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Hot Topics in Corporate Whistleblower Protections


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This course provides an overview of recent developments in protections for corporate whistleblowers, including the recently enacted Taxpayer First Act whistleblower protection law, Sarbanes-Oxley protected conduct, protections for cybersecurity whistleblowers, the impact of Wadler on gatekeeper whistleblower protections, the expanding scope of actionable retaliation, and the burden of proof under SOX.

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Hot Topics in Corporate Whistleblower Protections

  2. 2. TAXPAYER FIRST ACT WHISTLEBLOWER PROTECTION • Effective July 1, 2019 • Modeled on SOX and FCA whistleblower protection provisions • Broad scope of coverage, prohibiting any “employer, officer, employee, contractor, subcontractor, or agent” of an employer from retaliating against a whistleblower. • Applies to law firms, accounting firms, public companies and private companies
  3. 3. TAXPAYER FIRST ACT WHISTLEBLOWER PROTECTION • Protected Conduct: • Providing information or assisting in an investigation regarding underpayment of tax or any conduct which the employee reasonably believes constitutes a violation of the internal revenue laws or any provision of Federal law relating to tax fraud • Testifying or participating in any IRS judicial or administrative action regarding tax underpayment or violation of internal revenue law • Protects internal disclosures • Reasonable belief standard
  4. 4. TAXPAYER FIRST ACT WHISTLEBLOWER PROTECTION • Broad scope of actionable retaliation • Contributing factor causation • 180-day statute of limitations • Must file initially at OSHA • Option to litigate in federal court 180 days after filing • Exempt from mandatory arbitration
  5. 5. TAXPAYER FIRST ACT WHISTLEBLOWER PROTECTION • Remedies • double back pay with interest; • reinstatement; • uncapped special damages (comp damages); and • attorney fees, litigation costs, and expert witness fees.
  6. 6. SEC WHISTLEBLOWER PROGRAM • Nearly a decade old • 28,000 tips • $387M paid to whistleblowers • FY19 $60M awards • Whistleblower disclosures led to $2B in monetary sanctions, including $1B of disgorgement of ill-gotten gains, half of which was returned to investors • Stopped fraudulent schemes • Filed from 72 countries and every state
  7. 7. SEC WHISTLEBLOWER PROGRAM • Voluntarily provides the SEC with original information about violation of the federal securities laws • Information provided must lead to a successful SEC action resulting in monetary sanctions exceeding $1 million • Also awards independent analysis • Award can range from 10% to 30% of collected sanctions
  8. 8. SEC WHISTLEBLOWER PROGRAM • 3 core facets: • Whistleblower can file anonymously through counsel • SEC enforces prohibition against retaliation • SEC prohibits companies from impeding whistleblowing
  9. 9. SEC WHISTLEBLOWER PROGRAM: TIPS FOR WHISTLEBLOWERS • Identify specific, original information • Establish a material violation • Do not delay reporting but be patient during investigation • Provide roadmap for a successful enforcement action • Focus on SEC enforcement priorities, e.g., protecting retail investors • Provide strong investigative leads • Don’t provide privileged information
  10. 10. Should Whistleblowers Report Internally Before Reporting to the SEC?
