by Stephen Kohn
But if you are not the first to file, it is still to your advantage to fully cooperate with an ongoing investigation, and provide the government with new information that the original whistle-blower could not contribute.
12. Limitations on Filing Anonymously: To file an anonymous qui tam claim, the whistleblower must be represented by counsel. But “prior to the payment of an award the identity of the whistleblower” must be provided to the Commissions, along with “such other information” the Commissions “may require.” Even postjudgment, after the whistleblower’s identity has been provided to the Commissions, the Commissions are still prohibited from releasing any information to third parties that may identify the whistleblower, except under very limited circumstances.
13. Settlement Coverage: The statute explicitly ensures that qui tam rewards are based not only on monies obtained as a result of “judicial or administrative action” but also include monies obtained by the government as a result of “settlement.” The basis for rewards also includes actions taken by the Commissions that are in any manner “based upon” the “original information provided by the whistleblower,” including indirect “related” actions.
14. Disqualification of Certain Employees: Various classes of employees are disqualified by statute from obtaining rewards. The disqualification is primarily applied to employees whose job it is to detect fraud, such as employees of an “appropriate regulatory agency,” employees of the Department of Justice, or “law enforcement organization(s)” employees of the “self-regulatory” organizations and the “registered futures association.”
15. Whistleblowers Disqualified from Obtaining Rewards: Even if a whistleblower is completely eligible to obtain a reward, there are three grounds for disqualification. First, if the whistleblower is “convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award.” Second, if the whistleblower “knowingly and willfully makes any false, fictitious, or fraudulent statement” when filing his or her qui tam. Persons who “knowingly” file false statements in an attempt to obtain a reward can be criminally prosecuted. Third, the failure to file claims in accordance with the rules published by the Commission can, standing alone, result in the denial of a claim.
16. Antiretaliation: No employer can terminate or discriminate against any employee who files a qui tam claim, who testifies in a qui tam case, or who assists in a qui tam–related investigation.
Under the CEA antiretaliation provision, discrimination cases must be filed directly in federal court within two years of the retaliatory adverse action. Employees are entitled to reinstatement, back pay, special damages, and attorney fees and costs. The SEA’s protections are broader than the CEA (filing a qui tam) and also requires that claims be filed in federal court. The law has a three-year statute of limitations (that can be lengthened up to ten years, depending on when the employee learns of the retaliation). The scope of damages under the two laws are somewhat different. Whereas the CEA directly permits an award of special damages, the SEA is silent on that provision. But the SEA mandates an award of double back pay, whereas the CEA only provides for a straight back pay award. There is no provision in the law for filing retaliation cases confidentially, and an employer will know who the plaintiff is in any such case. The Sarbanes-Oxley corporate reform law also prohibits retaliation against whistleblowers who allege securities fraud. The SOX law has additional protections for which the SEA provisions are silent. Corporate whistleblowers should try to file claims under SOX and if appropriate, join the CEA or SEA claims with the SOX case. The SOX law has a 180-day statute of limitations. See Rule 4.
In a major breakthrough for whistleblower protection, the Securities and Exchange Commission now views retaliation as a securities violation. The logic behind this rule is compelling. The antiretaliation provisions of SOX and Dodd-Frank are both part of the Securities and Exchange Act. Under the law, the SEC can sanction any person who violates any part of the SEA. Thus, as a matter of law, firing a whistleblower is a violation of the SEA, just as engaging in insider trading is also a violation. In December 2016 the SEC sanctioned SandRidge Energy Inc. $1.4 million for retaliatory actions.
Because the sanction in the SandRidge Energy retaliation case was over $1 million, the whistleblower who disclosed that violation to the SEC (most likely the victim of the retaliation) would be entitled to a reward of no less than $140,000 and no greater than $420,000. On top of that, the SEC’s finding could be admissible in a wrongful discharge lawsuit.
The rewards “create powerful incentives” for informants “to come to the Commission with real evidence of wrongdoing . . . and meaningfully contributes to the efficiency and effectiveness of our enforcement efforts.”
Mary Jo White, Chair, Securities and Exchange Commission
17. Confidentiality: The qui tams mandate that the Commissions not disclose any information “which could reasonably be expected to reveal the identity of the whistleblower,” except under very specific circumstances, such as during a grand jury proceeding, or if the Commissions file a lawsuit against a corporation and the corporation is entitled to learn the identity of the informant. The Commissions must also ensure that any information about the whistleblower shared with other law enforcement or regulatory agencies is held in confidence by those agencies.
18. Access to Information: The ability of corporations (or the public) to learn the identity of whistleblowers who provide information under the qui tam provisions is extremely limited. The statute ensures that the Freedom of Information Act cannot be used by third parties to obtain any information that may identify the whistleblower. However, these documents are not completely shielded from public view, especially if the government prosecutes the wrongdoer and information is used in administrative or court proceedings.
