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Client Alert: Dodd-Frank Whistleblower Provisions Are a Game-Changer – Part I

SECURITIES AND CORPORATE ALERT

Dodd-Frank Whistleblower Provisions Are a Game-Changer – Part I

“BOUNTY” PAYMENTS AND ANTI-RETALIATION PROTECTIONS FOR WHISTLEBLOWERS IN SECURITIES AND COMMODITIES MATTERS

ISSUERS AND THEIR SUBSIDIARIES SHOULD REVISIT THEIR INTERNAL COMPLIANCE PROGRAMS

The massive Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), signed by President Obama on July 21, 2010, amends the Securities Exchange Act of 1934 (the “SEA”) by, among other things, significantly enhancing the protections and remedies available to corporate “whistleblowers” and diminishing the defenses available to public reporting companies and their subsidiaries. Dodd-Frank also creates new rights of action against employers who retaliate against whistleblower employees and requires the Securities and Exchange Commission (the “SEC”) to pay “bounties” to certain whistleblowers. The act contains similar provisions amending the Commodity Exchange Act (the “CEA”). Accordingly, companies subject to the jurisdiction of the SEC or of the Commodity Futures Trading Commission (the “CFTC”) should immediately re-examine and, if necessary, revise their internal compliance and reporting programs to reduce the possibility that they may become liable under these new provisions. In some cases, companies may want to amend existing agreements with their employees.

Strengthening Whistleblower Protections Under Sarbanes-Oxley

Congress included in the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) provisions that prohibit SEC reporting companies “or any officer, employee, contractor, subcontractor, or agent of such company” from discharging, demoting, suspending, threatening, harassing, or otherwise discriminating against an employee if the employee provides information or other assistance in investigations into potential fraudulent acts. The employee is protected if he or she provides the information to, or the investigation is conducted by: (i) a federal regulatory or law enforcement agency; (ii) any member or committee of Congress; or (iii) any person with supervisory power over the employee. Sarbanes-Oxley also permits an employee who alleges such discharge or discrimination to file a complaint with the Department of Labor or, if the Department of Labor has not issued a final decision within 180 days after the complaint is filed, to bring a lawsuit in federal district court.

Sections 922 and 929A of Dodd-Frank significantly strengthen these employee protections under Sarbanes-Oxley. In particular, these sections:

  • enlarge the period during which the employee can file a complaint with the Department of Labor from 90 days after the employer’s violation to 180 days after the violation or the date on which the employee became aware of the violation;
  • permit a party to such a lawsuit to request a jury trial;
  • provide that these rights may not be waived by any agreement, such as employment agreements, including pre-dispute arbitration agreements; and
  • expand these protections to employees of all subsidiaries and affiliates whose financial information is included in the consolidated financial statements of SEC reporting companies.

What Companies Should do Now

To the extent that they have not done so already, companies subject to these whistleblower provisions should review their internal whistleblower reporting, compliance (e.g., anti-retaliation), and governance policies and procedures. Some companies may need to adopt additional management training programs to help managers to recognize and respond to internal whistleblower reports. Some practitioners have suggested that employment agreements that include agreements to arbitrate disputes covered by the whistleblower protections will need to be amended to eliminate these (now invalid) provisions. Finally, the extension of the whistleblower protections to employees of subsidiaries and affiliates may necessitate that: (i) parent companies determine which subsidiaries and affiliates are now covered by the enhanced Sarbanes-Oxley whistleblower protections; and (ii) these subsidiaries and affiliates review (or adopt) their own whistleblower reporting, compliance, and governance policies and procedures.

New Whistleblower Incentives and Protections Under Dodd-Frank for Reporting Securities Law Violations

In addition to strengthening the whistleblower protections enacted in Sarbanes-Oxley, Dodd-Frank: (i) contains its own potentially significant financial incentives for qualifying whistleblowers to report securities violations; and (ii) provides its own remedies to whistleblowers for retaliation by their employers.

