SEC Enforcement Action for Whistleblower Retaliation
On September 29, 2016, the SEC ordered International Game Technology (IGT) to pay a $500,000 penalty for terminating the employment of a whistleblower because he reported to senior management and the SEC that the company’s financial statements might be distorted. Though this is the second time the SEC has exercised its authority under the Dodd-Frank Act to redress whistleblower retaliation, it is the SEC’s first stand-alone retaliation case. The enforcement action underscores the SEC’s emphasis on protecting whistleblowers.
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Retaliation Against SEC Whistleblower
The whistleblower joined IGT in 2008. When IGT terminated his employment on October 30, 2014, the whistleblower was a division director with a budget of more than $700 million and supervisory responsibility forup to eleven direct reports. Throughout his tenure at IGT, he received exceptional ratings and was described as the VP’s Supervisor’s top employee, as a “high potential” employee, and as an employee with a potential “future assignment” at the vice-president level. In addition, IGT even sought authorization from senior resources managers to pay him a special retention bonus.
Starting in June 2014, the whistleblower led several projects to determine whether it was cheaper for IGT to refurbish used parts using outside vendors or through internal refurbishment. During the project, the whistleblower became concerned that IGT was improperly accounting for costs associated with refurbished used parts. Although the whistleblower was not an accountant in the company, he reasonably believed that the company’s current method resulted in a $10 million discrepancy in the financial statements.
On July 30, 2014, the whistleblower reported his findings to his supervisors during a presentation. After raising concerns about the accounting method and its impact on the financial statements, the whistleblower had a heated disagreement with the executive supervisor on the issue. Immediately following the meeting, the executive supervisor emailed the whistleblower’s supervisor regarding the presentations, stating that, “I can’t allow [the whistleblower] to place those inflammatory statements into presentations, if there is not basis in fact.”
Thereafter, IGT conducted an internal investigation into the allegations made by the whistleblower. During the investigation, IGT retaliated against the whistleblower by removing him from job opportunities that were significant to performing his job successfully. On October 31, 2016, the internal investigation concluded that IGT’s cost accounting model was appropriate and did not cause its financial statements to be distorted. That same day, IGT terminated the whistleblower.
SEC Enforcement of Dodd-Frank Prohibition Against Whistleblower Retaliation
Although the whistleblower’s underlying disclosure about a potential securities law violation was ultimately not substantiated, he was still protected as a whistleblower under the SEC Whistleblower Program because he reasonably believed that IGT’s cost accounting model constituted a violation of federal securities laws. Recently, the trend in federal courts has been to broadly construe protected activity under this reasonable belief standard.
As Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said, “[s]trong enforcement of the anti-retaliation protections is critical to the success of the SEC’s whistleblower program. This [IGT] whistleblower noticed something that he felt might lead to inaccurate financial reporting and law violations, and he was wrongfully targeted for doing the right thing and reporting it.”
Similarly, Jane A. Norberg, Chief of the SEC’s Office of the Whistleblower, stated that “[b]ringing retaliation cases, including this first stand-alone retaliation case, illustrates the high priority we place on ensuring a safe environment for whistleblowers. We will continue to exercise our anti-retaliation authority when companies take reprisals for whistleblowing efforts.”
Protections for SEC WhistleblowersProtections for SEC Whistleblowers Post-Digital Realty (11-6-2020)
Prior SEC Enforcement Action for Whistleblower Retaliation
The IGT enforcement action is consistent with an SEC enforcement action against hedge fund advisory firm Paradigm Capital Management (“Paradigm”), which also redressed whistleblower retaliation. On June 16, 2014, the SEC announced that it was taking enforcement action against Paradigm for engaging in prohibited principal transactions and for retaliating against the whistleblower who disclosed the unlawful trading activity to the SEC.
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.
The SEC’s press release accompanying the order includes the following statement by Enforcement Director Ceresney: “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.” The Paradigm enforcement action suggests that whistleblower retaliation can result in liability far beyond the damages that a whistleblower can obtain in a retaliation action and that retaliation can invite or heighten SEC scrutiny.
These enforcement actions signal to companies that retaliating against a whistleblower can result not only in a private suit brought by the whistleblower but also in a unilateral SEC enforcement action. The IGT action, in particular, indicates that employers cannot take adverse actions against whistleblowers, even when the underlying disclosure is in error.
SEC Whistleblower Retaliation Lawyers
The SEC whistleblower retaliation lawyers at Washington DC whistleblower law firm Zuckerman Law represent whistleblowers at the SEC and CFTC concerning a variety of fraud schemes, including:
- Accounting fraud;
- Investment and securities fraud;
- Foreign bribery and other FCPA violations;
- EB-5 investment fraud;
- Manipulation of a security’s price or volume;
- Fraudulent securities offerings and Ponzi schemes;
- False or misleading statements about a company or investment;
- Inadequate internal controls;
- Deceptive non-GAAP financial measures; and
- Violations of auditor independence rules.
To learn more about the SEC Whistleblower Program, download Zuckerman Law’s eBook: SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award:
SEC Whistleblower Retaliation Damages and Remedies
Sarbanes-Oxley Whistleblower Protection for SEC Whistleblowers
The Sarbanes-Oxley whistleblower protection provision provides a remedy for SEC whistleblowers that have suffered retaliation. To learn more about protections for SEC whistleblowers, download our free guide Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers.