This is a repost of an article by Jennifer Korb that appeared in the Utah Bar Journal:

Whistleblower Claims under the Dodd-Frank Act: Highlights from the SEC’s Annual Report to Congress for the 2014 Fiscal Year

On November 17, 2014, the U.S. Securities and Exchange Commission (referred to herein as the SEC or the Commission) issued its annual report to congress on the Dodd-Frank Whistleblower Program for the 2014 fiscal year, which ended September 30, 2014 (the Report). See 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program (last visited June 1, 2015). This is the third such report since the Whistleblower Program went into effect in August 2011.

The Report provides an overview of the Whistleblower Program, including its history and purpose, the activities of the Office of the Whistleblower (OWB),[i] detailed information regarding the claims for whistleblower awards and profiles of whistleblower award recipients, and information about the Commission’s efforts at combating retaliation.  The Report acknowledges three “integral” components of the Whistleblower Program, (1) monetary awards, (2) protection from retaliation, and (3) confidentiality protection, and that the success of the program depends upon the Commission’s and OWB’s ability to further these objectives.

Amongst the notable events of 2014 are the issuance of the largest whistleblower award to date ($30 million), and the filing of the Commission’s first enforcement action under the anti-retaliation provisions of the Dodd-Frank Act.  These events signify that the Commission is serious about encouraging whistleblowers and that public companies should pay particular attention to how they handle internal reports.

The Commission has experienced a few setbacks, however, when it comes to the scope of the anti-retaliation provisions.  In two private actions, the anti-retaliation provisions have been narrowed to cover only those who complain to the Commission, thus excluding those who complain only to a company supervisor or compliance officer.  This narrowing goes against the Commission’s recommendation and final rule and the Commission’s position in amicus curiae briefs endorsing the more liberal interpretation expanding anti-retaliation protection to those who report to the Commission or to their employer.

The Basics of a Dodd-Frank Whistleblower Claim

A whistleblower claim is only available to an individual or individuals,  not entities.  See 17 C.F.R. § 240.21F-2(a)(1).  A claim may be submitted online through the Commission’s Tips, Complaints and Referrals Portal or by mailing or faxing the appropriate form to the OWB.[ii]  A claim may be submitted anonymously as long as the individual is represented by an attorney.  While an individual may submit a claim without the assistance of counsel (if anonymity is not a concern), a knowledgeable attorney can help the whistleblower craft a strong submission and advocate for a higher award during the decision-making process.

In the event the Commission does not take an action based on the information provided by a whistleblower, the Dodd-Frank Act does not allow a whistleblower the right to continue on their own with a private action.

A claimant is eligible to receive a whistleblower reward if he or she voluntarily provides the Commission with “original information” about a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur.  The information provided must lead to a successful Commission action that results in an award of monetary sanctions exceeding $1 million.  See 15 U.S.C.A. § 78u-6(a)(1) and (b).

The Commission’s Rule 21F-4 provides a tremendous amount of detail regarding what it means to provide “original information.”  See 17 C.F.R. § 240.21F-4(b). In short, original information is derived from a person’s independent knowledge (not from publicly available sources) or independent analysis (evaluation of information that may be publicly available but which reveals information not generally known) and is not already known by the Commission.  See Commission’s Frequently Asked Questions #4.

An eligible whistleblower may receive an award of anywhere from 10 to 30% of monetary sanctions collected in actions brought by the Commission as well as related actions brought by other regulatory and law enforcement authorities.  See 15 U.S.C.A. § 78u-6(b). “Related actions” include judicial or administrative actions brought by the Attorney General of the United States, an appropriate regulatory authority, a self-regulatory organization, or a state attorney general in a criminal case that is based on the same original information the whistleblower voluntarily provided to the Commission.  See 17 C.F.R. § 240.21F-3.

The OWB posts on its website Notices of Covered Actions for each Commission action exceeding $1 million in sanctions.  In the 2014 fiscal year alone the OWB posted 139 such notices.  See Report at 13.  If a claimant has been working with the Commission on a particular matter, the Commission will contact the claimant or his or her counsel and alert them to the opportunity to apply for an award.  See Commission’s Frequently Asked Questions #11. Claimants have ninety days from the date of the Notice of Covered Action in which to file a claim for an award, or the claim will be barred.  See 17 C.F.R. § 240.21F-10.  To file a claim for an award, the claimant must complete the appropriate form and either mail or fax it to the OWB.  According to the Commission, the majority of applicants who went on to receive an award, were represented by counsel when they applied for the award.  See Report at 17.

