A whistleblower achieved a significant win on a critical challenge that nearly all corporate whistleblowers often face – whether they can use confidential company documents to expose fraud and other illegality. Judge Bashant’s decision in Erhart v. Bofi Holdings clarifies that employer confidentiality agreements do not supersede federal whistleblower rights, and signals that retaliatory lawsuits against whistleblowers are unlikely to succeed. This post discusses the decision and provides guidance to corporate whistleblowers concerning precautions to take in using company documents to blow the whistle.
For more information about this topic, see De Facto Gag Clauses: The Legality of Employment Agreements That Undermine Dodd-Frank’s Whistleblower Provisions.
Charles Matthew Erhart worked for BofI Federal Bank (BofI) as an internal auditor and sued BofI under the Sarbanes-Oxley Act and other whistleblower protection laws. Erhart alleged that BofI terminated his employment in retaliation for disclosing to the bank and federal regulators numerous violations of federal and state law. In particular, Erhart’s whistleblower retaliation complaint alleges that he opposed the bank’s decision to withhold information that was clearly responsive to an SEC subpoena and disclosed improprieties in the CEO’s personal accounts and potential violations of BSA/Know Your Customer rules. Erhart also disclosed information to The New York Times, which resulted in adverse publicity for BofI and substantial decline in BofI’s stock price.
Shortly after Erhart filed his retaliation claim, BofI further retaliated against him by suing him for alleged theft and dissemination of BofI’s confidential information. In particular, BofI brought claims for (1) breach of contract; (2) conversion; (3) breach of the duty of loyalty; (4) negligence; (5) fraud; (6) violation of the Computer Fraud and Abuse Act; (8) unfair business practices; and (9) other violations of federal and state law. Erhart’s answer to BofI’s complaint asserts fifty-two affirmative defenses.
BofI moved for summary judgment on several of Erhart’s defenses, essentially seeking a ruling that whistleblowing is not a defense to BofI’s claims. Though Judge Bashant granted BofI’s motion in part, Erhart achieved a significant win because he can assert protected whistleblowing as a defense to most of BofI’s claims.
Charles Matthew Erhart worked for BofI Federal Bank (BofI) as an internal auditor and sued BofI under the Sarbanes-Oxley Act and other whistleblower protection laws. Erhart alleged that BofI terminated his employment in retaliation for disclosing to the bank and federal regulators numerous violations of federal and state law. In particular, Erhart’s whistleblower retaliation complaint alleges that he opposed the bank’s decision to withhold information that was clearly responsive to an SEC subpoena and disclosed improprieties in the CEO’s personal accounts and potential violations of BSA/Know Your Customer rules. Erhart also disclosed information to The New York Times, which resulted in adverse publicity for BofI and substantial decline in BofI’s stock price.
Shortly after Erhart filed his retaliation claim, BofI further retaliated against him by suing him for alleged theft and dissemination of BofI’s confidential information. In particular, BofI brought claims for (1) breach of contract; (2) conversion; (3) breach of the duty of loyalty; (4) negligence; (5) fraud; (6) violation of the Computer Fraud and Abuse Act; (8) unfair business practices; and (9) other violations of federal and state law. Erhart’s answer to BofI’s complaint asserts fifty-two affirmative defenses.
BofI moved for summary judgment on several of Erhart’s defenses, essentially seeking a ruling that whistleblowing is not a defense to BofI’s claims. Though Judge Bashant granted BofI’s motion in part, Erhart achieved a significant win because he can assert protected whistleblowing as a defense to most of BofI’s claims.
The public policy protecting whistleblowers from retaliation, which is reflected in the Dodd-Frank Act and the Sarbanes-Oxley Act, precludes companies from interfering with or barring whistleblowing. In particular, an SEC rule implementing the Dodd-Frank whistleblower reward program bars companies from “enforcing, or threatening to enforce, a confidentiality agreement” to impede communicating with the SEC. 17 C.F.R. § 240.21F-17. Judge Bashant held that the “public policy in favor of whistleblower protection clearly outweighs the interest in the enforcement of [BofI’s confidentiality] agreement, and the agreement is unenforceable.”
Judge Bashant held that whistleblowers are permitted to take company documents to disclose fraud to the government for two reasons. First, “whistleblowers often need documentary evidence to substantiate their allegations.” Second, “[a]llowing a whistleblower to appropriate documents supporting believed wrongdoing also mitigates the possibility that evidence of the wrongdoing will be destroyed before an investigation can be conducted.” But Judge Bashant also held that if a whistleblower engages in wholesale stripping of confidential documents or where the appropriation of confidential documents is “vast and indiscriminate,” the public policy in favor of whistleblower might not immunize the whistleblower from potential liability. Here, Judge Bashant declined to reject Erhart’s whistleblower defense to the appropriation claims because (1) Erhart testified in a declaration that he “was very careful in [selecting] the information [he] accessed and turned over. Each document was specifically related to one of the allegations of wrongdoing [he] had discussed with [his supervisor] and then reported to federal law enforcement”; and (2) Erhart states that “every document” he used was one he “had properly accessed in the course of performing [his] work as an internal auditor.”
