Whistleblowers on Wall Street: A Guide to SEC Whistleblower Rewards and Protections

Whistleblowers on Wall Street
www.JohnHowleyEsq.com
Understanding the SEC Whistleblower Program

Disclaimer and Copyright
These slides are designed to give you a basic overview of the SEC
Whistleblower program. They are not intended as legal advice. Depending
on when you read these slides, they may or may not contain current
information . And, of course, I have not become your lawyer merely because
you read my slides.
If you think you might have a claim, you should consult with me or another
lawyer immediately to protect your rights. Do not delay. All whistleblower
claims are subject to strict time limits and procedural requirements. Failure
to comply with those time limits or procedural requirements could result in
the loss of your claims.
These slides are copyright © 2016 by John Howley, Esq. All rights are
reserved.

Types of Whistleblowers
• National Security and Civil Liberties
• Government Misconduct and Mismanagement
• Fraud in Government Programs and Contracts
• Tax Fraud and Evasion
• Violations of the Securities Laws

SEC Whistleblower Laws
• The Sarbanes-Oxley Act of 2002 (SOX)
• The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank)

Eligible Whistleblowers
• For purposes of recovering a whistleblower award under the
Dodd-Frank Act, an “Eligible Whistleblower” is:
• a person who, alone or jointly with others,
• voluntarily provides
• original information
• about a possible violation of the federal securities laws
• to the Securities and Exchange Commission
• after July 21, 2010.
17 C.F.R. § 240.21F-2

• A “person” is limited to a natural person; corporations and
organizations do not qualify as whistleblowers under Dodd-
Frank.
• More than one person may qualify as a whistleblower in the
same case.
• Whistleblowers do not have to be employees of the
company; any person with relevant information may qualify.

• “Voluntary” disclosure means the information is provided
before a “request, inquiry, or demand that relates to the
subject of your submission” is directed to you or anyone
representing you:
• by the SEC;
• in connection with an investigation, inspection, or examination
by the Public Company Accounting Oversight Board or a self-
regulatory agency; or
• in connection with an investigation by Congress, another
federal agency, or state Attorney General or securities
regulator.
17 C.F.R. § 240.21F-4(a)

• “Original information” means information that is:
• based on your independent knowledge and not derived from
public sources; or
• derived from your independent analysis of facts that may or
may not be publicly available.
17 C.F.R. § 240.21F-4(b)(1)

• The “original source” of information is still eligible for a
whistleblower award even if the information is disclosed to
the SEC, in the media, in judicial or administrative
proceedings, or in government reports, hearings, audits, or
investigations.
17 C.F.R. § 240.21F-4(b)(1)

Qualifying Disclosures
• Possible Violations of the Securities Laws
• 18 U.S.C. § 1341 (mail fraud)
• 18 U.S.C. § 1344 (bank fraud)
• 18 U.S.C. § 1348 (securities and commodities fraud)
• SEC rules and regulations
• Other federal laws relating to fraud against shareholders
18 U.S.C. § 1514A

• Examples of Securities Law Violations
• Fraudulent corporate disclosures and financial statements
• Material misrepresentations and omissions in securities
offerings
• Insider trading
• Market manipulation
• Ponzi schemes
• Improper tax treatment of a merger that could result in
substantial, unreported tax liability. See Wong v. CKX, Inc., 890
F. Supp. 2d 411, 416 (S.D.N.Y. 2012).

• Not Violations of the Securities Laws
• Violations of banking laws such as 18 U.S.C. § 1005, 18 U.S.C.
§ 1007, and 12 U.S.C. § 5536. See Zillges v. Kenney Bank &
Trust, No. 13-C-1287, 2014 WL 2515403 (E.D. Wisc. June 4,
2014).
• Violations of 18 U.S.C. § 1513E. See id.
• Violations of the Foreign Corrupt Practices Act (FCPA). See Liu
v. Siemens A.G., 978 F. Supp. 2d 325, 330 (S.D.N.Y. 2013); In re
Gupta, Case No. 2010-SOX-54, 2011 WL 121916, at *5 (Dep’t of
Labor Jan. 7, 2011).
• Defrauding customers by overbilling or providing poor quality
work. See Safarian v. American DG Energy Inc., No. 10-CV-
6082, 2014 WL 1744989, at *4 (D.N.J. Apr. 29, 2014)
Unless these violations result in false or misleading
representations or omissions that violate the Securities laws.

