The U.S. Court of Appeals for the Second Circuit created a federal appellate split today when it revived a Dodd-Frank Act retaliation claim by an ex-finance director, who was responsible for the company’s financial reporting and compliance with accounting standards. The court held that he was protected even though he only raised claims of accounting fraud internally with his employer, but did not report them to the Securities and Exchange Commission (SEC or the Commission) before he was terminated.
Articles Discussing Employee Whistleblowers.
Two recent cases from opposite coasts confirm that employees do not have an unfettered right to steal their employer’s documents notwithstanding the documents’ potential relevance to a whistleblower retaliation claim.
The Securities and Exchange Commission (SEC) recently issued interpretative guidance intended to advance the agency’s position that a whistleblower is entitled to the anti-retaliation protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act after making an internal complaint regarding possible securities law violations, even if the individual does not report directly to the SEC. The SEC’s interpretation comes as no surprise, as it has taken this litigation stance since issuing its first Dodd-Frank regulation in 2011. The release of an official agency interpretation on August 4, 2015 may be the SEC’s attempt to convince the courts to adopt its view. If the courts do, internal whistleblowers would have the benefit of Dodd-Frank’s procedural process and remedies in addition to those under the Sarbanes-Oxley Act of 2002 (SOX).
Executive Summary: On July 31, 2015, the Fifth Circuit issued a decision that may have both a positive and negative impact on employers defending whistleblower retaliation claims under the Sarbanes Oxley Act (SOX). In this decision, the court held that a former employee could not proceed with the portion of his whistleblower retaliation claim that was based on protected activity he did not identify in his administrative complaint to the Occupational Safety and Health Administration (OSHA). However, the court reinstated the former employee’s claims that were based on activity that he did report in his administrative complaint, finding that the lower court applied an overly restrictive pleading requirement in dismissing the claims. The Fifth Circuit adopted the more liberal pleading standard established by the U.S. Department of Labor (DOL) Administrative Review Board (ARB) in May 2011 – rendering it far easier for whistleblowers to advance their retaliation claims beyond the pleading stage, into the discovery phase, and potentially on to trial by jury.
The Sarbanes-Oxley Act (SOX) provides anti-retaliation protection to whistleblowers who engage in “protected activity.” To engage in protected activity under SOX, the whistleblower must provide information to the Securities and Exchange Commission (SEC) or another law enforcement agency, to Congress or one of its members, or to a “person with supervisory authority” over the whistleblower. The information must pertain to “any conduct” which the whistleblower “reasonably believes” constitutes a violation of at least one of six federal fraud laws enumerated under SOX. These laws are:
In a matter of first impression, the U.S. District Court for the Western District of Pennsylvania in Cestra v. Mylan Inc. No. 15-0873 (E.D. Pa., May 22, 2015) held that the antiretaliation provision of the False Claims Act applies to an employer who terminates an employee for engaging in protected conduct against an unrelated entity.
On March 5, 2015, OSHA issued amended procedures for the handling of retaliation complaints under Section 806 of the Sarbanes-Oxley Act of 2002. The amended procedures, now effective, govern employee protection claims. By way of background, on November 3, 2011, an interim final rule (“IFR”) governing these provisions and requesting comment was published in the Federal Register, 76 FR 68084. Pursuant to the IFR, five comments were received.
On March 5, 2015, the U.S. Department of Labor issued a Final Rule implementing protections for employees of securities companies and their subsidiaries, as well as employees of national credit-rating agencies. The Final Rule protects employees of public companies, their subsidiaries, contractors and subcontractors from retaliation for reporting actions they believe to be violations of securities laws. The Final Rule replaces the Interim Final Rule the DOL implemented on November 3, 2011, at the direction of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), which amended the Sarbanes-Oxley Act of 2002 (SOX). The Final Rule is effective immediately.
