United States: A Review Of Recent Whistleblower Developments - 28 January 2019

Whistleblower Developments is a periodic report covering significant cases, decisions, proposals, and legislation related to whistleblower statutes and how they may impact your business. Recent developments include:

  • Upward Trends in 2018 With the SEC's Whistleblower Program
  • Court Refuses to Extend Dodd-Frank Act Whistleblower Protections to Claim Made Under Commodity Exchange Act
  • The New York State Department of Financial Services Publishes Guidance on Company Whistleblower Programs
  • Former In-House Attorney Allowed to Amend Dodd Frank Whistleblower Complaint for a Second Time

Upward Trends in 2018 With the SEC's Whistleblower Program

The upward trend has continued for another year. The SEC Office of the Whistleblower closed out the SEC's 2018 fiscal year having made more whistleblower awards than it had in all the program's previous years combined. According to the SEC's 2018 Whistleblower Program Annual Report, as of September 30, 2018, the program awarded about $168 million to 13 whistleblowers. This total is substantially more than the $158 million combined total it awarded to 46 whistleblowers in the seven years the program existed.

Notably, the SEC handed out its three biggest awards, ever, in fiscal 2018, all of which were above $30 million. The largest, which totaled $50 million, was awarded in March and split between two whistleblowers who helped the SEC collect $145 million from Merrill Lynch.

The SEC also stated in its annual report that the whistleblower program received more than 5,200 tips from whistleblowers in 2018, which constitutes almost a 20-percent increase over 2017. This figure is also a more than 75-percent increase since the program issued its first award in 2012. The SEC stated that it observed an uptick in tips following the U.S. Supreme Court's February 2018 ruling in Digital Realty, which established that whistleblowers must report their concerns to the SEC, rather than another government agency or their employer, to be protected from retaliation.

In 2018, the most common types of complaints reported by whistleblowers were offering fraud (20%), disclosures and financial reporting (19%), and manipulation (12%). Insider trading and trading/pricing issues rounded out the top five categories of complaints received by the SEC. The SEC noted that it received 39 tips relating to "Initial Coin Offerings and Cryptocurrencies," so it has added that type of complaint to its online whistleblower reporting system. The SEC also noted that it had received whistleblower submissions from individuals in 72 foreign countries.

Court Refuses to Extend Dodd-Frank Act Whistleblower Protections to Claim Made Under Commodity Exchange Act

On October 22, 2018, the United States District Court for the Northern District of Illinois, in Johnson v. Oystacher, No. 15-cv-02263 (N.D. Ill. Oct. 22, 2018), dismissed a claim brought under the anti-retaliation provisions of the Commodity Exchange Act (CEA), refusing to impute to the CEA a regulation promulgated by the SEC precluding anyone from impeding an individual from communicating with the SEC. The plaintiff and the defendant had owned a high-volume trading firm together, with the plaintiff serving as Chief Risk Officer while the defendant managed trading activity. The defendant allegedly engaged in a market manipulation scheme, and the Commodity Futures Trading Commission (CFTC) began investigating. The plaintiff testified in the investigation, first supporting the defendant, but he later changed his position and came to believe the defendant was engaging in improper trading practices. After demanding the defendant cease the improper conduct, the plaintiff was ousted from the firm and was allegedly coerced into signing a settlement agreement. The agreement required the plaintiff to provide notice to the firm if he was contacted by regulators and provided that settlement payments to the plaintiff would stop if the firm or the defendant was fined by any regulator in an amount greater than $1 million.

The plaintiff asserted a claim under the anti-retaliation provisions of the CEA, which prohibit adverse action against a person for providing information to, or assisting, a CFTC investigation. The plaintiff acknowledged the provision did not expressly apply but argued the court should apply the rationale of the SEC rule, 17 C.F.R. § 240.21F-17(a), which prohibits anyone from impeding the actions of a would-be whistleblower, including through a settlement agreement. The court rejected the plaintiff's position, saying that trying to read the SEC regulation into the CEA was "entirely off base." Because the CEA language was plain and unambiguous, and did not protect potential whistleblowers, the plaintiff's position was rejected.

The New York State Department of Financial Services Publishes Guidance on Company Whistleblower Programs

In early January of 2019, the New York State Department of Financial Services (DFS) issued guidance on internal whistleblowing programs. The DFS's stated purpose in publishing the guidance is "to detail principles and best practices that all institutions regulated by the Department should account for when designing and implementing their whistleblowing programs." The guidance applies to all DFS-regulated institutions, regardless of industry, size, or number of employees.