• The information provided must “lead to” a successful SEC
action resulting in more than $1 million in monetary
sanctions.
• “Lead to” means the information causes the SEC to:
• open a new investigation;
• re-open a closed investigation;
• pursue a new line of inquiry in connection with an ongoing
investigation; or
• the information significantly contributes to the success fo an
SEC enforcement action.

Reporting Procedures
• Information must be submitted:
• online by completing the SEC’s Tips, Complaints, and Referrals
questionnaire; or
• by mailing SEC Form TCR to the SEC Office of the
Whistleblower.

• Confidentiality
• SEC will not disclose the whistleblower’s identity in response to
Freedom of Information Act requests
• Information provided by the whistleblower may be used in the
SEC’s investigation and shared with other government agencies
• Documents or information produced in court or administrative
proceedings may reveal the whistleblower’s identity

• Anonymous Submissions are Permitted
• must be done through an attorney
• whistleblower must give the attorney a completed Form TCR
signed under penalty of perjury

Internal Compliance Reports
• Use of internal corporate compliance procedures is not
required.
• When internal corporate compliance procedures are used,
the whistleblower must report the information to the SEC
within 120 days to remain eligible for an award.

• Benefits of Using Internal Compliance Procedures
• All information developed during the company’s internal
investigation will be credited to the whistleblower when
calculating the whistleblower’s award.
• For purposes of determining who provided “original
information,” the SEC will use the date the whistleblower first
reported the information internally.
• Use of internal compliance procedures is a “plus” factor when
the SEC determines the amount of the whistleblower’s award.

• Internal Compliance Procedures and Retaliation Claims
• Use of internal compliance procedures puts the employer on
notice for purposes of any retaliation claim.
• But could trigger retaliation.
• Fifth Circuit holds that a whistleblower does not engage in
protected activity unless the information is provided to the
SEC. See Asadi v. GE Energy (USA), LLC, 720 F.3d 620, 623-30
(5th Cir. 2013).
• The Second Circuit and most district courts disagree. See, e.g.,
Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).

Claiming Awards
• The SEC contacts whistleblowers or their attorneys when an
enforcement action results in sanctions of $1 million or
more.
• The SEC also posts on its web site notices of enforcement
actions resulting in sanctions of $1 million or more.
• Individuals who believe they may be eligible for a
whistleblower award must apply within 90 calendar days.
• Applications are submitted by mail or fax to the Office of the
Whistleblower using Form WB-APP.

Calculating Awards
• In administrative and judicial proceedings resulting in
sanctions exceeding $1 million, the SEC must award
between 10% and 30% of the monetary sanctions to
qualified whistleblowers.
• The SEC has discretion to consider the unique facts and
circumstances of each case when determining the amount
of the whistleblower award.

Calculating Awards
• Factors Favoring a Higher Award Percentage
• the significance of the whistleblower’s information to the
success of the proceeding
• the extent of assistance provided by the whistleblower during
an investigation and proceeding
• the law enforcement interest in deterring violations by
rewarding whistleblowers
• whether the whistleblower participated in a company’s internal
compliance systems before or at the same time the information
was reported to the SEC
17 C.F.R. § 240.21F-6

Calculating Awards
• Factors Tending to Reduce Award Percentages
• the whistleblower was a participant or culpable in the
securities law violations
• unreasonable delays in reporting the violations to the SEC
• interference with the company’s internal compliance and
reporting systems
17 C.F.R. § 240.21F-6

