When Congress passed the Dodd-Frank Act in 2010, it bolstered protections for whistleblowers who report certain kinds of misconduct, such as violations of securities law. At the time, the Sarbanes-Oxley Act already provided many of these whistleblowers with a cause of action for retaliation. But the new Dodd-Frank cause of action included a longer statute of limitations, a more generous damages remedy, and a right to proceed straight to federal court rather than first bringing the claim to the Department of Labor (as Sarbanes-Oxley requires).
Sarbanes-Oxley provides protection for individuals who blow the whistle internally. But courts have struggled with whether Dodd-Frank provides that same protection, or if Dodd-Frank protects only individuals who report misconduct to the Securities and Exchange Commission (SEC) directly.
The Dodd-Frank Act, passed in 2010, includes a new cause of action for whistleblowers who claim that their employer retaliated against them for reporting wrongdoing. But it’s not yet certain whether a whistleblower who blew the whistle internally, but not to the Securities & Exchange Commission, can bring a Dodd-Frank claim. As we covered in this post, federal judges have issued conflicting decisions on this issue.
The Supreme Court is now ready to resolve this conflict. Today, the Court granted certiorari in Digital Realty Trust, Inc. v. Paul Somers, which presents the question of whether the Dodd-Frank protection extends to an internal whistleblower.
When Congress passed the Sarbanes-Oxley and Dodd-Frank Acts, it included protections for employees who blow the whistle on wrongdoing by their employers. However, those whistleblower protections don’t apply to every report of wrongdoing. Rather, they come into play only when an employee reports particular types of misconduct.
For example, in a recent decision (Erhart v. BofI Holding, Inc.), a federal court in California dismissed claims by an internal auditor (Erhart) against his employer (BofI Holding), ruling that Erhart didn’t plausibly allege that he had been engaged in the "protected activity" necessary to qualify for the whistleblower protections of those statutes.
On July 1, the SEC issued long-awaited proposed rules pursuant to the 2010 Dodd-Frank Act. As we've discussed in prior posts here and here, Section 954 of Dodd-Frank required the SEC to direct national security exchanges not to list any company that does not adopt a policy requiring recovery of incentive-based pay received by executive officers in excess of what would have been received under an accounting restatement. Although the new rules are only proposals and they could change after public comment, it's not too early for executives to begin to plan for the financial issues they will face in the event their company issues a financial restatement, as 746 companies did in 2014.
Clawbacks of executive compensation after a financial restatement are not new, of course. After the 2002 Sarbanes-Oxley Act authorized the SEC to claw back one year’s worth of incentive compensation from a CEO or CFO whenever there has been a financial restatement resulting from "misconduct," companies began voluntarily adopting clawback policies applicable to financial restatements. And after the Emergency Economic Stabilization Act of 2008 required clawback policies for companies receiving financial assistance under TARP that applied to "any bonus, retention award, or incentive compensation... based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate," additional companies adopted or expanded their clawback regimes. Today, most Fortune 100 companies have a clawback policy applicable to restatements (although they differ widely as to the triggering events, the types of compensation subject to clawback, whether the executive must have caused or contributed to the false or incorrect financial reporting, and the board's discretion to forgo a clawback, among other variables). But many large companies and most mid-cap and small companies have not adopted clawback policies, and virtually no company has implemented a clawback policy as severe as the Dodd-Frank legislation’s mandate. Most have been waiting for the SEC's proposed rules.
Section 304 of the Sarbanes-Oxley Act of 2002 requires the CEO and CFO of an issuer that has restated its financial statements to reimburse the company for any incentive or equity-based compensation, and for the profits on any stock sales of the company’s stock, during the 12-month period following the first issuance of the offending financial statements. Although this provision has been used sparingly by the SEC, the recent settlement of SEC investigatory charges by Saba Software, in which executives who were not charged with any wrongdoing agreed to repay bonuses and stock profits, is a cautionary tale for CEOs and CFOs of publicly traded companies.
Saba Software became the subject of an SEC investigation and enforcement action arising out of an alleged scheme to overstate revenues by overbooking and pre-booking time statements of international consultants in order to meet pre-arranged time estimates. As part of the settlement of the SEC charges in the fall of 2014, Saba was required to restate its financial records for the years 2009 through part of 2012. In a contemporaneous settlement, Saba’s CEO agreed to reimburse the company for over $2.5 million in incentive and equity compensation and profits from stock sales earned following the issuance of the financial statements the company restated. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543035992#.VOtSdC6LXfc.