Judge Bashant rejected BofI’s position that its confidentiality agreement barred Erhart from using any confidential information to pursue his retaliation claims. But she also noted that Erhart should be permitted to disclose BofI’s information in his complaint if doing so was “reasonably necessary” to pursue his retaliation claim.
In states that have enacted anti-SLAPP laws, whistleblowers should also consider bringing anti-SLAPP motions early in the litigation to dismiss a SLAPP suit and recover fees. Anti-SLAPP laws provide a procedural remedy to dispose of lawsuits that are brought to chill the valid exercise of constitutional rights, including the rights to free speech and petition the government for redress of grievances. A March 2018 California Court of Appeals decision in MMM Holdings, Inc. v. Reich is a good illustration of how anti-SLAPP laws are a critical tool in a whistleblower’s arsenal. A SLAPP suit can also give rise to liability for retaliation.
A whistleblower’s use of confidential company documents to expose fraud or other wrongdoing is a complex issue and the legality of using such documents hinges on several factors, including the factors that determined the outcome in Erhart (the whistleblower acted lawfully in that he obtained the documents in the course of performing his job duties and was careful in selecting the information that he accessed and disclosed to the government). In contrast, mass downloading of proprietary information beyond the scope of the protected whistleblowing or using privileged information can undermine or potentially gut a whistleblower’s claim. Prior to taking company documents for any purpose, seek the advice of an experienced attorney.
See these related posts:
For more information about whistleblower rewards and bounties, contact the SEC whistleblower lawyers at Zuckerman Law at 202-930-5901. Click below to hear SEC whistleblower lawyer Matt Stock’s tips for SEC whistleblowers:
If a provision in an employment agreement or severance agreement bars you from reporting information to the SEC, that gag clause might be unlawful and unenforceable. In particular, Rule 21F-17 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 them Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.
Rule 21F-17 is one of the regulations implementing the Dodd-Frank SEC whistleblower reward program. The SEC has taken enforcement actions to enforce Rule 21F-17.
Download our guides to Sarbanes-Oxley Whistleblower Protection and the SEC Whistleblower Program:
The whistleblower lawyers at Zuckerman Law have substantial experience litigating Sarbanes Oxley whistleblower retaliation claims and have achieved substantial recoveries for officers, executives, accountants, auditors, and other senior professionals. To learn more about corporate whistleblower protections, see our Sarbanes-Oxley Whistleblower Protection FAQ. Click here to read client testimonials about the firm’s work in SOX whistleblower matters and other employment-related litigation.
To schedule a free preliminary consultation, click here or call us at 202-262-8959.
Leading whistleblower law firm Zuckerman Law has written extensively about whistleblower protections and is quoted frequently in the media on this topic. A sample of those blog posts and articles appears below:
In states that have enacted anti-SLAPP laws, whistleblowers should also consider bringing anti-SLAPP motions early in the litigation to dismiss a SLAPP suit and recover fees. Anti-SLAPP laws provide a procedural remedy to dispose of lawsuits that are brought to chill the valid exercise of constitutional rights, including the rights to free speech and petition the government for redress of grievances. A March 2018 California Court of Appeals decision in MMM Holdings, Inc. v. Reich is a good illustration of how anti-SLAPP laws are a critical tool in a whistleblower’s arsenal. A SLAPP suit can also give rise to liability for retaliation.
A whistleblower’s use of confidential company documents to expose fraud or other wrongdoing is a complex issue and the legality of using such documents hinges on several factors, including the factors that determined the outcome in Erhart (the whistleblower acted lawfully in that he obtained the documents in the course of performing his job duties and was careful in selecting the information that he accessed and disclosed to the government). In contrast, mass downloading of proprietary information beyond the scope of the protected whistleblowing or using privileged information can undermine or potentially gut a whistleblower’s claim. Prior to taking company documents for any purpose, seek the advice of an experienced attorney.
See these related posts:
For more information about whistleblower rewards and bounties, contact the SEC whistleblower lawyers at Zuckerman Law at 202-930-5901. Click below to hear SEC whistleblower lawyer Matt Stock’s tips for SEC whistleblowers:
If a provision in an employment agreement or severance agreement bars you from reporting information to the SEC, that gag clause might be unlawful and unenforceable. In particular, Rule 21F-17 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 them Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” Rule 21F-17 is one of the regulations implementing the Dodd-Frank SEC whistleblower reward program. The SEC has taken enforcement actions to enforce Rule 21F-17.
Download our guides to Sarbanes-Oxley Whistleblower Protection and the SEC Whistleblower Program:
The whistleblower lawyers at Zuckerman Law have substantial experience litigating Sarbanes Oxley whistleblower retaliation claims and have achieved substantial recoveries for officers, executives, accountants, auditors, and other senior professionals. To learn more about corporate whistleblower protections, see our Sarbanes-Oxley Whistleblower Protection FAQ. Click here to read client testimonials about the firm’s work in SOX whistleblower matters and other employment-related litigation.
To schedule a free preliminary consultation, click here or call us at 202-262-8959.
Leading whistleblower law firm Zuckerman Law has written extensively about whistleblower protections and is quoted frequently in the media on this topic. A sample of those blog posts and articles appears below:
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Corporate Whistleblower