19. Non-Preemption: The SEA and CEA whistleblower protection provisions do not preempt states from enacting similar whistle-blower laws and are not exclusive remedies. The Dodd-Frank Act contains an explicit “savings clause” that prevents the law from being interpreted so as to “diminish the rights, privileges, or remedies of any whistleblower under any Federal or State law, or under any collective bargaining agreement.”
20. Rights Cannot Be Waived: The law prevents any employer from requiring employees to waive their rights to file whistleblower claims under the SEA and CEA qui tam laws. The SEC, by regulation, ensured that employers could not interfere with employee communications to the Commission: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible violation, including enforcing, or threatening to enforce, a confidentiality agreement. . . .” The Commodity Exchange Act has a similar rule, as does the amended version of the Sarbanes-Oxley Act.
The commission has put teeth into these provisions and has sanctioned companies that required employees to sign restrictive nondisclosure agreements, including imposing monetary fines and penalties.
On October 24, 2016 the SEC’s Office of Compliance Inspections and Examinations issued a “Risk Alert” carefully setting forth the Commission’s policy on restrictive NDAs. Corporations were advised to review their compliance manuals, codes of ethics, employment agreements, and severance agreements for any policies or rules that could restrict or create a chilling effect on an employee’s willingness to contact law enforcement about potential violations, or restrict an employee’s right to apply for or obtain a reward.
21. No Mandatory Arbitration: Under the Commodity Exchange Act and the Dodd-Frank amendments to the Sarbanes-Oxley Act, whistleblowers cannot be required to have their cases subjected to mandatory arbitration. Even if an employee signs an arbitration agreement that, under federal or state law, would typically require a dispute to be arbitrated, these types of agreements are void under the SOX and CEA.
22. Follow the Rules: Both Commissions were granted explicit rule-making authority under the whistleblower provisions. Under the law,
whistleblowers are required to follow these rules, and the failure to file a claim in accordance with the specifications set forth by the SEC or CFTC constitute grounds for denying a reward. Any person filing a qui tam should obtain the most recent version of any rules published by either Commission and ensure strict compliance with those rules. The SEC also established a separate Whistleblower Office dedicated to administering the rewards program and ensuring SEC compliance with the Dodd-Frank Act. The SEC’s whistleblower rules are published at 17 C.F.R. Parts 240 and 249. The CFTC’s rules are published at 17 C.F.R. Part 165. The extensive regulatory history justifying these rules is published at 76 Federal Register 34300 (June 13, 2011) (SEC rules) and 76 Federal Register 53137 (August 25, 2011) (CFTC rules).
23. File the Second Application: The SEC’s final regulations governing whistleblower rewards established a two-step process for qualifying for rewards. Whistleblowers must initially file a “Form TCR” or a “Tip, Complaint, or Referral” form. This form, available online from the SEC, initiates the reward process. If the SEC issues a sanction against a company for which a reward could be paid, the SEC is required to post notice of this sanction on the SEC’s website. Thereafter, in order to obtain a reward, a whistleblower must file a second application—and complete a new form known as “Form WB-APP.” This new application must be filed within ninety days of the SEC’s publication of the sanction.
24. Retroactivity: The qui tam provisions should have retroactive application. Under the law, employees can seek rewards for frauds and violations that occurred before the passage of the Dodd-Frank Act. However, the Commission has determined that rewards will only be paid on the basis of information provided to the Commission after July 21, 2010, the date the Dodd-Frank Act was signed into law. This rule was upheld by the U.S. Court of Appeals for the Second Circuit.
25. Appeals: Whistleblowers can appeal the denial of their qui tam claims. The scope of appeal under the SEA and CEA differ in one material respect. Under the CEA, “any determination” by the Commissions regarding the whistleblower’s qui tam case is subject to appeal, “including whether, to whom, or in what amount” an award is made. The SEA qui tam also permits an appeal of “any determination” made by the SEC, except the “amount of an award.” In other words, the SEC’s discretion as to whether to pay the whistleblower 10 percent, 30 percent, or some amount in between is nonreviewable. Under both laws an appeal must be filed within thirty days “after the determination is issued by the Commission.” Appeals are filed with the U.S. Court of Appeals, and the decision of the Commission is reviewed under the Administrative Procedure Act, 5 U.S.C. § 706. Before an appeal can be filed in court, the whistleblower must fully comply with and “exhaust” the administrative procedures mandated under the SEC and CFTC rules.
Dodd-Frank
As of January 2017 the U.S. Securities and Exchange Commission has paid whistleblowers more than $130 million in rewards based on their “unique and useful information” that, in many cases, has permitted the SEC to “move quickly and initiate enforcement action against wrongdoers before they could squander the money.” Figure 6 shows the top ten awards paid by the Commission since the reward laws were approved.
Copies of award decisions are published on the SEC’s Office of the Whistleblower website (www.sec.gov/whistleblower). To protect confidentiality, decisions usually do not identify either the company sanctioned or the whistleblower who obtained a reward. For example, in Case No. 2016-02, an “analyst” was awarded $700,000. In Case No. 2015-5, the Commission paid the whistleblower the maximum percentage award (30 percent), in large part due to the “hardships” “suffered” by the employee for making the report. In the same case, the Commission also sanctioned the company for retaliation.