In our last post, we counted down our most popular posts of 2014, from A-Rod to Walgreen. Now it’s time to take a look at the issues in executive disputes that are likely to draw plenty of attention in 2015.
1. Dodd-Frank Bounties and Whistleblower Litigation on the Rise
In November 2014, the SEC released its annual report on its Dodd-Frank whistleblower award program. The theme of the report is that Dodd-Frank is paying off – both for the SEC and for whistleblowing employees. The SEC reported that it issued whistleblower awards to more people in its 2014 fiscal year than in all previous years combined, including a $30 million bounty to one whistleblower in a foreign country. The number of whistleblower tips received continues to increase, and we expect news of more substantial awards in 2015. Meanwhile, litigation over various Dodd-Frank issues, such as whether a whistleblower claim is subject to arbitration, whether the shield against whistleblower retaliation applies overseas, and whether a whistleblower must report to the SEC in order to bring a retaliation claim, will continue to percolate in the federal courts.
2. The Supreme Court Weighs in on Employment Issues
A couple of key Supreme Court cases will address employee rights that apply across the board, from the C-suite to the assembly line. In Young v. United Parcel Service, the Court will decide whether, and in what circumstances, the Pregnancy Discrimination Act requires an employer that accommodates non-pregnant employees with work limitations to accommodate pregnant employees who have similar limitations. And in EEOC v. Abercrombie & Fitch Stores, Inc., the Court will address whether an employer can be liable under the Civil Rights Act for refusing to hire an employee based on religion only if the employer actually knew that a religious accommodation was required based on knowledge received directly from the job applicant.
Who doesn’t love the year-end countdown? We’re here to offer you one of our own – our most-read posts in 2014 about executive disputes. The posts run the gamut from A (Alex Rodriguez) to Z, or at least to W (Walgreen). They cover subjects from sanctified (Buddhists and the Bible) to sultry (pornographic materials found in an executive’s email). Later this week, we’ll bring you a look at what to expect in 2015.
Without further ado, let the countdown begin!
8. The Basics: Dodd-Frank v. Sarbanes-Oxley
This post is an oldie but a goodie. It includes a handy PDF chart that breaks down the differences in the Dodd-Frank and Sarbanes-Oxley whistleblower laws. Each of these laws continues to be a hot-button issue for plaintiffs and employers.
7. When Employment Relationships Break Bad
America may have bidden adieu to Walter White and his pals on Breaking Bad, but employment relationships continue to spin off in some very unpleasant ways. Such was the case with Stephen Marty Ward, who ended up in federal prison after he threatened his employer with disclosure of its trade secrets, as we covered in this post.
On September 22, the Securities and Exchange Commission announced its largest award to date under its whistleblower program: $30 million. The SEC said that the whistleblower, who lives in a foreign country, came to it with valuable information about a “difficult to detect” fraud.
In the order determining the award (which is heavily redacted to protect the identity of the whistleblower), the SEC commented that the claimant’s “delay in reporting the violations” was “unreasonable.” In arguing for a higher bounty, the claimant contended that he or she was “uncertain whether the Commission would in fact take action.” This argument, however, didn’t support a “lengthy reporting delay while investors continued to suffer losses.”
Taiwan and Manhattan’s Foley Square are separated by 7,874 miles, and Taiwanese citizen Meng-Lin Liu couldn’t bridge the distance in federal court. Liu sought to recover in Manhattan under the Dodd-Frank Act’s anti-retaliation provision (15 U.S.C. § 78u‐6(h)(1)). However, on August 14, the Second Circuit, which sits in Foley Square, affirmed the dismissal of his whistleblower retaliation claim. Liu v. Siemens AG, No. 13-4385-cv (2d Cir. Aug. 14, 2014).
As we previously described here, Liu’s case was relatively simple. He alleged that he repeatedly told his superiors at Siemens in Asia, and the public, that Siemens was violating the Foreign Corrupt Practices Act (FCPA). As a result, he claimed, Siemens demoted him, stripped him of his responsibilities, and eventually fired him with three months left on his contract.
The Securities & Exchange Commission gained significant new enforcement powers in the Dodd-Frank Act of 2010. Under the Act, the SEC can award bounties to whistleblowers who provide information leading to successful enforcement actions. It has already exercised this power, making eight whistleblower awards since starting its whistleblower program in late 2011. The Dodd-Frank Act also allows the SEC to sue an employer who retaliates against a whistleblower, but the SEC hasn’t previously taken that step.
