by Stephen Kohn
The revamped SOX is not an exclusive remedy. Employees can file both qui tam claims and SOX retaliation claims. Employees can join state causes of action with their SOX lawsuits, once the SOX claim is removed to federal court. Furthermore, employees can also join the new antiretaliation remedies contained under sections 748 and 922 of the Dodd-Frank Act with claims filed in federal court under the SOX. Joining these multiple causes of action into one large federal suit both expands the remedies available under any one law and expands the scope of activities that may be protected in the lawsuit. For example, state laws often provide for punitive damages that are not available under federal laws. Likewise, section 922 of the Dodd-Frank Act contains a broad definition of protected activity that may encompass disclosures that fall outside of the SOX protection.
The reward laws incorporated through the Dodd-Frank Act are more fully explained in Rules 8 and 9 (commodity and securities fraud and foreign bribery) and Checklist 7 (Dodd-Frank, Wall Street, and FCPA “Q&As”).
Employment Contracts, Union Grievance Procedures
Most union contracts protect employees (including government employees) from dismissal unless “good cause” exists. Obviously, firing a worker simply for making a lawful disclosure of misconduct to the appropriate authority would not constitute “good cause.” In these cases an employee has the option to seek protection through his or her labor union under contract, grievance, or arbitration procedures. However, utilizing these remedies may result in the waiver of an employee’s right to obtain relief under other whistleblower protection laws, and damages available in grievance or arbitration proceedings are limited.
Environmental Laws
Between 1972 and 1980 Congress recognized the importance of workers in exposing violations of environmental law. Employees were in the best position to identify serious environmental violations, as they would be the ones ordered to dump toxic waste, certify compliance with Environmental Protection Agency (EPA) permits, or test the quality of drinking water. Without protecting rank-and-file employees from retaliation, how could local communities learn that they were being polluted, especially before someone died from toxic exposure? The answer was to protect the whistleblowers. Consequently, the environmental whistleblowers were among the first such class of workers protected under law.
Because they were enacted over thirty years ago, these laws are in need of modernization. The major flaw is a radically short statute of limitations (thirty days) and the inability to remove a case to federal court. But despite these significant weaknesses, employees have been able to prevail in cases filed under these older laws.
Six environmental laws contain whistleblower protections that are administered by the U.S. Department of Labor. The first was the 1972 Water Pollution Control Act. Thereafter, Congress used the law as a model for the “employee protection provisions” of the 1974 Safe Drinking Water Act, the 1976 Toxic Substances Control Act, the 1976 Solid Waste Disposal Act, the 1977 Clean Air Act, and the 1980 Comprehensive Environmental Response, Compensation and Liability Act (better known simply as the “Superfund” law). A seventh environmental whistleblower law, attached as an amendment to the Surface Mining Act, is substantially identical to the six DOL-administered laws, except that it is administered by the Department of the Interior. Few cases have been filed under this law, which has been virtually ignored by Interior.
The scope of protected activity under the DOL-administered laws has been broadly defined to include disclosures to government regulators, supervisors, and the news media. The six laws all provide for reinstatement, back pay, compensatory damages, and attorney fees and costs. Punitive damages are available under two of the environmental laws. Claims must be filed with the DOL. Although federal court remedies are considered superior to administrative remedies, the DOL procedures are employee-friendly in that they provide for discovery rights similar to those offered in federal court, and the rules of evidence are relaxed, making it far less formal than federal court proceedings. Claims are first investigated by the Occupational Safety and Health Administration, which issues an initial determination. That ruling is completely nonbinding if either party appeals and requests a hearing. Cases are then tried before DOL administrative law judges, who are knowledgeable about the law and generally permit employees an opportunity to fully present their cases at a hearing.
Cases are subject to two levels of appeal. The first appeal is to a board appointed by the secretary of the DOL (the members whom the secretary can hire or fire at will). The second is to the U.S. Court of Appeals. With the right case these laws can be effective.
These laws have special significance for federal employees. Unlike other laws that cover private sector workers, four of these laws also cover federal employees. See Rule 14.
Federal Employees
Protections for federal employees are covered in Rule 14. Additionally, the websites of the Office of Special Counsel and the Merit Systems Protection Board contain extensive information on filing procedures, case precedents, and explanations as to how the Whistleblower Protection Act, the main law protecting federal employees, works. These websites are located at https://osc.gov and www.mspb.gov, respectively.
First Amendment Protections for Public Employees
One of the most important whistleblower protection laws is the First Amendment to the U.S. Constitution. The First Amendment was intended to protect speech critical of government operations or exposing corruption. In 1871, as part of the post–Civil War Reconstruction laws, Congress created a tort-type remedy for persons harmed when “state action” interfered with a constitutional right. Over time this law was applied to public employees and interpreted to protect whistleblowers who work for state and local government from retaliation. The law provides federal court jurisdiction, with the right to have claims heard by a jury. Traditional labor law remedies are available, such as reinstatement and back pay. Public employees are also entitled to compensatory damages, punitive damages, and attorney fees and costs.