Various whistleblower laws protect employees who “lawfully” disclose confidential information in good faith to bring to light illicit or illegal activity. Generally, therefore, employees do not receive whistleblower protections when they obtain or disclose the information illegally. A recent U.S. Supreme Court case however, demonstrates an exception to that rule. In Department of Homeland Security v. MacLean, the Court held that an air marshal who disclosed confidential information in direct violation of Transportation Security Administration (TSA) regulations was entitled to whistleblower protection. Specifically, the Court held that the exemption in the Federal Whistleblower Protection Act (WPA) excluding disclosures “specifically prohibited by law” from receiving protection does not apply to disclosures prohibited solely by agency regulations or by statutes that authorize agencies to promulgate regulations. Instead, under the WPA, in order to be excluded from protection, a disclosure must be prohibited by the specific text of a statute. Although the ruling applies only to federal employees, the Court’s analysis may shed some light on its view of whistleblower protections generally.
Just eight months ago, the U.S. Department of Health and Human Services (HHS)’s Centers for Medicare and Medicaid Services (CMS) announced a proposal to raise the ceiling for whistleblower payouts to nearly $10 million from the current cap of $1,000. This increased monetary incentive was just one of many provisions designed to decrease Medicare fraud. While the intention of the proposed rule was to intensify the fight to prevent Medicare fraud and abuse, many critics believed that it would open the floodgates to unsubstantiated fraud claims.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, provides broad whistleblower protections to individuals who report certain possible violations of federal securities laws. Mindful that such protections can be provided in more than one forum and by different statutes, the U.S. Court of Appeals for the Third Circuit held in Khazin v. TD Ameritrade Holding Corp., ___ F.3d ___, 2014 WL 6871393 (3d. Cir. Dec. 8, 2014), that certain claims under Dodd-Frank are arbitrable.
In United States, et al., ex rel. Grenadyor v. Ukranian Village Pharmacy, the Seventh Circuit recently confirmed the dismissal with prejudice of a False Claims Act (FCA) action based on the relator’s failure to plead with particularity the circumstances constituting three alleged types of fraud, as required by the Federal Rules of Civil Procedure.1 However, the court remanded the case to the district court to proceed on the relator’s retaliation claim that did not require the same level of detail.
In its Annual Report to Congress on the Dodd-Frank Whistleblower Program, the Securities and Exchange Commission reports that both the number of whistleblower claims and the magnitude of the financial awards stemming from those claims “were record-breaking” in FY 2014. Under the Dodd-Frank whistleblower incentive program, individuals who report original information that leads the SEC to recover monetary sanctions of $1 million or more are eligible to receive awards of 10 to 30% of that financial recovery. Notable findings of the report include:
Long awaited in Sarbanes-Oxley Act (SOX) whistleblower circles, on October 9, 2014 the U. S. Department of Labor’s Administrative Review Board (ARB) issued a split 2-1 panel decision in Fordham v. Fannie Mae, ARB No. 12-061, reversing in part and remanding an administrative law judge’s post-hearing dismissal of a former employee’s Section 806 whistleblower retaliation claim. The ARB’s decision in Fordham is significant because it addresses squarely, and at length, how ALJs and OSHA investigators should apply the separate and two-stage burden of proof required under Section 806 whistleblower retaliation claims. The result of the ARB’s Fordham decision likely will energize the plaintiffs’ bar, and could make it more difficult for covered employers – and their contractors and subcontractors based on Lawson v. FMR LLC – to obtain dismissals of SOX Section 806 whistleblower retaliation claims, whether at the investigatory stage or following a full-blown evidentiary hearing before an ALJ. If the ARB’s decision is appealed but withstands judicial review, Fordham v. Fannie Mae could lead to a sea change in publicly traded employers’ and their contractors’ and subcontractors’ involvement in, and potential exposure to, SOX whistleblower claims.
On September 22, 2014, the Securities and Exchange Commission’s (SEC) Office of the Whistleblower announced that it had issued a $30 million bounty payment to a foreign whistleblower. This award is more than double the amount of any previous payment issued by the Office of the Whistleblower and comes fast on the heels of a $300,000 payment to a whistleblower who worked as a compliance professional. The magnitude of the $30 million award and the payout to a company’s own compliance advisor underscore a fundamental shift in enforcement strategy among regulatory agencies – a shift from encouraging internal corporate compliance to policing corporate conduct by encouraging employees to report directly to the government.