting to avoid what can be the serious consequences of an SEC whistleblower claim. Thus, the SEC has spent much of early-2014 protecting the scope of the Whistleblower Program from perceived attacks on both public and private fronts.
Judicial Curtailment of Whistleblower Protection
Last year, in Asadi v. G.E. Energy (U.S.A.) LLC, the 5th Circuit held that the Dodd-Frank Act’s whistleblower protections extend only to employees who provide information to the SEC relating to a violation of securities laws. 720 F.3d 620 (5th Cir. 2013). This decision was perceived as a significant blow to the final rules enacted by the SEC under the authority of Dodd-Frank, because the SEC’s rules declare that under certain circumstances an individual may be a protected whistleblower even though they only report suspected violations internally, and not to the SEC. Moreover, in Liu v. Meng-Lin, a district court case now on appeal, the court held that Dodd-Frank’s anti-retaliation provisions for whistleblowers do not apply to conduct outside the United States. 2013 WL 5692504 (S.D.N.Y.).
The Liu appeal, which involves allegations that Siemens AG retaliated against a former compliance officer who reported a purported kickback scheme by Siemens’ Chinese subsidiary, has taken on new importance to the SEC. This February, the Commission filed an amicus brief noting that that the district court judge failed to address whether the SEC’s whistleblower protections applied to Liu’s internal reporting, which revisits the issues raised in the Asadi case. Referring to the 5th Circuit’sAsadi decision as “flawed,” the SEC urged the 2nd Circuit to uphold the SEC final rules providing anti-retaliation protection to whistleblowers who only report suspected violations internally. The outcome of Liu could create a circuit split—or sound the death knell in the SEC’s efforts to provide anti-retaliation protection to internal whistleblowers—thus, it will continue to be a closely watched case.
SEC Warns Against Whistleblower Restrictions
The SEC has also sounded warning shots to companies and their counsel who “creatively” draft contracts attempting to impede whistleblowers from bringing potential wrongdoing to the SEC’s attention. In February, Kara Brockmeyer, Chief of the Commission’s FCPA Unit, noted that whistleblower tips continue to serve as a primary lead for the SEC in identifying potential FCPA actions. She noted that the SEC is focused on enforcing the anti-retaliation whistleblower provisions of Dodd Frank, and opined that confidentiality agreements appearing to bar an employee from becoming a whistleblower violate the Dodd-Frank Act’s prohibition of regulated entities from taking actions to impede employees from making whistleblower complaints.
Following on the heels of Brockmeyer’s remarks, the SEC’s whistleblower chief, Sean McKessy, stated this March that the SEC is “very concerned” about confidentiality agreements, separation agreements, and employment contracts that attempt to prevent employees from reporting potential violations to the SEC in exchange for employment benefits. McKessy issued a stern warning to attorneys who draft such contracts, stating that while such powers are not invoked lightly, the SEC does have the ability to bar attorneys from practicing before the Commission.
To avoid stepping into the SEC’s crosshairs, companies and their counsel must carefully balance legitimate efforts to encourage internal reporting from turning into what the SEC views as an effort to impede employees from participating in Dodd-Frank’s Whistleblower Program.