Image of Dodd-Frank Corporate Whistleblower Protection

Dodd-Frank Corporate Whistleblower Protection

I. Background of the SEC Whistleblower Program

The Securities and Exchange Commission (“SEC”), via its whistleblower program,[1] awards whistleblowers who report securities-law violations that lead to SEC enforcement actions resulting in more than $1 million in sanctions. See 15 U.S.C. § 78u-6(b)(1). Since the program was implemented in 2011,[2] the SEC has awarded more than $150 million to whistleblowers. The four largest whistleblower awards the SEC has issued are $30 million in September 2014, $22 million in August 2016, $17 million in June 2016, and $14 million in October 2013.

II. Program Requirements

The SEC awards whistleblowers who (1) “voluntarily” provide (2) “original information” that (3) “led to the successful enforcement” (4) of a “covered judicial or administrative action, or related action.” 15 U.S.C. § 78u-6(b)(1).

  • Information is voluntarily provided if the whistleblower has no duty to report it but does so anyway “before a request, inquiry, or demand that relates to the subject matter of [the] submission is directed to [the whistleblower] or anyone representing [the whistleblower] (such as an attorney).” 17 C.F.R. § 240.21F-4(a).
  • A tip constitutes “original information” if it meets three criteria: (1) the information must come from the whistleblower’s “independent knowledge or analysis”; (2) the SEC must not have received the information from any other source; and (3) the information must not be “exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media.” 15 U.S.C. § 78u-6(a)(3). The second and third requirements do not apply where the whistleblower is the original source of the information. 15 U.S.C. § 78u-6(a)(3)(B)–(C).
    • There is a 120-day lookback period—i.e., where an individual reports his or her information internally and then, within 120 days, reports that information to the SEC, the SEC will treat that information as if it had been reported to the SEC on the date of the internal report. 17 C.F.R. § 240.21F-4(c)(3).
  • There are two standards for determining whether information “led to the successful enforcement” of an action: one applies to information about conduct not under investigation, and another applies to information about conduct already under investigation.
    • Information regarding conduct not under investigation leads to a successful enforcement where it (1) causes the SEC “to commence an examination, open an investigation, reopen an investigation that the Commission had closed, or to inquire concerning different conduct as part of a current examination or investigation,” and (2) the SEC brings a successful action “based in whole or in part on the conduct identified in the original information.” 17 C.F.R. § 240.21F-4(c)(1).
    • Information about conduct already under investigation leads to a successful enforcement where it “significantly contributed” to the action’s success. 17 C.F.R. § 240.21F-4(c)(2). Factors the SEC considers in applying this standard include whether, as a result of the information, the SEC was able to accomplish its successful enforcement action “in significantly less time or with significantly fewer resources,” bring other successful claims, or bring successful actions against others. Exchange Act Release No. 34-64545, 76 Fed. Reg. 34,300, 34,325.
  • A “covered judicial or administrative action” is any SEC action that results in monetary sanctions of more than $1 million. 15 U.S.C. § 78u-6(a)(1). A “related action” is any action that is based on the same information reported to the SEC and is brought by “(I) the Attorney General of the United States; (II) an appropriate regulatory authority; (III) a self-regulatory organization; [or] (IV) a State attorney general in connection with any criminal investigation.” 15 U.S.C. § 78u-6(a)(5), (h)(2)(D)(i)(I)–(IV).

III. Program Benefits

The SEC whistleblower program provides qualifying whistleblowers with (A) monetary rewards, (B) protection against employer retaliation, and (C) confidentiality. 15 U.S.C. § 78u-6(b)(1), (h)(1)(A), (h)(2)(A).

