Ninth Circuit: You Don’t Need to Report Securities Violations to the SEC to Be Protected by the Dodd-Frank Anti-Retaliation Provision
On March 8, 2017, a divided panel of the United States Court of Appeals for the Ninth Circuit held that the anti-retaliation provision of the Dodd-Frank Act protects individuals who make purely internal disclosures of alleged securities violations. The decision, Somers v. Digital Realty Trust, Inc., No. 15-17352 (9th Cir. March 8, 2017), aligns the Ninth Circuit with the Second Circuit, which reached the same result in Berman v. Neo@ogilvy, LLC, 801 F.3d 145 (2d Cir. 2015). These opinions stand in stark contrast to the position of the Fifth Circuit, which concluded in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013), that in order to enjoy the protection of the anti-retaliation provision an individual must report the alleged securities violation to the SEC. While the Ninth Circuit’s decision is the latest entry in this evolving circuit … Read More »
The Securities and Exchange Commission (SEC or Commission) Office of Compliance Inspections and Examination (OCIE) issued a Risk Alert on October 24, 2016, titled “Examining Whistleblower Rule Compliance.” This recent Risk Alert continues the SEC’s aggressive efforts to compel Rule 21F-17 compliance and puts the investment management and broker-dealer industries on formal notice that OCIE intends to scrutinize registrants’ compliance with the whistleblower provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank). By way of background, Dodd–Frank established a whistleblower protection program to encourage individuals to report possible violations of securities laws. Importantly, in addition to providing whistleblowers with financial incentives, Rule 21F-17 provides that no person may take action to impede a whistleblower from communicating directly with the SEC about potential securities law violations, including by enforcing or threatening to enforce a severance agreement or a … Read More »
The SEC announced on Wednesday that BlueLinx Holdings Inc. has agreed to pay a $265,000 penalty for including a provision in its severance agreements that required outgoing employees to waive their rights to monetary recovery if they filed a charge or complaint with the SEC or other federal agencies. Press Rel. No. 2016-157. According to the SEC’s order, approximately 160 BlueLinx employees have signed severance agreements that contained the provision since it was added to all of BlueLinx’s severance agreements in or about June 2013.
The provision violates Rule 21F-17 of the Exchange Act, which became effective on August 12, 2011, and prohibits any action to impede an individual from communicating with the SEC about a possible securities law violation. The purpose of the adoption of Rule 21F-17 was “to encourage whistleblowers to report possible violations of the securities laws by … Read More »
SEC Levies Disgorgement and Civil Penalties for Violations of the Consumer Protection Rule and the Dodd-Frank Whistleblower Protection Rule
On June 23, 2016, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. (collectively, “Merrill Lynch”) agreed to pay $415 million and admit wrongdoing to settle charges of rules based violations, including Exchange Act Rule 15c3-3, the Consumer Protection Rule (the “Consumer Protection Rule”) and Exchange Act Rule 21F-17 (“Rule 21F-17”), which prohibits any action impeding an individual from communicating directly with Commission staff about possible securities laws violations. See Release No. 78141.
Exchange Act Rule 15c3-3, known as the Consumer Protection Rule, was enacted to “protect broker-dealer customers in the event a broker dealer becomes insolvent” by eliminating the “use by broker-dealers of customer funds and securities to finance firm overhead and such firm activities a trading and underwriting through the separation of customer related activities from other broker-dealer operations.” To safeguard assets, the Consumer Protection … Read More »
The SEC announced yesterday that it has awarded $17 million to a former company employee whose tip substantially advanced the SEC’s investigation and enforcement proceeding. Press Rel. No. 2016-114. The award is the second largest award by the SEC to a whistleblower since the inception of its whistleblower program nearly five years ago, trailing behind a $30 million award announced in September 2014.