In Case No. 2014-8, the Commission waived a requirement of the rules. This was a significant decision, because the SEC could have used this technicality to deny the reward altogether. But instead it exercised discretion to help a whistle-blower. Usually government agencies rule in the opposite direction—if a whistle-blower makes a mistake, he or she is denied justice. In this case, however, instead of ignoring the contributions of the whistleblower and blindly following a rule, the Commission rewarded the employee for “diligent efforts to correct and bring to light the underlying misconduct.” The Commission also recognized that this whistleblower had tried to protect investors, and had suffered severe “professional injuries” when he or she tried to report the violations internally.
The Commission has also given awards to employees who performed compliance functions and awarded a foreign resident $30 million, noting that the Dodd-Frank Act’s whistleblower reward program had extraterritorial reach: “It makes no difference whether, for example, the claimant [whistleblower] was a foreign national, the claimant resides overseas, the information was submitted from overseas, or the misconduct comprising the U.S. securities law violation occurred entirely overseas.”
In Case No. 2016-1, the Commission reduced the whistleblower’s reward because of a “delay in reporting the violations.” When the whistleblower tried to justify the delay by identifying potential “personal and professional” risks associated with making a disclosure, the Commission rejected these arguments, explaining that the Dodd-Frank Act “changed the landscape for whistleblowers, by permitting whistleblowers “the right” to file reports “anonymously and to remain anonymous until the time the award is paid.”
In a precedent-setting ruling (In re KBR), the Commission sanctioned the multinational defense contracting firm $130,000 for requesting employees to sign restrictive confidentiality agreements concerning disclosures they made to company attorneys, who managed the internal compliance program. Although the confidentiality agreements did not specifically prohibit communications with the SEC, their restrictions were broad enough to cover communications with the Commission: “KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning them that they could face discipline and even be fired if they discussed matters with outside parties without prior approval of KBR’s legal department.” The SEC found that these terms violated Rule 21F-17, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.
Following up on the KBR precedent, on December 19, 2016, the Commission sanctioned Virginia-based communications company Neustar, Inc., $180,000 for requiring employees to sign restrictive severance agreements that prohibited communications with the SEC. In its investigation the Commission determined that 246 employees had signed agreements that prohibited them from making any statement that “disparages, denigrates, maligns, or impugns” the company.
Someone Listened!
Someone listened! Study after study documented the key role whistleblowers play in fraud detection. Scientifically sound statistical analyses from organizations ranging from PricewaterhouseCoopers to the Association of Certified Fraud Examiners documented how, even despite the current disincentives whistleblowers face, employees still come forward with information and play a central role in successful fraud detection. One such study, published by the University of Chicago Booth School of Business, actually wondered why any employee would ever blow the whistle, given the real risks of financial ruin. Their conclusion was clear: Incentives for employee disclosures were the key for stimulating the single most important source of information on actual frauds.
PRACTICE TIPS
• The entire Dodd-Frank Wall Street Reform and Consumer Protection Act is printed as House Report No. 111-517 (June 29, 2010). It is available online at www.whistleblowers.org. The sections that relate to whistleblower protections are Section 748 (Commodity Exchange Act) (7 U.S.C. § 26); Sections 922-24 (Securities Exchange Act) (15 U.S.C. § 78u-6); Sections 922 and 929 (Sarbanes-Oxley Act) (amended 18 U.S.C. § 1514A); Section 1057 (Consumer Protection Board) (12 U.S.C. § 5567); and Section 1079B (False Claims Act) (amended 31 U.S.C. § 3730(h)).
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On June 13 and August 25, 2011, the SEC and CFTC published final rules implementing the Dodd-Frank whistleblower reward program. These rules are explained in Checklist 7, Dodd-Frank, Wall Street, and FCPA “Q&As.” The SEC’s Office of the Whistleblower publishes one of the best websites for whistleblowers: www.sec.gov/whistleblower. It posts all SEC award rulings and copies of the law and regulations.
RULE 9Get a Reward! Report Foreign Corrupt Practices Worldwide
The most important international whistleblower reward law is the Foreign Corrupt Practices Act (FCPA), which targets bribery of foreign government officials. Enacted by the U.S. Congress in 1977, its goal is to stop global corporate bribery. It was amended in 1998 to conform to the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention), of which the United States was a founding party. Since 2010 whistleblowers are covered under the FCPA.
The FCPA is extremely broad in scope, as reflected in the requirements of the Anti-Bribery Convention, which mandates that member countries make it a criminal offense “for any person” to “offer” or “give” money or any other “advantage” to a foreign government official in order to “obtain or retain” a “business advantage.” The Convention targets both direct payments and payments made through “intermediaries,” and also prohibits the “aiding and abetting” of violations. Furthermore, the Convention requires that all member states “broadly” assert territorial jurisdiction over these crimes so that “extensive physical connection to the bribery act is not required.”