Recent Dodd-Frank Awards
• Five awards between $14 million and $35 million
• Multiple awards between $1 million and $6 million
• Most awards at or near the 30% maximum
• SEC takes the position that 30% is the aggregate limit even
when more than one whistleblower is entitled to an award

Recent Dodd-Frank Awards
• Several awards were denied or reduced because the
whistleblower delayed reporting to the SEC
• One award was denied because the whistleblower provided
information only to the U.S. Department of Housing and
Urban Development (HUD), not to the SEC
• One claimant was permanently barred from the Dodd-Frank
whistleblower program for submitting 196 frivolous claims
• Numerous claims were denied because the whistleblowers
provided information before the effective date of Dodd-
Frank

Calculating Awards
• Appeals of Whistleblower Award Determinations
• Awards between 10% and 30% of the total monetary
sanctions are generally not appealable
• Denials of an award may be appealed within 30 days of the
SEC’s final decision
• Appeals are taken to the U.S. Court of Appeals for the D.C.
Circuit or to the Circuit Court of Appeals where the
whistleblower resides or has her principal place of business

Retaliation Remedies
• Employers may not take adverse employment action against
a person who:
• engaged in lawful acts;
• to provide information to the SEC or
• to assist in an SEC investigation or proceeding based on the
information provided; and
• reasonably believed that the information relates to a possible
securities law violation.
17 C.F.R. § 240.21F-2(b)

• The SEC may bring an enforcement action against an
employer who retaliates against a Dodd-Frank
whistleblower. 17 C.F.R. § 240.21F-2
• The employee may bring a separate action against the
employer in federal court. 15 U.S.C. § 78(u)-6(h).

• Caution: Dodd-Frank anti-retaliation protections do not
apply extraterritorially. See Liu v. Siemens A.G., 978 F. Supp.
2d 325, 328-29 (S.D.N.Y. 2013), aff’d, 763 F.3d 175 (2d Cir.
2014).
• Taiwanese resident employed by Chinese subsidiary of a
German company with ADRs traded on an American
exchange.
• Court cautioned against “intrusion into the employment law
of a foreign nation.” Id. at 329.

Paradigm Capital Management
• First SEC anti-retaliation enforcement action
• Hedge fund ordered to pay $2.2 million fine for retaliating against
an employee who reported securities law violations
• Employee was terminated in August 2012
• Fine was imposed in June 2014
• Employee filed a separate retaliation lawsuit in federal court

• Private Actions for Retaliation Under Dodd-Frank
• Filed directly in federal court
• No need to exhaust administrative remedies
• Arbitration agreements are not enforceable for Dodd-Frank
retaliation claims
• Remedies include reinstatement, double back pay, litigation
costs and attorneys’ fees
• 6 year statute of limitations from the date of the retaliatory act
(or 3 years after the material facts are known)

• Private Actions for Retaliation Under Sarbanes-Oxley (“SOX”)
• employee engaged in protected conduct;
• the employer “knew or suspected, actually or constructively”
that the employee engaged in protected conduct;
• the employee suffered an “unfavorable personnel action”; and
• the circumstances are sufficient to raise an inference that the
protected conduct “was a contributing factor in the
unfavorable action.”
29 C.F.R. § 1980.104(b)(1)

• Procedures for Retaliation Claims Under SOX
• OSHA has 180 days of exclusive jurisdiction
• employee files a complaint with OSHA
• OSHA has 60 days to determine whether “reasonable cause”
exists to find retaliation occurred
• a party may request a hearing before an ALJ
• ALJ decisions may be reviewed by the Administrative Review
Board
29 C.F.R. § 1980.105 - 1980.114

John Howley, Esq.
TheHowleyLawFirmP.C.
350FifthAvenue,59thFloor
NewYork,NewYork 10118
(212)601-2728
jhowley@johnhowleyesq.com

Whistleblowers on Wall Street: A Guide to SEC Whistleblower Rewards and Protections

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