The Commission considers a number of factors in determining the appropriate amount of an award.  The award percentage may be increased depending on the significance of the information provided, the extent of the assistance provided, the extent to which the claimant participated in the company’s internal compliance systems, and the Commission’s interest in deterring violations of the particular securities laws at issue.  The Commission may reduce the amount of an award if the claimant has some culpability for the violations, if there was an unreasonable delay in reporting the violations, or if the claimant interfered with the company’s internal compliance systems.  A complete list of criteria used to determine award amounts is included in the Commission’s Rule 21F-6.  See 17 C.F.R. § 240.21F-6

Attorneys at the OWB evaluate each application for an award and work with the enforcement staff responsible for the action to get a full understanding of the contribution made by the applicant.  Based on the information collected, the OWB prepares a written recommendation as to whether the applicant should receive an award, and if so, how much.  A Claims Review Staff (comprised of five senior officers in Enforcement, including the Director of Enforcement) then considers the OWB’s recommendation and issues a Preliminary Determination setting forth its opinion regarding allowance of the claim, and the amount of any proposed award.  See Report at 13.

An applicant can seek reconsideration of the Preliminary Determination by submitting a written response within 60 days of (i) the date of the Preliminary Determination, or (ii) the date OWB made the record available to the applicant for review, whichever comes later.  After considering the applicant’s written response, the Claims Review Staff issues a Proposed Final Determination, and the matter is then handed to the Commission for its decision and Final Order.  All Final Orders are redacted before being posted on the OWB’s website, to protect the identity of the applicant.  Id. at 14.

The denial of an award may be appealed within 30 days of the issuance of the Commission’s Final Order.  The applicant may appeal to the United States Court of Appeals for the District of Columbia or to the circuit court where the claimant resides or has his or her principal place of business.  An award that is based on appropriate factors and that is within the specified range of 10 to 30%, however, is not appealable.  See 17 C.F.R. § 240.21F-13. The three most common reasons for a denial of a claim are that (1) the information was not original because it was not provided to the Commission for the first time after July 21, 2010 (when the Dodd-Frank Act was signed into law), (2) the claimant failed to submit the application for award within 90 days of the posting of a Notice of Covered Action, and (3) the claimant’s information did not lead to a successful enforcement action.  See Report at 15.

The anti-retaliation provisions of the Dodd-Frank Act provide a private right of action for a whistleblower who alleges he experienced retaliation from his employer as a result of providing information to the Commission under the whistleblower program or assisting the Commission in any investigation or proceeding based on the information submitted (a “whistleblower-protection claim”).  A whistleblower has a generous six to ten years from the date of the alleged violation in which to file a whistleblower-protection claim.  15 U.S.C. § 78u-6(h)(1)(B)(iii) (statute of limitations). Relief available to a prevailing whistleblower includes reinstatement to his former position, two times the amount of back pay owed plus interest, and compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.  15 U.S.C.A. § 78u-6(h)(1). Additionally, under Rule 21F-2, the Commission itself may take legal action through an enforcement proceeding against an employer who retaliates against a whistleblower.  As discussed below, the Commission took advantage of this provision for the first time in 2014.

Whistleblower tips (and awards) are on the rise.

 From 2012 to 2014, the number of whistleblower tips received by the Commission increased more than 20%, and the SEC issued more whistleblower awards in the 2014 fiscal year than in all previous years combined.  See Report at 1 and 20.  According to the Report, the Commission received a total of 10,193 tips since the inception of the program in August 2011.  Of those 10,193 tips, fourteen resulted in monetary awards, nine of which were authorized during the 2014 fiscal year.

Of those individuals who have received awards since the inception of the program, over 40% were current or former company employees, and 20% were contractors or consultants.  Of those current or former company employees, over 80%  went to their supervisor or compliance personnel before going to the Commission, in an attempt to remedy the problem internally.  See id. at 16.

In their complaint forms, whistleblowers are asked to identify the nature of their allegations.  The three most commonly picked categories are Corporate disclosures and financials, offering fraud, and manipulation, and these three have consistently ranked the highest since the beginning of the program.  Id. at 21.