Ten days ago, that changed. The SEC announced that it had charged Paradigm Capital Management and owner Candace King Weir with engaging in prohibited trades and retaliating against a head trader who reported the trades to the SEC, and that Paradigm and Weir had settled the charges for $2.2 million. Without its new enforcement authority under Dodd-Frank, the SEC wouldn’t have been able to bring the retaliation charge.
According to the SEC’s press release, Paradigm “removed [the whistleblower] from his head trader position, tasked him with investigating the very conduct he reported to the SEC, changed his job function from head trader to a full-time compliance assistant, stripped him of his supervisory responsibilities, and otherwise marginalized him.”
The formal order issued by the SEC further describes what happened to the whistleblower. The day after the trader told Paradigm that he had reported these particular trades to the SEC, Paradigm removed him from his position. The trader and Paradigm tried to negotiate a severance package, but when that fell through, Paradigm brought him back to investigate trades and work on compliance policies – but not to resume his head trading responsibilities.
While we’re talking about whistleblowers, it’s worth noting that two days ago, the U.S. Court of Appeals for the Second Circuit heard oral argument on appeal from the a federal district court’s opinion in Meng-Lin Liu v. Siemens AG, 978 F.Supp.2d 325 (S.D.N.Y. 2013). This case raises the significant question as to whether the anti-retaliation provisions of the Dodd-Frank Act, 15 U.S.C. § 78u-6(h)(1)(a), apply to an employee who is terminated by a non-U.S. corporation that does business in (and is regulated by) the United States.
In 2010, Congress passed the Dodd-Frank Act, strengthening legal protections for employees who report violations of the securities laws. However, as we’ve covered here, here, and here, the courts have diverged widely as to whether an employee must report directly to the SEC in order to be shielded from retaliation.
In Asadi v. GE Energy (USA), LLC, which we addressed in this post, the Fifth Circuit decided that to meet Dodd-Frank’s definition of a “whistleblower” – and to be protected by its anti-retaliation provision – an employee must in fact provide information to the SEC. However, most of the district courts that have addressed the issue have decided that an employee need not report to the SEC in order to be protected from adverse actions by his or her employer.
Here at the Suits by Suits Worldwide Operations Center, weather continues to have us flummoxed, vexed, and annoyed: even though a famous Pennsylvania rodent discerned that we would have six more weeks of our brutal winter, we’ve had a pleasant warm spell that is about to come to a crushing end due to a storm front that goes by the curious name of "Texas Hooker" (we did not make that up). And we’re about to be plunged back into the depths of the polar vortex yet again – although our earlier bouts with the grim chill may have wiped out our area’s growing population of stink bugs.
In any event, we always take shelter from the storms, the cold, and the heat by digging into our Inbox of interesting developments in executive employment disputes and the issues that surround them, including:
For those of us who follow whistleblower law, Wednesday was a big day – and a good one for employers. In two separate federal appellate decisions, courts affirmed the dismissal of whistleblower actions based on very different issues. For potential whistleblowers and employers alike, the decisions demonstrate yet again the importance of the particular requirements and scope of the law that a whistleblower relies on to support his claim.
The first decision, Villanueva v. Department of Labor, No. 12-60122 (5th Cir. Feb. 12, 2014), comes to us from the Fifth Circuit. It involves William Villanueva, a Colombian national who worked for a Colombian affiliate of Core Labs, a Netherlands company whose stock is publicly traded in the U.S. Villanueva claimed that he blew the whistle on a transfer-pricing scheme by his employer to reduce its Colombian tax burden, and that his employer passed him over for a pay raise and fired him in retaliation for his whistleblowing.
The federal courts are drawing a clear battle line over the disclosures that an employee must make before bringing a whistleblower retaliation claim under the Dodd-Frank Act of 2010. Leading the charge on the one side is the Fifth Circuit, which held in Asadi v. GE Energy (LLC) that a fired employee can’t bring a Dodd-Frank retaliation claim unless he reported corporate misconduct to the SEC prior to his firing. On the other side, the SEC and judges in New York, Connecticut, and Tennessee are massing in support of allowing a plaintiff to bring a retaliation claim even if he only disclosed the misconduct internally prior to firing.
Two months ago, Judge Richard Stearns of the U.S. District Court for the District of Massachusetts joined the SEC’s side of the battle. He ruled that Richard Ellington could pursue a Dodd-Frank retaliation claim against his former employer, New England Investment & Retirement Group, Inc. (NEINV), and his boss, Giacoumakis, even though Ellington only reported concerns about wrongdoing to NEINV’s compliance officer prior to his termination, and did not go to the SEC until after he was fired. Ellington v. Giacoumakis, No. 13-11791-RGS (D. Mass. Oct. 16, 2013).
