Blowing the Whistle Under Dodd-Frank: Reporting, Retaliation, and Recovery

4/25/2014

In response to corporate misconduct surrounding the financial crisis, President Barack Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act into law in 2010. The whistleblower provisions in Dodd-Frank provide a potential windfall for whistleblowers and a new avenue for liability for companies.

I. Whistleblower Program Background

The SEC coordinates whistleblowers through its Office of the Whistleblower (OWB). Headed by Sean McKessy, the OWB is responsible for promoting the whistleblower program and handling tips.[1] The OWB maintains a tip hotline, meets with whistleblowers and counsel, and assists in evaluating tips and awards.[2] In fiscal year 2013, the Commission received 3,238 tips, up 237 from fiscal year 2012.[3] Also in 2013, the Commission reported its largest award to date, $14 million, to a whistleblower whose tip assisted the Commission in quickly recovering a large amount of investor funds.[4] In keeping with the OWB’s obligation to protect and incentivize whistleblowers, the OWB does not release the names of companies connected to its awards, and does not go into detail about the companies’ violations.[5] As the whistleblower program matures, the OWB anticipates more investigations and larger awards.[6]

II. Who Can Blow the Whistle and Receive an Award?

To receive an award, one must be eligible under the SEC regulations. In general, the regulations set forth a seven-step test to determine a whistleblower’s eligibility:

1) Any individual (not a corporation or entity, but not limited to an employee or insider)
2) Who voluntarily submits
3) Original information
4) To the Commission and pursuant to Commission procedures
5) Relating to a possible violation of federal securities laws
6) That leads to a successful enforcement action
7) In which the Commission obtains monetary sanctions totaling more than $1 million.[7]

The (2) “voluntary submission” rule requires the individual to submit the information without it first being requested by the Commission or a self-regulatory organization, and without a pre-existing duty to report.[8] Regarding (3) “original information,” the information must be “derived from . . . independent knowledge or independent analysis” and must not be already known to the Commission. Information obtained through attorney-client privilege, through an external or internal audit, or through violations of federal or state criminal law is ordinarily excluded from “original information.”[9] (4) “Leads to” means the information must be “sufficiently specific, credible, and timely” to cause the Commission to “commence an examination, open an investigation, reopen an investigation . . . or . . . significantly contribute[] to the success of” an ongoing action.[10]

A whistleblower generally may still receive an award even though he first reported to a company’s internal compliance department; reporting to a company’s internal compliance department will act as a placeholder for purposes of being an original source.[11] Note also that the whistleblower does not need to first report to his compliance department to be eligible for an award. Lastly, unlike qui tam suits, the whistleblower may not himself sue for the violation; the government must bring the suit and recover in order for the whistleblower to receive an award.

III. Reporting and Retaliation

Though a whistleblower may not qualify to receive an award, his tip may still entitle him to protection under the anti-retaliation provisions. For the purposes of anti-retaliation, a whistleblower is more broadly defined as someone who provides a tip regarding violations of securities laws.[12] The statute provides, “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 the whistleblower provided a tip.[13] A retaliating employer is subject to suit by both the affected employee and the Commission for reinstatement, double back pay, and compensation for litigation fees.[14] Importantly, a whistleblower may retain anonymity during the entire process if he or she is represented by counsel.[15]

The Federal Courts are split as to whom the whistleblower must report to trigger the anti-retaliation provisions. The majority of district courts to examine the issue have held that a whistleblower may be entitled to anti-retaliation provisions if he reports a securities law violation to a company’s internal compliance department.[16]

The Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C., however, held that a Dodd-Frank whistleblower cannot receive anti-retaliation protection unless he reports to the Commission.[17] No Florida district courts or other circuits have examined the issue. Though the Asadi decision may incentivize whistleblowers to bypass internal compliance, the vast majority of whistleblowers still go to internal compliance before reporting to the Commission,[18] and reporting first to internal compliance may increase the amount of a potential award.[19]

IV. Claiming an Award

Whistleblowers are eligible to receive an award ranging from 10% – 30% of the total amount collected.[20] The OWB posts a Notice of Covered Action for each enforcement action which results in sanctions exceeding $1 million.[21] The whistleblower has 90 days from the posting of the notice to apply for an award.[22] The OWB then evaluates the application and recommends an award to the Claims Review Staff designated by the Commission’s Co-Directors of Enforcement.[23] Factors which may indicate that the whistleblower should receive a larger award include the significance of the information provided, the assistance of the whistleblower, the interest of law enforcement, and whether the whistleblower first used internal compliance procedures.[24] Factors which decrease the award include the whistleblower’s culpability, delay in reporting, or interference with internal compliance.[25] Should the SEC later collect additional money based on the whistleblower’s original tip, the whistleblower may receive an additional award.[26]

People who would like to provide a tip to the Commission, or companies facing an investigation by the Commission as a result of a whistleblower, should contact counsel.

