The Securities and Exchange Commission (“SEC”) released its fiscal year 2016 Annual Report to Congress on the Dodd-Frank Whistleblowing Program on November 15, 2016. The Report, which covers the twelve months ending September 30, 2016, provides details and analyses of the activities and payouts of the Office of the Whistleblower (“OWB”). Key insights are outlined below.
A Record Year for Whistleblower Awards
Under Dodd-Frank’s Section 21F “Securities Whistleblower Incentives and Protection,” an individual who voluntarily provides “original information” leading to a successful enforcement action may be eligible to receive an award of 10 percent to 30 percent of monetary sanctions exceeding $1 million. Since the program’s inception in August 2011 through the end of fiscal year 2016 (“FY 2016”), the SEC awarded over $111 million to 34 whistleblowers.
In FY 2016, the SEC awarded $57 million - more than the amount of all awards made in prior fiscal years - to 13 whistleblowers. These included awards of $22 million and $17 million, the second and third largest awards made through FY 2016.1 Six of the 13 awards exceeded $1 million.
A growing percentage of award recipients are company insiders. Since inception, approximately 65 percent of award recipients were entity insiders. The SEC’s FY 2015 Report stated about 50 percent were. Approximately 80 percent of award recipients who were insiders first reported their concerns internally.
Another Record Year of Tips Received in FY 2016
Whistleblower tips increased seven percent to 4,218 in FY 2016. The top categories of complaints were: Corporate Disclosures and Financials (938), Offering Fraud (646), Manipulation (472), Insider Trading (262), Trading and Pricing (257) and FCPA (238). There were 996 tips designated as “Other,” reflecting allegations that did not fit into the SEC’s designated categories. Tips were received from all 50 states, with the highest numbers coming from California, New York, Florida, Ohio and Texas, and from 67 countries, including the United Kingdom, Canada and Australia.
Enforcement Actions Against Companies Using Agreements or Policies that Could Impede the Whistleblowing Process
In April 2015, the SEC reached a $130,000 settlement with KBR, Inc., over KBR’s use of improperly restrictive language in confidentiality agreements that the SEC alleged had the potential to stifle the whistleblowing process.2
The SEC intensified its efforts to penalize companies for inserting provisions in employment or separation agreements or internal policies that potentially could hinder an individual from fully engaging in the whistleblowing process. In FY 2016, the SEC settled four matters in which it alleged that confidentiality or other provisions in employment or separation agreements or internal policies had the potential to impede the ability of current or former employees to provide full and unfettered information directly to the SEC.3 The offending clauses: (i) prohibited employees from disclosing any aspect of the confidential information or trades secrets of the firm, or any of its subsidiaries or affiliates unless the former employee first obtained the written approval of an authorized firm representative; (ii) required employees to waive their rights to obtain financial rewards for providing information to the SEC; (iii) limited the information that individuals could disclose to the government; or (iv) included a liquidated damages penalty if the former employee were to violate the non-disclosure clause. The penalties ranged from $265,000 to $340,000. Several of the firms were required to undertake remedial measures, such as revising the relevant agreements or policies, advising former employees about the changes, and increasing training and education.
On October 24, 2016, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert as part of its National Exam Program specifically warning that the SEC is examining documents and policies of firms, including employment and separation agreements, compliance manuals and codes of ethics, to determine whether any provisions contained therein have the potential to impede the flow of information from individuals pursuing whistleblowing claims.4
First Standalone Anti-Retaliation Action
Under the anti-retaliatory provisions of the Sarbanes-Oxley Act (“SOX”) and Dodd-Frank, publicly-traded companies and their subsidiaries, and certain private entities doing business with public companies, are barred from taking any adverse employment action against employees who engaged in “protected activity.” The provisions define “Protected Activity” to include reporting conduct that the employee reasonably believes is a violation of various federal criminal statutes prohibiting fraud relating to SEC rules and regulations, mail and wire fraud, or frauds against public company shareholders.5
As part of its ongoing efforts to protect whistleblowers from retaliation, the SEC brought its first standalone retaliation action in FY 2016.6 The SEC alleged that International Gaming Technology (“IGT”) fired a whistleblower, a company insider, after he raised issues internally, and then to the SEC, regarding IGT’s accounting methodology, specifically that the standard cost model utilized by IGT was inflated and could result in inaccuracies in the company’s financial statements. IGT consented to a violation of the anti-retaliation provisions of the Exchange Act and agreed to a $500,000 civil penalty.
