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The Friday List: 10 Important Facts about the SEC Whistleblower Program

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

The SEC recently announced that it has now ordered more than $1 Billion in financial penalties based on tips from whistleblowers.  Also, the Supreme Court is currently deciding the definition of a “whistleblower.”  We felt it a good time to offer 10 significant facts about the SEC’s Whistleblower program, which was created in 2012 as part of the Dodd Frank-Act.

 

10 Important Facts about the SEC Whistleblower Program

 

  1. The SEC has awarded more than $175 Million to 49 whistleblowers.
  2. The largest whistleblower award to date is $30 Million.
  3. A whistleblower is entitled to 10%-30% of monetary sanctions if the sanctions imposed exceed $1 Million.
  4. Both an outsider and a former employee can be a whistleblower.
  5. Covered firms may not take retaliatory job action against a whistleblower.
  6. Employee separation and non-compete agreements may not limit an employee’s whistleblower rights.
  7. Directors can be liable for whistleblower retaliation.
  8. Unless the Supreme Court decides otherwise, internal reporting, is sufficient, but not required, to become a protected whistleblower.
  9. In-house counsel and compliance officers are entitled to whistleblower protections.
  10. Firms must adopt whistleblower procedures.

General Counsel Awarded $7.9 Million for Wrongful Whistleblower Termination

 

A jury awarded a terminated General Counsel $2.9 Million in compensatory damages and $5 Million in punitive damages for wrongful termination due to his whistleblower activities.  In a key ruling, the Court (USDC for Northern District of California) ruled not to exclude evidence provided by the GC that his former employer claimed was privileged under California professional rules.  The Court held that federal law preempted the more stringent state law and that federal common law governing privilege applied to his Sarbanes-Oxley Act whistleblower retaliation claim.  The GC had raised Foreign Corrupt Practices Act compliance concerns.

OUR TAKE: While we sympathize with the plaintiff in this case, the broader policy of piercing lawyer-client privilege may result in limiting the role of in-house counsel.  Because the court can discard privilege, senior management and outside counsel may be less likely to include in-house lawyers in more sensitive matters.

Jury Verdict

WADLER v. BIO-RAD LABORATORIES, INC.

Large Asset Manager Pays $340,000 Fine because Separation Agreements Violated Whistleblower Rule

whistleblower-retaliation

The SEC fined a large asset manager $340,000 because it added provisions to its separation agreements prohibiting employees who received severance payments from collecting whistleblower awards.  The SEC contends that the respondent added the provisions after the SEC adopted the Dodd-Frank rule prohibiting any action that could impede a potential whistleblower.   The SEC imposed the fine even though the respondent voluntarily changed the language and even without any evidence that any employee was actually impeded or that the respondent ever sought to enforce the restrictions.  An SEC official faulted the firm for taking “direct aim at our whistleblower program by using separation agreements that removed the financial incentives for reporting problems to the SEC.”

OUR TAKE: Registrants must immediately review and revise confidentiality and separation agreements to strike any potentially violative language.

https://www.sec.gov/litigation/admin/2017/34-79804.pdf

SEC Imposes $1.4 Million Fine for Whistleblower Rule Violations

whistleblower woman

The SEC fined a public company $1.4 Million because its severance agreements violated the Dodd-Frank’s whistleblower rules and because it retaliated against an internal whistleblower.  The SEC maintains that the firm’s severance agreements, which included non-disparagement and confidentiality provisions, violated the whistleblower rules because they impeded severed employees from communicating with the SEC.  Also, the SEC asserts that the respondent terminated an internal whistleblower for raising concerns about how the firm calculated oil and gas reserves.  The SEC’s Whistleblower Chief noted, “This is the first time a company is being charged for retaliating against an internal whistleblower.”

OUR TAKE: In addition to the retaliation action, the SEC, for the first time this year, imposes a 7+ figure fine for violating the whistleblower rules.  As we predicted (see http://cipperman.com/2016/12/02/friday-list-2017-predictions/), the SEC continues to bring more cases assessing punitive fines for violations of the whistleblower rules.  Compliance officers should review severance agreements and internal complaint processes.

http://www.sec.gov/litigation/admin/2016/34-79607.pdf

SEC Risk Alert Warns About Whistleblower Policies and Practices

whisteblower-intimidation

The SEC’s Office of Compliance Inspections and Examinations has issued a Risk Alert notifying advisers and broker-dealers that examination staff will examine whether agreements and other documents limit whistleblowers in violation of the Dodd-Frank Act.  The staff will examine compliance manuals, codes of ethics, and employment and severance agreements to determine whether any provisions directly or indirectly impede an employee or former employee from communicating potential securities laws violations to the SEC.  For example, the staff will assess whether confidentiality agreements include exceptions for SEC reporting or provisions requiring an employee to represent that s/he has not assisted with an investigation.  The Risk Alert recommends immediate remedial measures including revising documents and notifying both current and former employees about their unrestricted right to report to the SEC.   The SEC has brought several cases during the last year alleging that a registrant’s practices violated Dodd-Frank’s whistleblower provisions.

OUR TAKE: Our most recent C-suite survey reported that 91% of respondents have not changed their compliance programs due to whistleblower concerns.  (See http://cipperman.com/wp-content/uploads/2016C-SuiteSurveyResuts.pdf).  Compli-pros should add policies and procedures that ensure that whistleblowers are in no way impeded by company documents.  Then, firms should test the policies by reviewing agreements and interviewing current and former employees.

https://www.sec.gov/ocie/announcement/ocie-2016-risk-alert-examining-whistleblower-rule-compliance.pdf

Company Fined for Whistleblower Retaliation

whistleblower-retaliation

The SEC fined a public company $500,000 for terminating and otherwise retaliating against a whistleblower who claimed financial statements may have been misstated.  The whistleblower reported his concerns to management, an internal hotline and, ultimately, to the SEC.  The company limited certain career opportunities and finally terminated him after an internal investigation found that the company’s financial statements were not misstated.  The employee had received consistently positive performance reviews.  The SEC claims that the job actions violated the whistleblower anti-retaliation provisions of the Dodd-Frank Act.

OUR TAKE: Dodd-Frank protects whistleblowers even if their assertions are later determined to be incorrect.  Notably, the respondent agreed to pay a fine to the SEC.   What about the aggrieved whistleblower?  We assume he will hire a lawyer and file a claim for wrongful discharge, if he hasn’t already sued or settled.

https://www.sec.gov/litigation/admin/2016/34-78991.pdf