The hot spots for whistleblower tips in the United States are California, Texas, Florida and New York.  Utah tipsters numbered 33 in 2014, compared to 556 in California, 264 in Florida, 204 in New York and 208 in Texas.  International hot spots include the United Kingdom, India, Canada and China.  The total number of tips from abroad during 2014 was 448 or approximately 11.51% of all tips received by the Commission that year.  Id. at 28 and 29.

In September 2014, the largest award to date ($30 million) was given to a foreign national.  The Commission revealed that the information provided by this whistleblower allowed it to “discover a substantial and ongoing fraud that otherwise would have been very difficult to detect.”  Id. at 10.  The information led to not only a successful Commission enforcement action, but to successful related actions.  Apparently the award would have been even larger had the Commission not determined that the whistleblower’s delay in reporting the securities violation was unreasonably long.  The Commission did not reveal the length of the delay that it found unreasonable, only that during the delay “investors continued to suffer significant monetary injury that otherwise might have been avoided.”    Order Determining Whistleblower Award Claim, SEC Release No. 73174, File No. 2014-10 (September 22, 2014).

In August 2014, the Commission awarded more than $300,000 to a whistleblower who had compliance or internal audit responsibilities within the company.  Under the whistleblower rules, information provided by such a person is not considered to be “original information” unless an exception applies.  In this instance, the Commission applied an exception that allows a person occupying a compliance or internal audit position with the company to receive a whistleblower award if they reported the violations internally at least 120 days before providing the information to the Commission.  Report at 11.

In July 2014, the Commission awarded more than $400,000 to a whistleblower who “aggressively worked internally to bring the securities law violation to the attention of appropriate personnel in an effort to obtain corrective action.”  Id.  The Commission recognized the whistleblower’s persistence in reporting the information to the Commission after the company failed to address the issue on its own.

The Commission also made awards to groups of whistleblowers who reported on the same company.  In July 2014, the Commission awarded three whistleblowers 30% of monetary sanctions collected in the action.  One whistleblower received 15%, another 10%, and the third 5%, based on the level of assistance each provided to the Commission.  See Order Determining Whistleblower Award Claim, SEC Release No. 72652, File No. 2014-6 (July 22, 2014).  In June 2014, the Commission awarded a total of $875,000 to be divided equally between two whistleblowers who “acted in concert to voluntarily provide information and assistance that helped the SEC bring a successful enforcement action.”  Report at 12; See also Order Determining Whistleblower Award Claim, SEC Release No. 72301, File No. 2014-5 (June 3, 2014).

The Commission’s First Anti-retaliation Action.

On June 16, 2014, the Commission issued its very first administrative cease-and-desist proceeding under the authority of the anti-retaliation provisions of the Dodd-Frank Act.  As mentioned above, the anti-retaliation provisions not only provide a private right of action for individuals who experience retaliation from whistleblower activities, Rule 21F-2 gives the Commission the ability to enforce the anti-retaliation provisions as well.

The Commission’s first action charged hedge fund advisory firm Paradigm Capital Management, Inc. out of New York with retaliating against its head trader.  In the Matter of Paradigm Capital Mgmt., Inc. and Candace King Weir, Investment Advisers Act Release No. 3857 (June 16, 2014).  The head trader reported activity to the Commission that suggested Paradigm was engaging in prohibited principal transactions with an affiliated broker-dealer that were not disclosed to a hedge fund client.  When Paradigm was notified of the report by the head trader, it allegedly engaged in a series of retaliatory actions, including, but not limited to, removing the whistleblower from the head trader position, and stripping the whistleblower of supervisory responsibility.   The whistleblower was not terminated (although he or she resigned) and his or her compensation remained the same.

Without admitting or denying the Commission’s allegations, Paradigm agreed to settle the charges by payment of $2.1 million, comprised of disgorgement, prejudgment interest and a civil penalty.  See id. at 12.  The Commission’s order does not specify what portion of the penalty was attributable to the retaliation claims, and which portion was attributable to the alleged trading violations.

Whistleblowers Who Do Not Report to the Commission May Not be Protected by the Anti-Retaliation Provisions

As the number of whistleblower complaints increases, so do the number of anti-retaliation suits.  Employers facing private anti-retaliation actions by whistleblowing employees have had some success arguing that the employee does not qualify as a whistleblower, and therefore is not entitled to the protections of the anti-retaliation provisions.