No details on the underlying enforcement action have been released, but the action can be expected to bring in between $56 million and $170 million because the SEC awards whistleblowers 10 to 30 percent of the sanctions it secures. In determining the award percentage, the SEC considers the following factors:
(i) the significance of the information provided by the whistleblower; (ii) the degree of assistance provided by the whistleblower in the enforcement action or related actions; (iii) … Read More »
The SEC recently announced a $3.5 million whistleblower award that reversed course from its earlier determination that the whistleblower was not entitled to an award. Press Rel. No. 2016-88 (May 13, 2016). During its preliminary review, the Claims Review Staff determined that the whistleblower had not provided information to the SEC that lead to the success of the Covered Action because the information did not cause the Enforcement Staff to open an investigation, cause the Enforcement Staff to inquire into conduct that was different from what the Enforcement Staff was already investigating, or significantly contribute to the Covered Action. The whistleblower subsequently filed a written response that contested this decision and that provided additional factual information relevant to the investigation.
The SEC reviewed this response and determined that the whistleblower had provided information that “significantly contributed” to the success of the … Read More »
The U.S. Court of Appeals to the Second Circuit’s recent decision holding that Dodd-Frank’s “whistleblower” anti-retaliation protections apply to employees who are dismissed after reporting alleged violations internally but before alerting the Securities and Exchange Commission (the “Commission”) creates a Circuit spilt and sets up a potential statutory-interpretation showdown in the U.S. Supreme Court. Berman v. Neo@Ogilvie LLC & WPP Group USA, Inc., slip op. at 2 (2d Cir. Sept. 10, 2015).
The Second Circuit’s decision focuses on the conflict between Dodd-Frank’s definition of “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws of the Commission,” 15 U.S.C. § 78u-6(a)(6) (emphasis added), and the retaliation protection provision of the same statute which through incorporation of the Sarbanes-Oxley Act provides a cause of action to a “whistleblower” terminated after reporting alleged violations to … Read More »
On April 22, 2015, the SEC announced an award of between $1.4 million and $1.6 million to a compliance officer who provided original information to the SEC that led to the successful enforcement of a covered action. Exchange Act Rel. 74781 (Apr. 22, 2015). The Dodd-Frank Whistleblower rules generally exclude information that is obtained by an “employee whose principal duties involve compliance or internal audit responsibilities … .” 17 C.F.R. § 240.21F-4(b)(4)(iii)(B). This rule would ordinarily prevent those employees from qualifying as a Whistleblower. An exception applies, however, when the employee has “a reasonable basis to believe that disclosure of the information to the Commission is necessary to prevent the relevant entity from engaging in conduct that is likely to cause substantial injury to the financial interest or properly of the entity or investors … .” 17 C.F.R. § 240.21F-4(b)(4)(v)(A).
The … Read More »
SEC Uses Its Powers under the Dodd-Frank Whistleblower Provisions to Warn Employers Against Attempting to Restrict Employees’ Ability to Report Potential Violations
On April 1, 2015, the SEC announced a settled enforcement proceeding against KBR, Inc., a publicly traded, Houston-based technology and engineering company, for including “restrictive language” in confidentiality agreements used in the course of internal investigations. This is the first time the SEC has used its enforcement powers under Rule 21F-17 of the Whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Rule 21F-17 provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communication.”
The language to which the SEC took exception appeared in confidentiality agreements KBR used in connection with internal investigations. The statement, which investigators required employees to sign before the interview, was included … Read More »
There was not much activity from the SEC Office of the Whistleblower (OWB) in the months since it announced the highest whistleblower award to date in September 2014, but that changed in February when it issued a number of denials. The following is a summary of what’s happened since our last whistleblower award update:
In the Matter of the Claim for Award, Exchange Act Rel. No. 72947. On August 29, 2014, the SEC issued its first award under the Dodd-Frank Act to an employee who performed audit and compliance functions. The employee, who had compliance responsibilities, received an award of $300,000. Generally, information provided to an individual with compliance responsibilities is not considered “original.” Such an employee is entitled to an award, however, if they first report the misconduct to the company and it subsequently fails to take action within 120 … Read More »