Whistleblower Law Blog
Topic: Dodd-Frank Act
Dhir v. Carlyle Group, 3:16-cv-00219, U.S. District Court, District of Connecticut
A hedge fund employee decided to blow the whistle on the company’s misstatements to investors regarding its financial investments in certain derivative products. The plaintiff, Nikhil Dhir, a former portfolio manager at the hedge fund, claims that the firm misstated both the amount of assets the firm had invested in these derivative products, as well as the risk associated with the products. Dhir alleges that Vermillion hedge fund founders, Chris Nygaard and Drew Gilbert, “knowingly and intentionally” advertised the fund has having low risk and volatility, even though freight derivatives are highly volatile and not liquid.
On October 23, 2015, a federal magistrate judge in California held that individual corporate directors may be found liable under the Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
Plaintiff Sanford Wadler brought a whistleblower action under SOX, Dodd-Frank, and state law, against Bio-Rad Laboratories, Inc. and the individual members of its Board. Wadler claimed that Bio-Rad wrongfully terminated him in retaliation for disclosures he made to Bio-Rad‘s upper-level management regarding possible violations of the Foreign Corrupt Practices Act (FCPA) in China. The defendants filed a motion to dismiss, leading to the October 23, 2015 ruling.
Bio-Rad manufactures and sells products around the world, and is subject to the FCPA. Bio-Rad agreed to pay $55.1 million in fines for possible FCPA violations in Thailand, Vietnam, and Russia. Subsequent to discovering these violations, Bio-Rad hired Steptoe and Johnson LLP to investigate possible bribery by Bio-Rad employees in China. The firm found no evidence of improper payments.
A petitioner has filed a Writ of Mandamus directing the Securities and Exchange Commission to issue a determination on an award claim filed under the Dodd-Frank Act. The Writ, filed in the United States Court of Appeals for the District of Columbia Circuit, is intended to reduce the time period between filing an award claim under the SEC’s Whistleblower Program before receiving a determination from the SEC.
The SEC’s Whistleblower Program, established by Section 922 of the Dodd-Frank Act, requires the SEC to pay a monetary award to whistleblowers who voluntarily provided original information to the SEC that led to the successful enforcement of a covered judicial, administrative, or related action. The Whistleblower Program has proven effective, as it incentivizes whistleblowers to come forward and report illegal activities to the government. Due to the amount of award claims filed, however, the SEC has faced delays in issuing determinations on filed claims.
Although it remains to be seen how the Court will rule on the Writ, the petitioner’s filing illustrates the popularity of the Whistleblower Program, the laudable goals of the Program, and the delays currently affecting the SEC’s administration of the Program.
Fiscal 2015 was arguably the most successful year in the short history of the whistleblower program at the Securities & Exchange Commission: In the 12 months ended September 30, almost 4,000 tips were received from whistleblowers around the world — a record number — and more than $37 million was paid out in rewards.
The whistleblower program was created by the Dodd-Frank Act of 2010: Under the statute, people who report securities violations may be eligible for a reward if the SEC uses their information to recover more than $1 million for taxpayers.
The 2015 tallies are reported in the SEC program’s new annual report. Beyond the monetary rewards being paid to whistleblowers, the report highlights a number of steps taken by the SEC to help insiders who share information about corporate wrongdoing.
In Berman v. Neo@ogilvy LLC, the Second Circuit held that there was enough ambiguity between the Dodd-Frank Act’s definition of “whistleblower” and its anti-retaliation provisions to trigger Chevron deference to the SEC’s interpretation of the statute. The Second Circuit thus accepted the SEC’s interpretation that Dodd-Frank does not require whistleblowers to report wrongdoing to the SEC to invoke the Act’s employee protection provisions. This is the opposite conclusion reached by the Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C., setting the stage for the Supreme Court to resolve the conflict among the Circuits.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, 15 U.S.C. § 78u–6, was passed in 2010 in response to the 2008 economic crash. Section 922 of Dodd-Frank contains two courses of relief for whistleblowers: a whistleblower can provide information to the SEC and the SEC may provide that whistleblower with a monetary award; or a whistleblower may file a private cause of action against an employer who retaliates because of the whistleblower’s protected disclosures (this latter section is often referred to as the “anti-retaliation provision”).
On April 28, 2015, the Securities and Exchange Commission announced that it was awarding a whistleblower 30 percent of funds recovered in settlement of the Commission’s first retaliation charges brought under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
The whistleblower’s share will be more than $600,000. In deciding to award the maximum 30 percent, the SEC’s Claims Review Staff weighed heavily the “substantial evidence that the whistleblower suffered unique hardships as a result of reporting.”
In the Matter of Paradigm Capital Management, Inc. and Candace King Weir, File No. 3-15930 (June 16, 2014), the SEC charged the hedge fund investment adviser with retaliating against the whistleblower for reporting what the whistleblower believed to be misconduct to the SEC. The SEC found that Paradigm removed the whistleblower from the whistleblower’s then-current position, changed the whistleblower’s job function, and removed the whistleblower’s supervisory responsibilities, among other retaliatory acts.
On February 26, 2015, New York Attorney General Eric Schneiderman announced plans to introduce state legislation to protect and reward employees who report information about illegal activity in the banking, insurance, and financial services industries.
Schneiderman’s proposal, titled the Financial Frauds Whistleblower Act, would create a state-level equivalent of the federal Dodd-Frank Wall Street and Consumer Protection Act. The Dodd-Frank Act provides financial incentives and anti-retaliation protections to whistleblowers who report fraud in the financial services industry.
While a number of states have whistleblower programs modeled after the federal False Claims Act, the Financial Frauds Whistleblower Act would be the first state-level equivalent of the Dodd-Frank Act, which created the whistleblower programs at U.S. Securities and Exchange Commission and U.S. Commodity Futures Trading Commission.
Schneiderman’s proposal would also address the limitations on awards imposed by federal law. Under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), rewards to whistleblowers who report financial crime are capped at $1.6 million.
The Financial Frauds Whistleblower Act would compensate whistleblowers whose information leads to action by the state’s banking and insurance regulator, the New York Department of Financial Services—providing the potential for large awards.
The legislation has yet to pass the New York State legislature.
The Financial Industry Regulatory Authority — a self-policing arm of the securities industry — reminded its member firms not to ask their employees to sign confidentiality agreements that forbid reporting possible wrongdoing to FINRA itself, or to industry regulators such as the U.S. Securities and Exchange Commission.
FINRA may discipline firms that add such provisions to agreements with their employees, it said in a new regulatory notice. FINRA also said that any language that bars employees from sharing certain documents outside their firm can’t stop employees from giving the same documents to regulators.
The U.S. Securities and Exchange Commission said it awarded more than $300,000 to a whistleblower who first reported wrongdoing internally — but then went to the feds after being ignored for four months.
The SEC typically doesn’t reveal details about the people who receive awards under the Dodd-Frank Act, since the law grants confidentiality to whistleblowers, but the agency said this was its first-ever payout to a person who worked in a company’s audit or compliance areas.
The U.S. Securities and Exchange Commission (SEC) said it filed — and promptly settled, for $2.2 milllion — its first-ever charges against a company for retaliating against a whistleblower who reported wrongdoing under the Dodd-Frank Act.
The SEC charged Paradigm Capital Management Inc., a hedge fund advisory firm, with engaging in prohibited principal transactions and then removing a head trader from his regular responsibilities after he reported the conflict of interest to the SEC.