A whistleblower is defined in the Dodd-Frank Act as,

any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.

15 U.S.C.A. § 78u-6(a)(6) (emphasis added).  Accordingly, you must report to the Commission to be considered a whistleblower.

The anti-retaliation provisions of the Act, however, are not so limited, and open the door to the possibility that a whistleblower may be someone who reports information to someone other than the Commission, such as an employer.  Specifically, section 78u-6(h)(1)(A) 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 of any lawful act done by the whistleblower—

(i) in providing information to the Commission in accordance with this section;

(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or

(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter, including section 78j-1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

78u-6(h)(1)(A) (emphasis added). The third category of protected activity does not require that the whistleblower “make disclosures” to the Commission, and has been successfully used to argue a more liberal interpretation of what it means to be a whistleblower under the anti-retaliation provisions. In fact, the majority of courts that have considered the conflicting sections of the Act have adopted the more liberal interpretation allowing the anti-retaliation protections to extend to individuals who complain internally alone.  See, e.g., Kramer v. Trans–Lux Corp., No. 3:11CV1424 (SRU), 2012 WL 4444820, at *4 (D. Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F.Supp.2d 986, 994 n. 9 (M.D. Tenn. 2012); Egan v. TradingScreen,

Inc., No. 10 Civ. 8202 (LBS), 2011 WL 1672066, at *4–5 (S.D.N.Y. May 4, 2011); but see, Asadi v. G.E. Energy LLC, 720 F.3d 620 (5th Cir. 2013), and Berman v. Neo@Oglivy LLC, No. 1:14-cv-523-GHW-SN, 2014 WL 6860583, at *2 (S.D.N.Y Dec. 5, 2014).

The Commission has made its opinion known, by rule and amicus brief, and is squarely in favor of the more liberal interpretation.  In Rule 21F-2(b)(1) the Commission clarified that it considers an individual to be a whistleblower “for purposes of the anti-retaliation provisions” if he or she provides information regarding a possible securities law violation in a manner described in § 78u-6(h)(1)(A).  See 17 C.F.R. § 240.21F-2(b)(1)(i-iii).  As discussed above, the third category of protected activity in § 78u-6(h)(1)(A) does not require that the information be provided to the Commission.  In several amicus briefs filed by the Commission arguing in favor of judicial deference to Rule 21F-2(b)(1) and thus in favor of a more liberal interpretation of whistleblower, the most recent of which was filed in February 2015, the Commission stated:

The Commission has a strong programmatic interest in demonstrating that [Rule 21F-2(b)(1)’s] reasonable interpretation of certain ambiguous statutory language was a valid exercise of the Commission’s broad rulemaking authority under Section 21F. . . .  First, the rule helps protect individuals who choose to report potential violations internally in the first instance (i.e., before reporting to the Commission), and thus is an important component of the overall design of the whistleblower program.  Second, if the rule were invalidated, the Commission’s authority to pursue enforcement actions against employers that retaliate against individuals who report internally would be substantially weakened.

Brief of the Securities and Exchange Commission as Amicus Curiae Supporting  Appellant at 4, Berman v. Neo@Ogilvy LLC et al., Case No. 14-4626, Docket No. 54, (2d Cir. Feb. 6, 2015) (hereinafter referred to as SEC’s Berman Amicus Curiae Brief).

Despite the Commission’s rule and case law in favor of a more liberal interpretation of “whistleblower”, a few courts, including the Fifth Circuit, have  applied a narrow interpretation, citing statutory construction and reliance on the intent of congress.

In Asadi v. G.E. Energy, 720 F.3d, 620 (5th Cir. 2013), Khaled Asadi filed a complaint against G.E. Energy alleging that it violated the anti-retaliation provisions of the Dodd-Frank Act when it terminated him after he made an internal report to his supervisor of a possible securities law violation.  Asadi was employed by G.E. Energy as its Iraq Country Executive, which required him to relocate to Amman, Jordan.  In 2010, while working in Jordan, Iraqi officials told Asadi that G.E. Energy had hired a woman who was close with a senior Iraqi official, and that they suspected GE Energy had done so to “curry favor” with that official in negotiating a joint venture agreement.  Id. at 621.  Asadi was concerned that this alleged conduct might violate the Foreign Corrupt Practices Act (“FCPA”),[iii] and he reported the issue to his supervisors.  Shortly thereafter, Asadi received a negative performance review and was pressured to step down from his position and accept a position with minimal responsibility.  Asadi refused and approximately one year after reporting his concern to supervisors, G.E. Energy fired him.  Asadi, 720 F.3d at 621.

