In a marked shift from its 2011 rulemaking implementing the whistleblower reward provisions of the Dodd-Frank Act, the U.S. Commodity Futures Trading Commission (CFTC) has issued proposed regulations that would authorize the CFTC to take enforcement action for whistleblower retaliation and prohibit gag clauses in employment contracts that deter employees from providing information to the CFTC.
Proposed Rule to Enforce Dodd-Frank Anti-Retaliation Provision
In its 2011 rulemaking implementing the whistleblower provisions of the Dodd-Frank Act, the CFTC stated that it lacked “the statutory authority to conclude that any entity that retaliates against a whistleblower” would be subject to enforcement action under the Commodity Exchange Act (CEA). At that time, the CFTC concluded that Section 23(h)(1)(A) of the CEA only provided a private right of action to any individual who provides information to the CFTC about potential violations of the CEA.
The SEC, however, construed an analogous anti-retaliation provision as providing authority to take enforcement action for whistleblower retaliation and the SEC has enforced the anti-retaliation provision of the Dodd-Frank Act. The CFTC has reconsidered its position and concluded that it is authorized to enforce the anti-retaliation provision in the Dodd-Frank Act:
By today’s action, the Commission is taking a necessary step to end the incongruous situation where whistleblowers enjoy protection from retaliation through SEC enforcement action under the securities laws, but no such protection through Commission enforcement action under the CEA. In 1982, Congress granted customers a private right of action under CEA section 22 without diminishing or undermining the Commission’s enforcement authority under the CEA. So too here, the Commission believes that Congress intended the Commission to fully exercise its enforcement authority with respect to CEA section 23(h)(1)(A) and to fully exercise its rulemaking authority under CEA section 23(i) in addition to creating a private right of action to protect whistleblowers.
This proposed rule is critical to the success of the CFTC Whistleblower Program because corporate whistleblowers often suffer retaliation, and there it is critical for the CFTC to send a clear message that it will take enforcement action where it finds a violation of the Dodd-Frank CFTC anti-retaliation provision.
The SEC has sent such a message by taking enforcement action for whistleblower retaliation. For example, in June 2014, the SEC announced that it was taking enforcement action against Paradigm Capital Management (“Paradigm”), a hedge fund advisory firm, for engaging in prohibited principal transactions and for retaliating against the whistleblower who disclosed the unlawful trading activity to the SEC. See Exchange Act Release No. 72393 (June 16, 2014), https://www.sec.gov/litigation/admin/2014/34-72393.pdf. This is the first case in which the SEC has exercised its authority under Dodd-Frank to bring enforcement actions based on retaliation against whistleblowers.
According to the order, Paradigm retaliated against its head trader for disclosing, internally and to the SEC, prohibited principal transactions with an affiliated broker-dealer while trading on behalf of a hedge fund client. The transactions were a tax-avoidance strategy under which realized losses were used to offset the hedge fund’s realized gains.
When Paradigm learned that the head trader had disclosed the unlawful principal transactions to the SEC, it retaliated against him by removing him from his position as head trader, changing his job duties, placing him on administrative leave, and permitting him to return from administrative leave only in a compliance capacity, not as head trader. The whistleblower ultimately resigned his position.
Paradigm settled the SEC charges by consenting to the entry of an order finding that it violated the anti-retaliation provision of Dodd-Frank and committed other securities law violations; agreeing to pay more than $1 million to shareholders and to hire a compliance consultant to overhaul their internal procedures; and entering into a cease-and-desist order.
Proposed Rule to Prohibit Gag Clauses in Employment Agreements
The CFTC proposes to add a new § 165.19(b), which would “prohibit the enforcement of confidentiality and predispute arbitration clauses respecting actions by potential whistleblowers in any pre-employment, employment or post-employment agreements.” This proposed prohibition is critical to the success of any whistleblower program because companies use overly broad confidentiality agreement to silence and punish whistleblowers.
Fortunately, the SEC has vigorously enforced its similar prohibition against gag clauses in employment agreements. In a recent enforcement action, on August 10, 2016, the SEC issued a cease-and-desist order against BlueLinx Holdings Inc. for using overly broad confidentiality provisions in severance agreements that would likely deter employees from blowing the whistle. See Exchange Act Release No. 78528 (August 10, 2016), https://www.sec.gov/litigation/admin/ 2016/34-78528.pdf. In particular, to receive severance, BlueLinx employees had to waive the right to recover a whistleblower award and agree to notify the company’s legal counsel before disclosing information to government agencies pursuant to legal process. The SEC’s order imposed a substantial penalty on BlueLinx because these requirements violated Dodd-Frank Rule 21F-17.
And in April 2015, the SEC took administrative action against KBR for requiring witnesses in certain internal investigations to sign confidentiality statements with language warning that they could face disciplinary action, including termination of employment, if they discussed the subject of the interview with outside parties without the KBR legal department’s prior approval. See Exchange Act Release No. 74619 (Apr. 1, 2015), https://www.sec.gov/litigation/admin/2015/34-74619.pdf. The SEC concluded that such agreements violate Rule 21F-17, which prohibits companies from using gag clauses in agreements or policies to prevent whistleblowers from providing information to the SEC: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” Id. at 2 (alteration in original). Rule 21F-17 is one of the regulations implementing the Dodd-Frank SEC Whistleblower Program. The SEC found a violation because the threat of disciplinary action undermines the purpose of Rule 21F-17(a), which is to “encourage individuals to report to the Commission.” Id. at 3.
To settle the charges, KBR agreed to pay a $130,000 penalty and to amend the confidentiality statement to clarify that employees are free to report possible violations to the SEC and other federal agencies without KBR’s approval. In announcing this enforcement action, Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, pledged that the SEC “will vigorously enforce” Rule 21F-17 to ensure that whistleblowers are not silenced.
The CFTC’s proposed enhancements to its whistleblower rules are critical to the success of the CFTC Whistleblower Program and will send a strong signal to corporate whistleblowers that they can come forward without fear of reprisal.
CFTC Whistleblower Attorneys
The experienced whistleblower lawyers at Zuckerman Law represent whistleblowers worldwide under the Dodd-Frank whistleblower bounty provisions. The firm has a licensed Certified Public Accountant and Certified Fraud Examiner on staff to enhance its ability to investigate and disclose complex financial fraud to the SEC, and two of the firm’s attorneys served in high-level position at a government agency that protects whistleblowers. Firm Principal Jason Zuckerman has been named by Washingtonian Magazine as a “Top Whistleblower Lawyer” and the firm has been ranked by U.S. News as a Tier 1 Firm in Labor & Employment Litigation.
Whistleblower law firm Zuckerman Law has substantial experience investigating securities fraud schemes and preparing effective submissions to the SEC concerning a wide range of federal securities violations, including:
- Accounting fraud;
- Investment and securities fraud;
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- Manipulation of a security’s price or volume;
- Fraudulent securities offerings and Ponzi schemes;
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