  11. 11. INCENTIVES TO REPORT INTERNALLY • Dodd-Frank whistleblower rules incentivize internal whistleblowing: • Rule 21F-6(a)(4) authorizes an increase in the award percentage where the whistleblower reported the possible securities violations through internal whistleblower, legal or compliance procedures. • under Rule 21F-4(c)(3), a whistleblower can get credit for information disclosed by a company to the SEC where the information results from an internal investigation of the whistleblower’s disclosure to the company. • Increased protection against retaliation
  12. 12. MAY 2019 $4.5M AWARD • May 24, 2019 SEC awarded $4.5M to a whistleblower whose disclosures to his employer Biomet and regulators about a kickback scheme in Brazil led to a $30M enforcement action • Whistleblower got credit for information that the company provided to the SEC following an internal investigation • Whistleblower filed a TCR within 120 days of internal disclosure
  13. 13. DISINCENTIVES TO REPORT INTERNALLY • Retaliation • Potentially giving the wrongdoer an opportunity to destroy evidence • Employer has an opportunity frame the evidence before the government commences an investigation • Employer could self-report before the whistleblower files a TCR (but note 120-day rule)
  14. 14. DIGITAL REALTY V. SOMERS Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018) • Question: Does the anti-retaliation provision of the Dodd-Frank Act protect internal reporting? • Holding: To qualify for Dodd-Frank protection, whistleblower must demonstrate that they reported a potential securities law violation to the SEC and engage in protected conduct:. 1. providing information to the SEC Office of the Whistleblower; 2. initiating, testifying in, or assisting in any SEC investigation or judicial or administrative action; or 3. making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002, the Securities Exchange Act of1934, and any other law, rule, or regulation subject to the jurisdiction of the SEC.
  15. 15. DIGITAL REALTY V. SOMERS Is a Dodd-Frank Act Whistleblower Required to Prove Knowledge of Whistleblowing to the SEC?
  16. 16. DIGITAL REALTY V. SOMERS • Dodd-Frank “protects a whistleblower who reports misconduct both to the SEC and to another entity, but suffers retaliation because of the latter, non-SEC, disclosure . . . for example, where the retaliating employer is unaware that the employee has alerted the SEC . . . The employee can recover under the statute without having to demonstrate whether the retaliation was motivated by the internal report . . . or by the SEC disclosure.” • Reporting to the SEC is a threshold eligibility requirement
  17. 17. WHISTLEBLOWER PROGRAMS IMPROVEMENT ACT • July 2019 House passed H.R. 2515, Whistleblower Protection Reform Act of 2019, which clarifies that internal whistleblowing is protected under Dodd-Frank Act • S. 2529, Whistleblower Programs Improvement Act, introduced 9/23/19
  18. 18. SOX CONTINUES TO PROTECT INTERNAL WHISTLEBLOWING Section 806 of SOX protects a disclosures about any conduct that they reasonably believe violates: • federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud; • any rule or regulation of the SEC; or • any provision of federal law relating to fraud against shareholders when the information or assistance is provided to or the investigation is conducted by: • a federal regulatory or law enforcement agency; • Congress; or • a person with supervisory authority over the employee
  19. 19. SOX PROTECTED CONDUCT • “Reasonable belief” standard: • Disclosure of potential violation protected • Complainant need not allege shareholder fraud • No magic words required (e.g., fraud or misrepresentation) • Complainants no longer need to show that their disclosures “definitively and specifically” relate to the relevant laws • Reasonable but mistaken belief protected
  20. 20. SOX PROTECTED CONDUCT Murray v UBS Securities LLC et al, No. 14-00927 (S.D.N.Y. April 25, 2017) • Because “[m]any employees are unlikely to be trained to recognize legally actionable conduct by their employers,” an employee’s “belief” in his employer’s wrongdoing is “central[]” to the analysis of SOX-protected conduct. • “[S]ince § 806 was ‘designed to encourage insiders to come forward without fear of retribution,’ ‘[i]t would frustrate the purpose of Sarbanes-Oxley to require an employee, who knows that a violation is imminent, to wait for the actual violation to occur when an earlier report possibly could have prevented it. . . ’”
  21. 21. SOX CONTRIBUTING FACTOR CAUSATION Palmer v. Canadian National Railway, ARB No. 16-035, ALJ No. 2014-FRS-154 (ARB Sept. 30, 2016) (en banc) • “Contributing factor” = protected activity played some role—even an insignificant or insubstantial role—in the adverse action • Decision-maker knowledge of the protected activity and close temporal proximity will suffice to prove causation in some cases • Whistleblower need not prove pretext
  22. 22. CONTRIBUTING FACTOR CAUSATION • Palmer • We want to reemphasize how low the standard is for the employee to meet, how ‘broad and forgiving’ it is. ‘Any’ factor really means any factor. It need not be ‘significant, motivating, substantial or predominant’ — it just needs to be a factor. • Potential forms of proof: • temporal proximity; • the falsity of an employer’s explanation for the adverse action; • inconsistent application of an employer’s policies; • employer’s shifting explanations for its actions; or • animus toward the whistleblower’s protected activity. • “[I]f the ALJ believes that the protected activity and the employer’s nonretaliatory reasons both played a role, the analysis is over and the employee prevails on the contributing-factor question . . . ”
  23. 23. CONTRIBUTING FACTOR CAUSATION Does contributing factor causation require a showing of retaliatory motive? • Seventh and Eighth circuits require proof of retaliatory motive. • 3rd, 4th, 5th, 7th, 9th, and Fed. Cir. do not
  24. 24. SAME-DECISION AFFIRMATIVE DEFENSE • In contrast to Title VII, not a burden of production • What is “clear and convincing evidence”? • Not enough for the employer to show that it could have taken the same action; it must show that it would have taken the same action • Quantified, the probabilities might be in the order of above 70%
  25. 25. SOX OR DODD-FRANK?