[1]U.S. SECURITIES AND EXCHANGE COMM’N, 2013 REPORT TO CONGRESS ON THE DODD-FRANK WHISTLEBLOWER PROGRAM 5-7 (2013), available at http://www.sec.gov/about/offices/owb/annual-report-2013.pdf.
[2]Id.
[3]Id. at 8.
[4]Press Release, U.S. Securities and Exchange Commission, SEC Awards More Than $14 Million to Whistleblower (Oct. 1, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539854258#.UsnPkvRDvo4.
[5]Id.
[6]Rachel Louise Ensign, Q&A: Sean McKessy, Chief, SEC’s Office of the Whistleblower, RISK & COMPLIANCE JOURNAL (Sept. 24, 2013, 12:23 PM), http://blogs.wsj.com/riskandcompliance/2013/09/24/q-a-sean-mckessy-chief-of-the-secs-office-of-the-whistleblower/.
[7]15 U.S.C.A. § 78u-6 (West 2014); 17 C.F.R. § 240.21F –2-4 (2013).
[8]17 C.F.R. § 240.21F –4(a).
[9]17 C.F.R. § 240.21F –4(b).
[10]17 C.F.R. § 240.21F –4(c).
[11]17 C.F.R. § 240.21F –4(b)(7).
[12]See 15 U.S.C.A. § 78u-6(a)(6).
[13]15 U.S.C.A. § 78u-6(h)(1)(A).
[14]15 U.S.C.A. § 78u-6(h)(1)(C).
[15]15 U.S.C.A. § 78u-6(d)(1).
[16]See Khazin v. TD Ameritrade Holding Corp., 2014 WL 940703, at *6 (D.N.J. 2014); Rosenblum v. Thomson Reuters (Markets) LLC, 2013 WL 5780775, at *5 (S.D.N.Y. 2013); Ellington v. Giacoumakis, 2013 WL 5631046, at *3 (D. Mass. 2013); Murray v. UBS Sec., LLC, 2013 WL 2190084, at *7 (S.D.N.Y. 2013); Genberg v. Porter, 935 F. Supp. 2d 1094, 1107 (D. Colo. 2013); Kramer v. Trans-Lux Corp., 2012 WL 4444820, at *5 (D. Conn. 2012); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 994 (M.D. Tenn. 2012); Egan v. TradingScreen, Inc., 2011 WL 1672066, at *5 (S.D.N.Y. 2011).
[17]720 F.3d 620, 623 (5th Cir. 2013); see also Banko v. Apple, Inc., 2013 WL 6623913, at *3 (N.D. Cal. 2013); Wagner v. Bank of Am. Corp., 2013 WL 3786643, at *6 (D. Colo. 2013).
[18]Rachel Louise Ensign, Q&A: Sean McKessy, Chief, SEC’s Office of the Whistleblower, RISK & COMPLIANCE JOURNAL (Sept. 24, 2013, 12:23 PM), http://blogs.wsj.com/riskandcompliance/2013/09/24/q-a-sean-mckessy-chief-of-the-secs-office-of-the-whistleblower/.
[19]17 C.F.R. § 240.21F –6(a)(2)(ii).
[20]U.S. SECURITIES AND EXCHANGE COMM’N, 2013 REPORT TO CONGRESS ON THE DODD-FRANK WHISTLEBLOWER PROGRAM 1 (2013), available at http://www.sec.gov/about/offices/owb/annual-report-2013.pdf.
[21]Id. at 13.
[22]Id.
[23]Id. at 13-14.
[24]15 U.S.C.A. § 78u-6(c)(1)(B)(i); 17 C.F.R. § 240.21F–6(a).
[25]17 C.F.R. § 240.21F –6(b).
[26]Press Release, U.S. Securities and Exchange Commission, SEC Announces Additional $150,000 Payment to Recipient of First Whistleblower Award (April 4, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541413136#.U1mJK1VdWlc.