G.E. Energy moved to dismiss under Rule 12(b)(6) arguing that Asadi did not qualify as a “whistleblower” and that the whistleblower provisions do not apply outside of the United States.  The district court granted G.E. Energy’s motion to dismiss with prejudice based on the latter argument regarding the extraterritorial reach of the protection, and as a result failed to decide whether Asadi qualified as a whistleblower.  Id.

Asadi argued on appeal that the protected activity included in the anti-retaliation provisions of the Act conflict with the Act’s definition of whistleblower. He acknowledged that he did not fit squarely within the definition of whistleblower under the Act, but argued that the anti-retaliation protections should be construed to protect individuals who take actions that fall within any category of protected activity in § 78u-6(h)(1)(A)(i-iii) (particularly category iii), even if they do not complain to the Commission.  Id. at 624.  Asadi had several district court decisions in his favor as well as an SEC rule.  Despite this, the Fifth Circuit disagreed.

The Fifth Circuit held that the Dodd-Frank Act does not contain conflicting definitions of whistleblower, but in fact contains a single clear and unambiguous definition in § 78u-6.  Id. at 627.  It also held that the definition in § 78u-6 does not render the language in the third-category of protected activity superfluous, because that category has effect “even when we construe the protection from retaliation under Dodd-Frank to apply only to individuals who qualify as ‘whistleblowers’ under the statutory definition of that term.”  Id.  To illustrate this point, the Court suggested that the intended application of the third-category of protected activity, would apply to protect an employee who, on the same day he discovered a securities violation, reports the violation to both his supervisor and to the Commission.  The supervisor, unaware that the employee also reported the violation to the Commission, terminates the employee.  The first and second category of protected activity would not protect the employee because the supervisor was not aware that the employee had reported the violation to the Commission.  Only the third category would protect this employee, which does not require that the retaliation result from the reporting of information to the Commission.  See id.

The Asadi Court would not defer to the Commission’s rule expanding the definition of whistleblower, because “the statute . . . clearly expresses Congress’s intention to require individuals to report information to the SEC to qualify as a whistleblower . . .”  Id. at 630.  The Court affirmed the district court’s dismissal of Asadi’s whistleblower-protection claim, finding that Asadi did not fall within the definition of a whistleblower under the Act.

In December 2014, the Southern District of New York followed Asadi and ruled that internal reporting was not protected under the Dodd-Frank Act.  See  Berman v. Neo@Oglivy LLC, No. 1:14–cv–523–GHW–SN, 2014 WL 6860583 (S.D.N.Y. Dec. 5, 2014).  That case is now on appeal before the Second Circuit, and the Commission has filed an amicus brief arguing that the Court should “defer to the Commission’s rule and hold that individuals are entitled to employment anti-retaliation protection if they make any of the disclosures identified in Section 21F(h)(1)(A)(iii) of the Exchange Act, irrespective of whether they separately report the information to the Commission.”  SEC’s Berman Amicus Curiae Brief at 37.  Oral argument before the Second Circuit is scheduled for June 17, 2015.

For now, the question of whether internal reporting is protected under Dodd-Frank is up in the air.  As a result of the indecision, a would-be whistleblower may decide to complain internally as well as to the Commission, just to be safe.  Alternatively, they may decide not to report at all.  From the employer’s perspective, a company would no-doubt be best served by implementing programs that encourage internal reporting before the employee runs to the Commission.

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[i] The Office of the Whistleblower is a separate office within the Commission established to administer and enforce the Whistleblower Program.  The OWB includes a Chief of the Office, a Deputy Chief, in addition to nine staff attorneys and three paralegals.

[ii] While this article focuses on whistleblower claims for alleged violations of U.S. securities laws, the whistleblower provisions also cover tips regarding violations of the U.S. Commodity Exchange Act, which are submitted to the U.S. Commodity Futures Trading Commission (CFTC).

[iii] The Commission and the Department of Justice share FCPA enforcement authority.