Whistleblower Law Blog
Topic: Securities and Exchange Commission (SEC)
On Tuesday the U.S. Supreme Court will hear arguments on a provision of law that has stood mostly unchanged since it was introduced more than 175 years ago — but that could, if interpreted badly, make it harder to maintain a pool of award money that’s been available to whistleblowers since the Dodd-Frank Act was implemented in 2011.
The provision in question is 28 U.S.C. § 2462, a catch-all that sets a five-year time limit for the enforcement of “any civil fine, penalty, or forfeiture” unless Congress specifies otherwise. In Kokesh v. Securities and Exchange Commission, the justices will consider whether this statute of limitations applies to disgorgements, a frequent remedy in SEC actions.
Disgorgements, in which offenders must return ill-gotten money, help to fill the coffers of the SEC’s Investor Protection Fund, from which Dodd-Frank whistleblowers are rewarded for providing tips that lead to successful enforcement actions.
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.
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.
On April 22, 2015, the U.S. Securities and Exchange Commission announced its second-ever whistleblower award to a compliance professional. The SEC’s award demonstrates that compliance professionals and other fiduciaries can be whistleblowers when the employer fails to take action to address misconduct reported by a fiduciary.
The complainant, in his role as a fiduciary, was statutorily required to disclose the suspected misconduct internally and then wait 120 days for the employer to investigate and take corrective measures before initiating an action under the SEC’s whistleblower award program. Here, the complainant did as required, and the SEC found that the employer did not take meaningful corrective action. The SEC held the financial award to the whistleblower was appropriate given the employer’s failure to remediate.
The SEC’s first ever award to a whistleblower was in 2014. The SEC releases limited information about whistleblower case as it is bound by the law to protect the confidentiality of whistleblowers.
Dow Chemical Company, a multinational corporation headquartered in Midland, Michigan, settled a case with a former employee, Kimberly Wood, who alleged that Dow terminated her in retaliation for blowing the whistle on it and its CEO Andrew Liveris’s improper spending and other financial wrongdoing.
Wood, a fraud investigator at Dow, alleged that Dow and Liveris violated Securities and Exchange Commission rules by exceeding the budget for a project by $13 million; paying for numerous unreported personal expenses for Liveris (including family trips to the Super Bowl, World Cup, and Masters Tournament); making payments, at the direction of Liveris, to certain charities, including Liveris’s own charity; excessive use of a corporate jet; improperly hiding cost overruns; and engaging in financial statement fraud.
On October 9, 2013, Wood reported an instance of financial statement fraud. The very next day, Dow notified Wood that it would terminate her employment by the end of the month. Wood sued Dow, alleging that it retaliated against her because of her protected activity in violation of the anti-retaliation provisions of the Sarbanes-Oxley Act of 2002 (SOX), 18 U.S.C. § 1514A. Under SOX, employers are prohibited from retaliating against employees who report certain illegal or unethical conduct. Employees are also protected when making disclosures about shareholder fraud or violations of any SEC rules and regulations.
In December 2014, the United States District Court for the Eastern District of Michigan denied Dow’s motion to dismiss Wood’s complaint. In its ruling, the Court held that SOX plaintiffs need not allege actual management knowledge of protected activity—it’s enough to allege sufficient facts from which such knowledge may be reasonably inferred. At that time the court denied its motion to dismiss, Dow said that it would defend its case “vigorously.” But just two months later, in February 2015, the parties announced that they reached an amicable settlement. The terms of the settlement are confidential.
In its recent FY 2016 Budget Request, the Securities and Exchange Commission touted the success of its Whistleblower Program and proposed increased funding for the program to help with an increased workload caused by a surge in whistleblower tips. The SEC’s Enforcement Division, in the 2016 Budget Request, revealed that it had received approximately 3,600 tips in FY 2014 through the Whistleblower Program, the largest number of tips ever received by the SEC. The SEC also reported in its request that it had granted the largest number of rewards in its history to whistleblowers in 2014.
Under the SEC’s Whistleblower Program, a whistleblower may receive a reward of between 10 and 30 percent of penalties collected by the SEC if the whistleblower provides information leading to a penalty of $1,000,000 or more. In fact, in September 2014, the SEC announced a reward of more than $30 million to a whistleblower.
The Budget Request praises the effectiveness of the program, stating, “Whistleblowers can often provide high-quality information that allows the Division to more quickly and efficiently detect and investigate alleged violations of the law.” The Request predicts that the surge in rewards, including the September 2014 reward of more than $30 million, will spur more tips and ultimately allow the Enforcement Division to “bring enforcement actions against violators where it would otherwise have not had sufficient information to do so.” The SEC proposes increased funding to hire more staff to handle the increased workload.
The Request demonstrates the success of the Program in protecting investors by ensuring a fair marketplace. It also shows the tangible impact that encouraging whistleblower activity has had in advancing the SEC’s mission. Finally, the Request’s proposal for additional funding, if approved, will allow the SEC’s Whistleblower Program to investigate more tips and prosecute wrongdoing more quickly and efficiently, and to reward more whistleblowers for providing important information to the government.
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.
For whistleblowers and their advocates, 2013 was a whipsaw year: Big advances followed sharp letdowns in quick rotation — sometimes from the same source. (Ahem, Supreme Court and White House.)
Plus there was the Snowden sideshow. But since NSA leaker Edward Snowden was never a real whistleblower — he acted outside the law and fled the consequences — his headline-grabbing revelations taught us no useful legal lessons.
Instead, the true news of 2013 was choppy-but-clear progress toward more employee-friendly readings of federal whistleblower laws. After two years of success at the administrative level, retaliation victims started getting their day in ever-higher courts. The U.S. Supreme Court put a cherry on the trend by hearing arguments in Lawson v. FMR LLC, its first whistleblowing case under the crucial Sarbanes-Oxley Act (SOX).