Generally, DFS's guidance focuses on protecting independence, confidentiality, and anonymity, and also establishes a definition of whistleblowing that is broader than employee complaints. "Whistleblowing" is defined as "the reporting of information or concerns, by one or more individuals or entities, that are reasonably believed by such individual(s) or entity(s) to constitute illegality, fraud, unfair or unethical conduct, mismanagement, abuse of power, unsafe or dangerous activity, or other wrongful conduct, including, but not limited to, any conduct that may affect the safety, soundness, or reputation of the institution. A whistleblower may be any person who has an opportunity to observe improper conduct at a company, including current or former employees, agents, consultants, vendors or service providers, outside counsel, customers, or shareholders."

The DFS's guidance is otherwise organized around the following ten principles and practices that DFS-regulated entities need to take into account:

  1. Providing independent, well-publicized, easily accessible, and consistent reporting channels;
  2. Strong protections for whistleblower anonymity;
  3. Established procedures for identifying and managing conflicts of interest;
  4. Providing trained staff members to receive and manage whistleblower complaints;
  5. Established procedures for investigating allegations of wrongdoing;
  6. Established procedures for ensuring appropriate follow-up to valid complaints;
  7. Protection for whistleblowers against retaliation; and
  8. Confidential treatment of the whistleblower matters themselves;
  9. Appropriate oversight of the whistleblowing function by senior management, internal and external auditors, and the company's board of directors;
  10. A top-down culture of support for the whistleblowing function.

Several of these factors are well-established principles in the legal and regulatory landscape surrounding whistleblowers and whistleblowing programs. All of the factors together, though, demonstrate more firm regulatory expectations around corporate practices with regard to whistleblower programs.

It bears noting that a few weeks prior to DFS issuing its guidance, it executed a Consent Order with Barclays Bank PLC, and Barclays Bank PLC, New York Branch. That Consent Order, signed by both affected Barclays Bank affiliates, detailed DFS's findings from its investigation of allegations that the CEO of Barclays Bank PLC took substantial efforts, including devoting bank resources, to identifying the authors of two anonymous letters that the organization classified as "whistleblows." Those letters included claims that implicated the CEO's credibility when he assisted in recruiting a new executive for the organization, and they also included claims that the new executive was unfit to work at Barclays. The DFS alleged the CEO's efforts were in contravention of established bank policy concerning whistleblower complaints and, according to DFS's findings, were the result of "certain shortcomings in governance, controls and corporate culture relating to Barclay's whistleblowing function."

In the Consent Order, DFS noted a number of specific issues surrounding Barclay's CEO's missteps, including (1) senior management's failure to document that the CEO was counseled against working to identify the authors of the anonymous "whistleblower" letters, (2) that senior management and board members were generally being exempted from annual whistleblower program training, (3) failure by the bank's board to ensure that the CEO was appropriately walled off from the internal investigation into the anonymous letters' allegations, and (4) a "tone at the top" of the bank that potentially undermined the bank's stated commitment to protecting the anonymity of whistleblowers. The Consent Order concluded by imposing ongoing reporting obligations on the bank and by memorializing the bank's agreement to promptly pay a $15 million penalty.

We encourage companies, to whom this guidance pertains, to review and evaluate internal policies to ensure they conform with this guidance. As we previously have noted, whistleblowers may be incentivized to first report concerns internally when company programs encourage such reports and create an environment that does not permit retaliation.

Former In-House Attorney Allowed to Amend Dodd-Frank Whistleblower Complaint for a Second Time

In early November 2018, a federal magistrate in Pennsylvania granted a former in-house attorney-turned-whistleblower the opportunity to amend his wrongful termination lawsuit against his former employer for a second time. This amendment would allow the whistleblower to allege he reported his concerns about the company's purported securities law violations to the Securities and Exchange Commission (SEC) prior to his termination and not after. As clarified by the U.S. Supreme Court in February 2018, this allegation is critical to the survival of a Dodd-Frank Act whistleblower claim.

The whistleblower in this case served as in-house tax counsel to Vanguard Group Inc. for approximately five years, from 2008 until his termination in 2013. In his lawsuit, he claims Vanguard Group Inc. terminated his employment in retaliation for his telling his superiors the company had been violating securities and tax laws. According to the whistleblower's complaint, the company had avoided more than $1 billion in federal tax liability and at least $20 million in New York state taxes through unlawful price manipulation.

The case is David Danon v. Vanguard Group Inc., 2:15-cv-06864, in the U.S. District Court for the Eastern District of Pennsylvania.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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