  26. 26. Distinctions Between Section 806 of SOX and Section 922A of Dodd-Frank
  27. 27. Gatekeeper WhistleblowersGatekeeper Whistleblowers
  28. 28. EXAMPLES OF GATEKEEPER WHISTLEBLOWERS • In-house counsel • Compliance personnel • Internal auditors • External auditors
  29. 29. GATEKEEPER SEC WHISTLEBLOWER REWARD ELIGIBILITY • Internal auditors and compliance personnel eligible if meet one of three criteria: – information reported to SEC at least 120 days after providing it to the employer’s audit committee, chief legal officer, chief compliance officer, or a supervisor; – reasonable basis to believe that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors; or – reasonable basis to believe that the company is engaging in conduct that will impede an investigation.
  30. 30. IN-HOUSE COUNSEL WHISTLEBLOWER PROTECTIONS Can in-house counsel bring SOX whistleblower claims?
  31. 31. SOX WHISTLEBLOWER PROTECTION FOR IN-HOUSE COUNSEL • Jordan v. Sprint, ARB No. 2005-SOX-41 (ARB Sept. 30, 2009). • Van Asdale v. Int’l Game Tech., 577 F.3d 989, 995–96 (9th Cir. 2009) • Wadler v. Bio-Rad Labs., Inc., 212 F. Supp. 3d 829 (N.D. Cal. 2016)
  32. 32. WADLER V. BIO–RAD LABS • 25 years as in-house counsel at Bio-Rad • Investigated and internally reported potential violations of the FCPA • Fired soon after submitting memo to Audit Committee • Bio-Rad’s outside counsel presented a slideshow to the SEC and DOJ addressing Wadler’s concerns in detail and revealing the results of investigations • $8M verdict • Ninth Circuit vacated the verdict as to the SOX claim and affirmed the wrongful termination claim
  33. 33. WADLER V. BIO–RAD LABS • Wadler v. Bio–Rad Labs., Inc., 2016 WL 7369246 (N.D. Cal. Dec. 20, 2016) • Where a retaliatory-discharge claim is brought under SOX and overlaps with a state-law claim, and the state’s ethical rules preclude the use of privileged or confidential information that SEC regulations would permit (part 205 “up the ladder” rules), the SEC’s regulations preempt the state’s rules. • An in-house attorney can use privileged information to establish whistleblower retaliation claim • The information should be reasonably necessary to any claim or defense • The public disclosure of privileged information, including such disclosure in government proceedings, expressly waives the attorney-client privilege as to that information
  34. 34. “DUTY SPEECH” HURDLE FOR GATEKEEPER WHISTLEBLOWERS Should gatekeeper whistleblowers be protected for disclosures made in the ordinary course of performing their job duties?