Financial Incentives (“Bounty Payments”) for Whistleblowers

One of the most significant, and potentially game-changing, provisions of Dodd-Frank is the requirement that the SEC pay awards to qualifying whistleblowers who voluntarily provide to the SEC “original information” relating to securities law violations that leads to an enforcement action resulting in monetary sanctions in excess of $1,000,000. The amount of the award can vary between 10% and 30% of the amount collected, as determined in the discretion of the SEC. “Original information” means information that:

  • is derived from the independent knowledge or analysis of the whistleblower;
  • is not known to the SEC from any other source (unless the whistleblower is the original source of the information); and
  • is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media (unless the whistleblower is a source of the information).

Qualifying whistleblowers do not include:

  • members, officers, or employees of an appropriate regulatory agency, the Department of Justice, a self-regulatory organization (such as stock exchanges), the Public Company Accounting Oversight Board, or a law enforcement organization;
  • any whistleblower convicted of a criminal violation related to the judicial or administrative proceeding at issue;
  • any whistleblower who obtains the information as the result of an audit required by securities laws; and
  • any whistleblower who fails to submit information to the SEC in the form required by SEC rules.

Whistleblower Remedies for Retaliation by Employers

Section 922 of Dodd-Frank also adds its own set of whistleblower remedies in the event that an employer engages in prohibited conduct against a whistleblower. Prohibited conduct includes discharge, demotion, suspension, threats, harassment, or any other discrimination because of any lawful act by the whistleblower:

  • in providing information to the SEC under the Dodd-Frank whistleblower protection provisions;
  • in initiating, testifying in, or assisting in any proceeding related to such information; or
  • in making disclosures that are required or protected under any laws, rules, or regulations subject to the SEC’s jurisdiction.

A whistleblower who alleges discharge or discrimination under this section can commence a lawsuit in federal district court. Any such lawsuit must be commenced within 6 years after the violation, or 3 years after the date on which the employee becomes aware (or should have become aware) of the facts of the violation, but in no event more than 10 years after the violation. Remedies include:

  • reinstatement;
  • double back pay, with interest; and
  • compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.

What Companies Should do Now

The requirement that the SEC pay awards to whistleblowers in successful enforcement proceedings can provide a significant incentive for employees to report violations directly to the SEC. Recently, some SEC and Department of Justice enforcement actions under the Foreign Corrupt Practices Act have resulted in sanctions against corporations in the hundreds of millions of dollars. Accordingly, companies subject to these whistleblower provisions need to do all they can to encourage employees to report potential violations to the appropriate company personnel rather than reporting to the SEC in the hope of receiving a portion of a large sanction. Companies should also take note of the 10-year statute of limitations provisions applicable to retaliation lawsuits. This may necessitate changes in record-keeping practices in order to preserve what may turn out to be evidence in such lawsuits.

New Whistleblower Incentives and Protections for Reporting Commodities Law Violations

Dodd-Frank contains financial incentive and whistleblower protection provisions applicable to the reporting of violations of the Commodity Exchange Act (the “CEA”) that are similar to those described above for reporting securities law violations. In particular, Section 748 of Dodd-Frank requires the CFTC to pay monetary awards to whistleblowers who voluntarily provide “original information” to the CFTC that leads to an enforcement action resulting in monetary sanctions in excess of $1,000,000. The amount of the award can vary between 10% and 30% of the amount collected, as determined in the discretion of the CFTC.

Qualifying whistleblowers do not include:

  • members, officers, or employees of an appropriate regulatory agency, the Department of Justice, an entity registered under the CFTC, a registered futures association, a self-regulatory organization (such as stock exchanges), or a law enforcement organization;
  • any whistleblower convicted of a criminal violation related to the judicial or administrative proceeding at issue;
  • any whistleblower who submits information based on facts previously submitted by another whistleblower; and
  • any whistleblower who fails to submit information to the CFTC in the form required by CFTC rules.

In addition, whistleblowers are protected against retaliation by their employers if they provide information to the CFTC or assist in an investigation related to such information. The aggrieved whistleblower can bring a lawsuit against the employer not more than two years after the violation (not the 10 years provided for in the amendments to the SEA). Remedies include reinstatement; straight back pay (not double back pay, as with the amendments to the SEA), with interest; and special damages, including compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.