A.   Monetary Rewards

Where all requirements are met, the whistleblower will receive an award of between 10% and 30% of the monetary sanctions collected as a result of the tip. 15 U.S.C. § 78u-6(b)(1). The determination of whether to make an award is subject to appeal. 15 U.S.C. § 78u-6(f). The amount awarded is at the SEC’s discretion. 15 U.S.C. § 78u-6(c)(1)(A). The SEC takes the following into consideration in determining the amount of the award:

(I) the significance of the information provided by the whistleblower to the success of the covered judicial or administrative action;

(II) the degree of assistance provided by the whistleblower and any legal representative of the whistleblower in a covered judicial or administrative action;

(III) the programmatic interest of the Commission in deterring violations of the securities laws by making awards to whistleblowers who provide information that lead to the successful enforcement of such laws; and

(IV) such additional relevant factors as the Commission may establish by rule or regulation.

15 U.S.C. § 78u-6(c)(1)(B)(i). However, there are several categorical exclusions.[3]

B. Anti-Retaliation Provision

Dodd-Frank states the following:

No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower—

(i) in providing information to the Commission in accordance with this section;

(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or

(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter, including section 78j-1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

15 U.S.C. § 78u-6(h)(1)(A).

1. Who Is Protected from Retaliation?

In 2015, the SEC issued an interpretive rule stating that “for purposes of the employment retaliation protections provided by Section 21F of the Securities Exchange Act of 1934 (‘Exchange Act’), an individual’s status as a whistleblower does not depend on adherence to the reporting procedures specified in Exchange Act Rule 21F-9(a),[[4]] but is determined solely by the terms of Exchange Act Rule 21F-2(b)(1).”[5] Exchange Act Release No. 34-75592, 80 Fed. Reg. 47,829 (Aug. 10, 2015). In other words, with regard to the anti-retaliation provision only, one’s status as a “whistleblower” does not depend on that person’s having reported a suspected violation to the SEC. The SEC is statutorily authorized to issue this type of rules and regulations “to implement the provisions of this section consistent with the purposes of this section.” 15 U.S.C. § 78u-6(j).

Despite the SEC’s guidance, federal courts remain divided as to whether employees must report suspected securities-law violations to the SEC in order to be covered by Dodd-Frank’s whistleblower protections. The Fifth Circuit and a minority of federal district courts have held that, for one to be considered a “whistleblower” under Dodd-Frank’s anti-retaliation provision, he or she must have reported suspected violations to the SEC. See Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620, 625 (5th Cir. 2013). The Second Circuit and a majority of U.S. district courts to have faced this question, on the other hand, have held that one is a “whistleblower” under the anti-retaliation provision even if he or she reports internally and not to the SEC. See Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 155 (2d Cir. 2015).

2. Minority Rule

In July 2013, the Fifth Circuit held that an employee’s complaint was properly dismissed where that employee was fired after reporting a suspected securities-law violation internally but not to the SEC. Asadi, 720 F.3d 620 at 625, 630 (“Under Dodd-Frank’s plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.”). Because the complainant did not report the suspected violation to the SEC, he was held not to be a “whistleblower” under Dodd-Frank’s anti-retaliation provision and so was not covered by the Act’s whistleblower protections. See id. at 630. A minority of U.S. district courts follow this line of reasoning. See, e.g., Puffenbarger v. Engility Corp., No. 1:15-cv-188, 2015 WL 9686978, at *8–9 (E.D. Va. Dec. 31, 2015) (“[B]ecause ‘the intent of Congress is clear,’ as the statute directly and unambiguously limits whistleblower protection to individuals who report to the SEC, it is necessary to ‘give effect to the unambiguously expressed intent of Congress,’ and hence to reject the SEC’s more expansive interpretation of the term ‘whistleblower.’”); Englehart v. Career Educ. Corp., No. 8:14-cv-444-T-33EAJ, 2014 WL 2619501, at *8–9 (M.D. Fla. May 12, 2014) (“Generally, anti-retaliation provisions are construed liberally to protect employees who complain about or report illegal conduct. However, in the context of the Dodd-Frank Reform Act, Congress chose to provide a restrictive definition of ‘whistleblower.’”).

