Tell the Securities and Exchange Commission (SEC). That’s the message the United States Supreme Court sent to whistleblowers with its decision yesterday in Digital Realty Trust, Inc. v. Somers.
As we previously covered here, the Digital Realty case involved a key issue under the Dodd-Frank Act’s anti-retaliation provision: does the provision apply to a whistleblower who reported internally, but did not provide information to the SEC?
When the calendar flips from December to January, it’s a good time to take stock of what to expect over the next 12 months. Here are four major issues in employment law that we’ll be watching in 2018:
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.”
As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.
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