Protection for Internal Reporting
In an interpretive release dated August 14, 2015, the SEC stated that the anti-retaliation protections afforded by Dodd-Frank are available to individuals who report the suspected securities law violation internally, rather than to the SEC.7 A split has developed among the federal courts of appeals on whether Dodd-Frank’s anti-retaliation protections extend to individuals who report internally, and not the SEC. The Second Circuit does not require reporting to the SEC for the protections to apply.8 The Fifth Circuit requires reporting to the SEC.9
In FY 2016, the SEC filed several amicus curiae briefs in private retaliation lawsuits seeking district courts and appellate courts to defer to the position set forth in the SEC’s interpretative release.
The SEC’s Whistleblower Program continues to be a fertile source of tips to the SEC, enabling the SEC to launch or expedite investigations into a wide range of wrongdoing. The SEC has calculated that whistleblower tips have led to approximately $584 million in enforcement fines. It should come as little surprise that the SEC has actively and forcefully sought to encourage whistleblowing activity and protect from retaliation those individuals that report concerns.
Even before the whistleblower program was fully functional, companies predicted that the current program would provide little incentive for employees to report problematic conduct internally, in order to allow a company to investigate and remediate wrongdoing, and instead incentivized employees to secretly gather information and share it with the government. This report undercuts those assumptions, as 80 percent of award recipients who were insiders first reported their concerns internally. The report also makes clear that the majority of successful whistleblowers are insiders, providing information on their own employers.
The flow of tips to the SEC is unlikely to subside in the Trump Administration. The substantial bounties and the surrounding publicity are likely to continue to incentivize whistleblowers, even if the SEC were to adopt a lighter regulatory touch under new leadership in a Trump Administration. Given the SEC’s scrutiny on possible company impediments to employee whistleblowers, firms would be wise to evaluate whether (i) their existing agreements and policies potentially chill the flow of information from company insiders to the SEC; and (ii) their policies and procedures are sufficiently robust to prevent anti-retaliation claims.
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Murphy & McGonigle lawyers represent companies and individuals in investigations and litigations involving whistleblowers under the Sarbanes-Oxley Act and the Dodd-Frank Act as well as other federal and state whistleblower statutes. Murphy & McGonigle lawyers further are available to review or implement whistleblower and anti-retaliation programs and policies. For more information about our firm or our capabilities in this area, please browse our website or contact:
1 The SEC issued a $20 million award to an individual in November 2016, after the close of FY 2016.
2 In the Matter of KBR, Inc., Release No. 74619 (April 1, 2015), https://www.sec.gov/litigation/admin/2015/34-74619.pdf.
3 In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated et al, Release No 78141, (June 23, 2016), https://www.sec.gov/litigation/admin/2016/34-78141.pdf; In the Matter of Health Net, Inc. Release No 78590 (Aug. 16, 2016), https://www.sec.gov/litigation/admin/2016/34-78590.pdf; In the Matter of BlueLinx Holdings Inc., Release No. 78528 (Aug. 10, 2016), https://www.sec.gov/litigation/admin/2016/34-78528.pdf; In the Matter of Anheuser-Busch InBev/SA/NV, Release No. 78957 (Sept. 28, 2016), https://www.sec.gov/litigation/admin/2016/34-78957.pdf.
4 SEC Office of Compliance Inspections and Examinations Risk Alert (October 24, 2016) available at https://www.sec.gov/ocie/announcement/ocie-2016-risk-alert-examining -whistleblower-rule compliance.pdf.
5 18 U.S.C. § 1514A.
6 In the Matter of International Game Technology, Release No. 78991 (September 29, 2016), https://www.sec.gov/litigation/admin/2016/34-78991.pdf.
7 Interpretation of the SEC’s Whistleblower Rules under Section 21F of the Securities Exchange Act of 1934, Release No. 34-75592 (Aug. 4, 2015), https://www.sec.gov/rules/interp/2015/34-75592.pdf
8 See Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015)
9 See Asadi v. GE Energy (USA) LLC, 720 F.3d 620 (5th Cir. 2013)