3. Majority Rule

The Second Circuit disagreed with the Fifth Circuit when it held in September 2015 that Dodd-Frank’s protection against retaliation applies not only to those employees who report suspected infractions to the SEC but also to those who report only internally. See Berman, 801 F.3d 145 at 155 (“Under SEC Rule 21F-2(b)(1), [the whistleblower] is entitled to pursue Dodd-Frank remedies for alleged retaliation after his report of wrongdoing to his employer, despite not having reported to the Commission before his termination.”). Most U.S. district courts that have faced this question reached the same conclusion, though with varying logic. See, e.g., Lutzeier v. Citigroup Inc., No. 4:14CV183, slip op. at 2 (E.D. Mo. Nov. 19, 2015) (“Under SEC Rule 21F-2(b)(1), an individual need not report to the Agency to qualify as a whistleblower. Therefore, the Court holds that Lutzeier can pursue Dodd-Frank remedies for alleged retaliation after his report of wrongdoing to his employer, despite not having reported to the Commission.”); Dressler v. Lime Energy, No. 3:14-cv-07060, slip op. at 16 (D.N.J. Aug. 13, 2015) (“[T]he SEC’s interpretation encourages internal reporting of possible securities violations and enhances the agency’s ability to enforce anti-retaliation policies.”); Somers v. Digital Realty Trust, Inc., 119 F. Supp. 3d 1088, 1106 (N.D. Cal. 2015) (“As the SEC has stated, a narrow reading of Dodd-Frank would ‘significantly weaken the deterrence effect on employers who might otherwise consider taking an adverse employment action.’”); Bussing v. COR Clearing, LLC, 20 F. Supp. 3d 719, 729–30 (D. Neb. 2014) (“This interpretation gives effect to the full range of disclosures protected by the anti-retaliation provision, while reserving rewards under the bounty program for whistleblowers who report to the SEC.”); Yang v. Navigators Group, Inc., 18 F. Supp. 3d 519, 534 (S.D.N.Y. 2014) (“[T]he statute does not clearly and unambiguously limit whistleblower protection to individuals who report violations to the SEC where the anti-retaliation provision simultaneously incorporates SOX-protected reporting to supervisors.”); Ellington v. Giacoumakis, 977 F. Supp. 2d 42, 45 (D. Mass. 2013) (“It is apparent . . . that Congress intended that an employee terminated for reporting Sarbanes-Oxley violations to a supervisor or an outside compliance officer, and ultimately to the SEC, have a private right of action under Dodd-Frank whether or not the employer wins the race to the SEC’s door with a termination notice.”).

C. Confidentiality

Generally, the SEC is prohibited from disclosing “any information, including information provided by a whistleblower to the Commission, which could reasonably be expected to reveal the identity of a whistleblower.” 15 U.S.C. § 78u-6(h)(2)(A). Under exceptional circumstances, however, the SEC may disclose this information.[6] Furthermore, with an attorney, whistleblowers can file anonymous reports and remain anonymous, even to the SEC, until an award is to be paid. 17 C.F.R. § 240.21F-7(b).

IV. Particular Award Jason Zuckerman Asked About

On May 13, 2016, the SEC announced a $3.5 million whistleblower award for a tip that “bolstered an ongoing investigation.” Andrew Ceresney, director of the SEC’s Division of Enforcement, was quoted as saying, “Whistleblowers can receive an award not only when their tip initiates an investigation, but also when they provide new information or documentation that advances an existing inquiry.” Mr. Ceresney added that the award-winning tip “increased [the SEC’s] leverage during settlement negotiations.”

As noted above, the plain text of Dodd-Frank Section 922 specifies that, for a whistleblower to be eligible for an award, the information furnished must have “led to the successful enforcement” of an action. 15 U.S.C. § 78u-6(b)(1). Also as noted above, however, the SEC interpreted this requirement as being met where a whistleblower’s tip “significantly contributed” to the success of an ongoing action. Therefore, the SEC appears to have complied with its own guidance in making this award.

Based on Mr. Ceresney’s statement, it seems that the enforcement had already reached settlement negotiations by the time the award-winning tip arrived. So, the question left open is to what degree a tip must increase the leverage of the SEC in settlement negotiations in order for that tip to be said to have “significantly contributed” to the success of the enforcement action.