The legal protections provided under the First Amendment and the Civil Rights Act of 1871 are explained in Rule 13.
Although the First Amendment should also apply to employees who work in the federal government, a series of Supreme Court cases has radically narrowed its applicability. Federal employees who suffer retaliation for exposing waste, fraud, or abuse are, in almost every circumstance, required to use the Whistleblower Protection Act as their exclusive remedy.
Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)
In 1989 Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The law created civil liability for violations of fourteen underlying criminal laws, mostly as they relate to banks (or, as defined in the statute, “federally insured financial institutions”). These laws include mail and wire fraud, making false statements to government officials, and financial institution fraud. If someone makes a criminal false statement to a government official related to fraud in a bank, that person can be criminally indicted under criminal law. But that person can also be held liable for money damages under FIRREA.
Civil lawsuits are far easier to win than criminal cases. The burden of proof is significantly reduced (i.e., from “beyond a reasonable doubt” in a criminal matter to a mere “preponderance of evidence” in a civil case), and constitutional protections against self incrimination do not apply. By using FIRREA to prosecute bankers who engage in criminal fraud, the government can realistically pursue and win a case. Bottom line: The ability of the government to prevail in a bank fraud case under FIRREA is far easier than obtaining a criminal conviction.
In regard to prosecuting the big banks, for twenty-five years the law was ignored. Most of the criminal laws referenced in FIRREA were designed to permit lawsuits against individuals who defrauded a bank, such as a bank teller who embezzled money from a local savings and loan bank. But everything changed in 2013. The United States sued the Bank of New York (BNY) Mellon, one o
f the world’s largest financial institutions. The approach used by the United States was novel: The bank could be sued for defrauding itself. In other words, if bank employees engaged in fraud to enrich the bank, the bank could be held liable. If accepted, this approach would convert FIRREA from a law that simply targeted people who violated one of the fourteen identified laws to rip off a bank to one that targeted banks for violating one of the fourteen laws to rip off the government, investors, or the American people (such as engaging in illegal loan practices).
In a precedent-setting case, U.S. District Judge Lewis A. Kaplan held that FIRREA was designed to “deter fraudulent conduct that might put federally insured deposits at risk.” Thus, banks that harm themselves by engaging in fraudulent financial transactions to increase profits are guilty of placing insured deposits at risk. As explained by Judge Kaplan:
Congress was addressing not only frauds by insiders who were trying to harm their employers, but also frauds by insiders seeking to benefit their employers—perhaps through deception of auditors or regulators.
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Ensuring that taxpayers would not need to bail the industry out again in order to protect the funds of depositors is consistent not only with seeking to prevent fraud perpetrated against the financial institutions, but also with deterring or punishing fraud which occurs as a result of insiders’ misguided efforts to benefit their institutions, particularly insofar as those efforts ultimately go on to expose the institutions to new and harmful risks.
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In sum, the essential point is this: the statute permits penalties against “whoever” commits a fraud affecting a federally insured financial institution. The purpose of that provision is to deter frauds that might put federally insured deposits at risk. Here, [BYN Mellon] has been charged with participating in a fraudulent scheme and harming itself in the process. Just as Congress clearly intended to deter bank employees from engaging in fraud that results in harm to these institutions, Congress was entitled to conclude that penalties against financial institutions in cases like this would deter such institutions from similar, harmful, fraudulent conduct.
United States of America vs. The Bank of New York Mellon Corporation unlocked the potential of FIRREA. Since that case, numerous other bank-fraud cases have been filed and billions of dollars recovered from banks that robbed taxpayers by obtaining bailouts, robbed their investors when stocks plummeted, and robbed their customers when they issued bad mortgages and other fraudulent financial instruments.
The BNY Mellon case was settled on March 9, 2015, for a total of $714 million paid to investors, the State of New York, and the federal government. U.S. taxpayers got back $167.5 million, the Department of Labor obtained $84 million to compensate victims who participated in the bank’s retirement plans, and the Securities and Exchange Commission obtained $30 million in sanctions to compensate investors.
Eric Schneiderman, Attorney General for the State of New York, explained the importance of the Mellon precedent: “Investors count on financial institutions to tell them the truth about how their investments are being managed. The Bank of New York Mellon misled customers and traded at their expense. Today’s settlement shows that institutions and individuals responsible for defrauding investors will be held accountable and will face serious consequences for their wrongdoing.”
How does all this relate to whistleblowers?
FIRREA is an older law that contains one of the worst federal whistle-blower reward statutes. Whistleblower rewards are capped at a maximum of $1.6 million. Even the Attorney General of the United States recognized that this maximum award would not properly incentivize employees to risk their careers to step forward, and in many cases would not even compensate Wall Street bankers for their direct financial losses when they were fired for being whistleblowers. In 2014 the Attorney General called for the law to be amended, consistent with the False Claims Act. Ultimately, in order to promote the detection and prosecution of bank fraud, the FIRREA whistleblower provision will need to be fixed.
