This post was originally published on the American Constitution Society Blog as part of ACSblog’s Symposium on Whistleblowers.
Last month, the Ethics & Compliance Initiative released a Global Business Ethics Surveyrevealing that employees feel increased pressure to compromise organizational standards and that in the private sector, more than one in three employees reporting misconduct experienced retaliation. At a time when whistleblower retaliation is on the rise, the U.S. Supreme Court held in Digital Realty Trust, Inc. v. Somers that the Dodd-Frank Act’s (Dodd-Frank) whistleblower protections apply only where the whistleblower disclosed potential securities law violations to the SEC. In other words, Dodd-Frank does not protect internal whistleblowing, including disclosures made to a corporate ethics or compliance program.
Corporate Whistleblowers Have Limited Protection
The anti-retaliation provision of the Sarbanes-Oxley Act (SOX) will continue to provide some degree of protection for corporate whistleblowers, but post-Somers, most corporate whistleblowers will not be protected under Dodd-Frank because most whistleblowers report internally. Indeed, the most recent annual report of the SEC Office of the Whistleblowerstates that approximately 83 percent of whistleblowers who reported wrongdoing to the SEC disclosed their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms before reporting to the SEC. Similarly, an Ethics Resource Center survey found that whistleblowers “almost always make some effort to root out wrongdoing internally before going outside the organization with their concerns.”
Therefore, post-Somers, an employee disclosing fraud solely to their employer can no longer avail themselves of the following advantages of Dodd-Frank whistleblower protection:
- Broader scope of coverage: SOX whistleblower protection applies primarily to employees of public companies and contractors of public companies. The Dodd-Frank prohibition against whistleblower retaliation applies to “any employer,” not just public companies. Accordingly, post-Somers, an employee at a private company that suffers retaliation for disclosing potential securities violations generally lacks any federal remedy. For example, a hedge fund employee opposing or trying to stop insider trading is not protected until the employee discloses the insider trading to the SEC.
- Longer statute of limitations: Whereas the statute of limitations for a SOX retaliation claim is just 180 days, the statute of limitations for a Dodd-Frank retaliation claim is six years.
- Double back pay: Dodd-Frank authorizes an award of double back pay (double lost wages), but SOX merely authorizes “make whole relief” in the form of lost wages, reinstatement, special damages, and attorney fees. SOX does not authorize an award of punitive damages. The limited make whole relief available under SOX provides minimal deterrence against whistleblower retaliation.
Post-Somers, Whistleblowers More Likely to Report Fraud Directly to the SEC Rather than to Their Employers, But Regulators Ill-Equipped to Respond to Disclosures
Diminished protection for internal whistleblower disclosures will likely spur corporate whistleblowers to report fraud directly to the SEC, rather than first reporting to management or to a corporate ethics and compliance program. But in an era of deregulation, budget cuts, and hiring freezes, most whistleblower tips to regulators will go unheeded.
In FY 2017, the SEC received more than 16,000 tips, including 4,400 tips submitted to the SEC Office of the Whistleblower, and brought 446 standalone enforcement actions. Many of those actions were brought following multi-year investigations, during which time violators continued to profit from their misconduct and defraud investors. Lean budgets have forced the SEC to impose a hiring freeze as it grapples with significant new challenges, including cryptocurrency fraud and increasingly sophisticated market manipulation schemes. While the SEC whistleblower program has demonstrated success in protecting investors, the SEC cannot investigate most whistleblower tips due to a lack of resources.
During FY 2017, the Commodity Futures Trading Commission (CFTC) brought just 49 enforcement-related actions. The CFTC’s mission includes regulating the approximately $600 trillion dollar over-the-counter swaps markets and derivatives, the “weapons of mass destruction” that caused the financial crisis. Last month, Congress cut the CFTC’s meager budget, thereby leaving the “critically important derivatives market and the general public increasingly vulnerable to systemic (and other) risk, and susceptible to fraud and manipulation,” according to Commissioner Benham.
Congress could increase funding for market regulators without using taxpayer funds, such as by authorizing the CFTC to assess user fees. But instead Congress has made a deliberate decision to weaken investor protection. It is a curious decision to make shortly after a financial crisis that cost nearly $30 trillion.
The likely increase in whistleblower tips to the SEC and CFTC post-Somers will likely hamper the regulators’ ability to promptly investigate and halt fraud, and whistleblower disclosures.
Congress Should Enact Comprehensive Whistleblower Protection Legislation
Currently, a patchwork of industry-specific whistleblower laws provides limited protection with fairly weak remedies (primarily lost wages), but no comprehensive federal whistleblower protection law exists. Accordingly, many disclosures about threats to public health and safety are not protected under federal whistleblower laws.
Indeed, there is no private right of action for a whistleblower who suffers retaliation for reporting unsafe work conditions. Every day millions of workers face the unacceptable choice of violating workplace safety regulations or losing their jobs. As approximately 5,200 workers died on the job from work injuries in 2016, failing to protect workers who oppose or report OSHA violations has serious consequences.
In sum, Somers exacerbates the weak state of whistleblower protection and warrants prompt congressional action to provide long overdue protection to courageous truth-tellers.
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Guide to SOX Whistleblower Protection
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Tips for SEC Whistleblowers
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