V. SEC Whistleblower Attorneys

If you have information that you would like to report to the SEC Whistleblower Office, contact an experienced SEC whistleblower attorney at Zuckerman Law for a free, confidential consultation.  Click here or call us today at 202-262-8959.

For more information about the SEC Whistleblower Program, the whistleblower attorneys at Zuckerman Law have authored several articles detailing SEC whistleblower incentives and protections, including:

Footnotes

[1] The Commodity Futures Trading Commission and Internal Revenue Service also have whistleblower programs. See U.S. Commodity Futures Trading Commission Whistleblower Program, https://www.whistleblower.gov; IRS Whistleblower – Informant Award, https://www.irs.gov/uac/whistleblower-informant-award.

 

[2] Dodd-Frank Section 922, passed in 2010, added the modern whistleblower program to the Securities Exchange Act of 1934. 15 U.S.C. § 78u-6. The SEC implemented the program in 2011 with the issuance of final rules. 17 C.F.R. §§ 240.21F-1 et seq.

 

[3] Awards are not made—

(A) to any whistleblower who is, or was at the time the whistleblower acquired the original information submitted to the commission, a member, officer, or employee of—

(i) an appropriate regulatory agency;

(ii) the Department of Justice;

(iii) a self-regulatory organization;

(iv) the Public Company Accounting Oversight Board; or

(v) a law enforcement organization;

(B) to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under this section;

(C) to any whistleblower who gains the information through the performance of an audit of financial statements required under the securities laws and for whom such submission would be contrary to the requirements of section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1); or

(D) to any whistleblower who fails to submit information to the Commission in such form as the Commission may, by rule, require.

15 U.S.C. § 78u-6(c)(2).

 

[4] Rule 21F-9(a) states the following:

To be considered a whistleblower under Section 21F of the Exchange Act (15 U.S.C. 78u-6(h)), you must submit your information about a possible securities law violation by either of these methods:

(1) Online, through the Commission’s Web site located at http://www.sec.gov; or

(2) By mailing or faxing a Form TCR (Tip, Complaint or Referral) (referenced in § 249.1800 of this chapter) to the SEC Office of the Whistleblower, 100 F Street NE., Washington, DC 20549-5631, Fax (703) 813-9322.

17 C.F.R. § 240.21F-9(a).

 

[5] Rule 21F-2(b)(1) states the following:

For purposes of the anti-retaliation protections afforded by Section 21F(h)(1) of the Exchange Act (15 U.S.C. 78u–6(h)(1)), you are a whistleblower if:

(i) You possess a reasonable belief that the information you are providing relates to a possible securities law violation (or, where applicable, to a possible violation of the provisions set forth in 18 U.S.C. 1514A(a)) that has occurred, is ongoing, or is about to occur, and;

(ii) You provide that information in a manner described in Section 21F(h)(1)(A) of the Exchange Act (15 U.S.C. 78u–6(h)(1)(A)).

(iii) The anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.

17 C.F.R. § 240.21F-2(b)(1).

 

[6] The SEC may disclose information that reasonably likely would reveal the whistleblower’s identity only under these circumstances:

(1) When disclosure is required to a defendant or respondent in connection with a Federal court or administrative action that the Commission files or in another public action or proceeding that is filed by an authority to which we provide the information, as described below;

(2) When the Commission determines that it is necessary to accomplish the purposes of the Exchange Act (15 U.S.C. 78a) and to protect investors, it may provide your information to the Department of Justice, an appropriate regulatory authority, a self regulatory organization, a state attorney general in connection with a criminal investigation, any appropriate state regulatory authority, the Public Company Accounting Oversight Board, or foreign securities and law enforcement authorities. Each of these entities other than foreign securities and law enforcement authorities is subject to the confidentiality requirements set forth in Section 21F(h) of the Exchange Act (15 U.S.C. 78u-6(h)). The Commission will determine what assurances of confidentiality it deems appropriate in providing such information to foreign securities and law enforcement authorities.

(3) The Commission may make disclosures in accordance with the Privacy Act of 1974 (5 U.S.C. 552a).

17 C.F.R. § 240.21F-7(a).

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