Another problem concerns the lack of judicial review. The whistleblower law indicates that the Department of Justice should be required to pay rewards. However, a whistleblower who is denied a reward (or who objects to the amount of a reward) cannot appeal this decision in court.
FIRREA has unique filing provisions that require a whistleblower to execute a detailed “declaration” and confidentially file it with the Attorney General. These provisions are set forth in Title 12 U.S. Code, Sections 4201–23. Declarations must be made under oath and set forth the basis of the whistle-blower’s knowledge of the underlying facts. The factual assertion should be very specific and must contain “at least one new factual element necessary to establish a prima facie case” of a FIRREA violation that was “unknown to the government.”
There is one unique provision in the FIRREA statute that apparently has never been used: If the United States decides not to directly prosecute a FIRREA violation, the Attorney General can appoint a private attorney to bring the case. This private attorney must be approved by the whistleblower, and can be paid on a reasonable contingent fee basis. Additionally, if the Attorney General has not made a decision as to whether to prosecute a FIRREA case, the whistle-blower can request the right to appoint a private attorney to pursue the claim. If such a request is made, either the Attorney General “shall” appoint the private counsel identified by the whistleblower to pursue the case or the United States shall file the complaint itself. However, like the reward provision, if the Attorney General refuses to follow this provision of the law, the whistleblower cannot sue in court.
While waiting for FIRREA to be fixed, whistleblowers do have a number of options. The bank frauds that trigger FIRREA liability may also trigger liability under other federal laws with stronger whistleblower provisions, such as the Securities and Exchange Act, the False Claims Act, and the Commodity Exchange Act. These three laws have no caps on reward amounts and permit whistleblowers to challenge denials in federal court.
A review of FIRREA fraud cases demonstrates the potential to use these stronger whistleblower laws. One major FIRREA case was triggered by a whistleblower who filed a False Claims Act lawsuit (due to the false statements issued by the bank). In an unfortunate twist of fate for the whistleblower, the court dismissed the whistleblower’s lawsuit due to the statute of limitations (i.e., the case was not filed timely) but permitted the U.S. government to pursue a FIRREA case against the bank.
The SEC has collected billions in sanctions as a result of successful FIRREA prosecutions (including the BNY Mellon case, where the SEC collected $30 million). This is extremely significant. The SEC’s whistleblower law has a strong “related action” provision. If the SEC collects at least $1 million in sanctions from a wrongdoer, the whistleblower is entitled to a reward of 10 to 30 percent for monies obtained not only by the SEC but also from any other government agency. Thus, had a whistleblower in the Mellon case filed for a reward under the securities law, he or she could have been entitled to a reward based on the “alternative remedy” provision, which should include not only the $30 million collected by the SEC, but potentially the millions collected from the other government agencies.
The key in bank fraud cases is not to rely solely on FIRREA for a reward but to think outside the box and try to determine whether the bank’s misconduct also violated other civil or criminal laws that have real reward provisions.
Food Safety
In December 2008 Clifford Tousignant ate some peanut butter. He was a decorated Korean War veteran and had won three Purple Heart medals for being wounded in combat. He survived the war, but the peanut butter was contaminated with salmonella. Tousignant died from food poisoning on January 12, 2009.
Jacob Hurley had better luck. In early January 2009 he ate his favorite comfort food, Austin Toasty Crackers with Peanut Butter. He became sick and started vomiting. Jacob had diarrhea for eleven days, so much so that blood began to appear in his stool. He became let
hargic and his skin sallow. His parents took him to the family doctor, and Jacob tested positive for salmonella poisoning. Jacob’s peanut butter crackers were tested and also contained salmonella.
A total of eight people died from this January 2009 outbreak of salmonella. In addition, an estimated nineteen thousand people were sickened in forty-three states. The source of the outbreak: peanut butter sold by the Peanut Corporation of America out of its Blakely, Georgia, processing plant. Jacob Hurley’s father asked why no company employees said or did anything. “It sickens me to no end that the majority of a company and its employees could knowingly allow tainted products to go out the door and into the nation’s food supply. Does no one have a conscience?”
As reports filtered out from the company’s plant, the source of the contamination became obvious. Workers had witnessed rats and cockroaches in the plant and knew about water leaks, surface contamination, and failure to properly clean the facility—all of which potentially contributed to the salmonella outbreak. They knew peanut butter that tested positive for salmonella was shipped out of the plant and sold to customers.
Some workers complained to managers. Most, however, kept silent. None filed a complaint with the government. E-mails later obtained by congressional investigators told the story: Delays caused by trying to stop contaminated shipments were “costing us huge $$$$$.” The company even wanted to turn “raw peanuts” found on the factory’s “floor into money.”
Could this disaster have been prevented?
On December 21, 2010, nearly two years to the day after Clifford Tousignant ate the contaminated peanut butter that killed him, Congress passed the FDA Food Safety Modernization Act. A key provision prohibits retaliation against employees who blow the whistle on contamination and safety risks in the “manufacture, processing, packing, transporting, distribution, reception, holding or importation of food.” The peanut butter scandal was the major catalyst for this change in law.