On December 10, 2013, Suits by Suits contributing editors Ellen D. Marcus and Jason M. Knott will present a live webinar titled “Whistleblower Watch: Big Issues in the Latest Whistleblower Cases Under Dodd-Frank, Sarbanes-Oxley, and the Internal Revenue Code.” During the webinar, Ms. Marcus and Mr. Knott will discuss the whistleblower and anti-retaliation provisions of the Dodd-Frank and Sarbanes-Oxley Acts, the Internal Revenue Code, and other federal statutes. Their presentation will address the types of businesses and conduct that can be targeted by whistleblowers, the procedures that whistleblowers must follow to pursue and preserve a claim, the remedies available to whistleblowers, and more. Ms. Marcus and Mr. Knott will also examine the pressing issues under these laws that are being debated in the courts. This includes contradictory decisions about whether the Sarbanes-Oxley Act’s whistleblower provision covers employees of privately-held companies, such as investment advisers—an issue that is currently before the U.S. Supreme Court in the case of Lawson v. FMR LLC, which we have previously covered in various posts. To register for the webinar, click here.
Twitter’s founders are cashing in on Wall Street, and journalists are piggybacking on the news with articles like this one, which recaps 10 “surprising superstars” of the social network. No, Suits by Suits didn’t make the cut, but you can still follow us at @suitsbysuits, where we’ll bring you 140-word tweets about news related to executive-employer disputes. These are the kinds of stories we track:
On Tuesday, November 12, the Supreme Court will hear argument in the most-watched case of this Term (at least for those of us who edit this blog). The case, Lawson v. FMR LLC, presents the question of whether an employee of a privately-held contractor of a public company can bring a whistleblower retaliation claim against his or her employer under the Sarbanes-Oxley Act of 2002. The plaintiffs in the case, and the parties who have appealed to the Supreme Court, are Jackie Lawson and Jonathan Zang.
In their lawsuit, Lawson and Zang claim that their employers – a group of privately-owned Fidelity subsidiaries that serve as “investment advisers” to publicly-held Fidelity mutual funds – retaliated against them for raising concerns about fraud. Here’s a handy chart from Fidelity’s brief that illustrates the relationship between the parties:
The First Circuit dismissed Lawson and Zang's claims, holding that Sarbanes-Oxley’s anti-retaliation provision only protects employees of public companies. Because Lawson and Zang worked on the blue side of the chart, and not the yellow side, they couldn’t bring a claim for retaliation. (The mutual funds on the yellow side have no employees; they do their business through their contractors on the blue side.)
What do Lawson and Zang argue?
The parties spend a lot of time parsing the language of the Sarbanes-Oxley anti-retaliation provision (18 U.S.C. § 1514A). In their opening and reply briefs, Lawson and Zang argue that the plain text of the law shows that Congress intended to shield employees of contractors of public companies from retaliation for reporting corporate misconduct. If Congress didn’t mean to protect those employees, they say, it wouldn’t have prohibited retaliation by “any officer, employee, contractor, subcontractor, or agent” of “such [public] company.” Under Fidelity’s reading of this provision, the language about contractors would only come into play if a contractor retaliated against a public company employee, and because that doesn’t happen in the real world, the use of the term “contractor [or] subcontractor” would be meaningless.
The Dodd-Frank and Sarbanes-Oxley whistleblower laws are hot topics right now. A split of authority is developing in the federal courts over how an employee can qualify as a whistleblower and bring a retaliation claim under Dodd-Frank. And the Supreme Court will hear argument next Tuesday in a case, Lawson v. FMR LLC, that will require it to decide whether private employers can be subject to Sarbanes-Oxley retaliation claims by their employees.
As we at Suits by Suits continue to watch these issues, we thought it would be helpful to step back for a broader view of these important whistleblower laws. In the table linked here, we have summarized the important facets of each law. This table will serve as a reference point for new developments, placing them in the broader context of these whistleblower protections.
We cover a broad range of issues that arise in employment disputes. Occasionally, we also spotlight other topics of relevant legal interest, ranging from health care to white-collar defense to sports, just to keep things interesting.
Led by Jason Knott and Andrew Goldfarb, and featuring attorneys with deep knowledge and expertise in their fields, Suits by Suits seeks to engage its readers on these relevant and often complicated topics. Comments and special requests are welcome and invited. Before reading, please view the disclaimer.