  35. 35. “DUTY SPEECH” HURDLE FOR GATEKEEPER WHISTLEBLOWERS • DOL and federal judges generally reject a duty speech/step outside exception to SOX: • Robinson v. Morgan-Stanley, ARB Case No. 07–070 (ARB Jan. 10, 2010) • Yang v. Navigators Group, Inc., 2014 WL 1870802 (S.D.N.Y. May 8, 2014) • Deremer v. Gulfmark Offshore, Inc., ALJ Case No. 2006-SOX-2 (June 29, 2007) • Split of authority under False Claims Act retaliation provision: • NY district judges have rejected a “duty speech” heightened burden for fraud alert employees to prove protected conduct. Malanga v. NYU Langone Med. Ctr., 2015 WL 7019819 (S.D.N.Y. Nov. 12, 2015) (FCA)
  36. 36. “DUTY SPEECH” HURDLE FOR GATEKEEPER WHISTLEBLOWERS • United States ex rel. Reed v. KeyPoint Gov't Solutions, No. 17-1379, (10th Cir. Apr. 30, 2019) • Senior Quality Control Analyst discovered fraud in the course of performing job duties, and reported it up the chain • Failed to plead notice of protected conduct because her job duties may have required her to seek remedial action from employees other than her direct supervisor
  37. 37. What is the scope of retaliation prohibited under whistleblower protection laws?
  38. 38. SCOPE OF ADVERSE ACTIONS • DOL construes adverse actions broadly: • Threat of retaliation • “Outing” a whistleblower • Constructive discharge • Harassment • Most anti-retaliation laws employ the Burlington Northern materiality standard
  39. 39. “OUTING” A WHISTLEBLOWER Halliburton, Inc. v. Admin. Review Bd., 771 F.3d 254, 259 (5th Cir. 2014) • Merely “outing” a whistleblower is an adverse action under SOX. • “[The] targeted creation of an environment in which the whistleblower is ostracized is . . . in effect, a potential deprivation of opportunities for future advancement.” • Menendez resigned and did not suffer economic loss • ALJ awarded special damages
  40. 40. CONSTRUCTIVE DISCHARGE • Smith v. LHC Grp., Inc., 727 F. App'x 100 (6th Cir. 2018) • Smith raised concerns about employees altering reimbursement paperwork and making false representations about staffing for the purpose of admitting patients • As Director of Nursing, Smith was concerned about potential prosecution and jeopardizing her nursing license. • Company ignored her disclosures and failed to take remedial action • Requiring an employee “to engage in activity she considers illegal and immoral” may create intolerable working conditions
  41. 41. POST-EMPLOYMENT RETALIATION • Potts v. Center for Excellence in Higher Education, Inc., 2018 WL 5796963 (10th Cir. Nov. 6, 2018) • After Potts resigned, operator of for-profit college sued her for disparaging them to the Commission of Career Schools and Colleges concerning alleged deceptions in maintaining accreditation. • Potts alleged that the suit against her violated the FCA’s anti-retaliation provision. • FCA retaliation proscribes retaliation only against current employees, not former employees
  42. 42. INVALID “GAG CLAUSES” BARRING WHISTLEBLOWING • Blatant contractual provision barring whistleblowing to regulators or law enforcement have always been unlawful • Post-Dodd-Frank, there is a sea change in barring provisions that have the effect of impeding lawful whistleblowing
  43. 43. INVALID “GAG CLAUSES” BARRING WHISTLEBLOWING • SEC Rule 21F-17 • “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.”
  44. 44. INVALID “GAG CLAUSES” BARRING WHISTLEBLOWING • SEC has taken steps to combat contractual provisions: • Requiring employees to waive possible whistleblower awards • Prohibiting employees from disclosing subject of internal investigation • Requiring notice prior to responding to inquiry from SEC
  45. 45. OSHA 9/15/16 GUIDANCE OSHA guidelines barring provisions that impede whistleblowing: • Provisions that require employees to waive the right to receive a monetary award from a government-administered reward program • Provisions that require the employee to advise the employer before voluntarily communicating with the government • Provisions requiring the employee to affirm she has not previously provided information to the government