At the end of April, in a speech to the Corporate and Securities Law Institute at Northwestern University School of Law, Securities and Exchange Commission Chair Mary Jo White discussed the SEC’s whistleblower program. Her speech made clear that the SEC views whistleblowers as an important part of its enforcement efforts going forward, noting, “They provide an invaluable public service, and they should be supported. And we at the SEC increasingly see ourselves as the whistleblower’s advocate.”
Moreover, she affirmed the success of the program: “I am here to say that the program is a success—and we will work hard at the SEC to build on that success.”
For the Foreign Corrupt Practices Act compliance officer, her remarks reaffirmed that the SEC sees its whistleblower program as an important adjunct to a compliance program. White stated, “Although there is no requirement under our rules that the whistleblower be a current or former employee, several of the individuals who have received awards were, in fact, company insiders. Notably, of these, over 80 percent first raised their concerns internally to their supervisors or compliance personnel before reporting to the Commission.” This should alleviate fears that the SEC whistleblower program might undermine internal company reporting mechanisms or even that compliance practitioners might go straight to the SEC in hopes of winning a large whistleblower award.
White also spoke about the SEC’s efforts not simply to reward whistleblowers, but to protect them from retaliation. In an enforcement action against a hedge fund, Paradigm Capital Management, an additional award was made to the original whistleblower out of the settlement paid by Paradigm. Of the $2.2 million settlement, $600,000 went to the whistleblower for the firm’s retaliation against him.
White said that in the Paradigm Capital case, “the head trader of a hedge fund advisory firm reported trading activity to the SEC that demonstrated the firm was engaged in prohibited principal transactions. After the trader notified the company of the report to the Commission, the company immediately began retaliating, including by removing the whistleblower from the head trader position, stripping the whistleblower of supervisory responsibilities, and, ironically, changing the whistleblower’s job function from head trader to a full-time compliance assistant.”
The award is nearly 30 percent of $2.2 million, which is the maximum amount a tipster can get under the program. The agency said the “unique hardships” the whistleblower faced were a factor in the size of his award. SEC Enforcement Director Andrew Ceresney was quoted in published reports as saying, “We appreciate and recognize the sacrifice this whistleblower made and the important role the whistleblower played in the success of the SEC’s first anti-retaliation enforcement action.”
White also brought up SEC enforcement of “pre-taliation”—that is, company action that might illegally muzzle whistleblowers before an issue of retaliation can even appear. White said, “In addition to protecting whistleblowers from retaliation once they have reported information to the Commission, Rule 21F-17 also prevents individuals and entities from taking steps to silence potential whistleblowers before they contact us, including through the threatened enforcement of confidentiality agreements.”
This was a reference to the KBR enforcement action where the company was fined for having language in its internal employee confidentiality agreement that required employees to go to the company’s legal department before releasing certain confidential information to outside parties such as the SEC. KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department.
From preventing companies from trying to stop whistleblowing via confidentiality agreements to monetary awards for retaliation even where no SEC or government action is taken to the award to whistleblowers as a part of an SEC settlement for retaliation by their former employers—through all of this, the SEC makes clear that it will test how your company treats whistleblowers.
In its cease-and-desist order, the SEC noted that since these investigations included allegations of possible securities law violations, the SEC found that these terms violated Rule 21F-17. This was in the face of zero findings that KBR had actually used such language or restrictions to prevent any employees from whistleblowing to the SEC.
White expanded on this concept in her speech by noting that the KBR agreement in question “ran afoul of the prohibition by, among other things, covering underlying facts and requiring pre-approval by the company’s legal department before reporting information and threatening disciplinary action for violating this pre-approval requirement. Requiring pre-approval before reporting may have, among other chilling effects, discouraged a potential whistleblower who wished to remain anonymous, which is an enormously important safeguard.”
White then addressed the criticism of the KBR settlement by stating, “The rule is not, however, a sweeping prohibition on the use of confidentiality agreements. Companies conducting internal investigations can still give the standard Upjohn warnings that explain the scope of the attorney-client privilege in that setting. Companies may continue to protect their trade secrets or other confidential information through the use of properly drawn confidentiality and severance agreements.” White concluded by warning, “Companies would be well-served to review their own agreements and policies to ensure that they are consistent with Rule 21F-17 and all of the whistleblower rules.”
In addition to the SEC whistleblower protections that White discussed in her speech, a recent article appeared about the case of Tony Menendez, who was profiled by Jessie Eisinger in an article titled, “The Whistleblower’s Tale: How An Accountant Took on Halliburton.” It told the story of a whistleblower at Halliburton who took his concerns to government regulators and was then outed by Halliburton as the SEC whistleblower and retaliated against.
Interestingly, the SEC took no action on the whistleblower claims and the company argued on appeal, “since the SEC hadn’t brought any enforcement action, his complaint about the accounting was unfounded.” Halliburton also claimed that simply because the whistleblower was identified by name, this alone was not the basis for a “material adverse action” against him. While Halliburton won at the administrative hearing level, it lost at the 5th Circuit Court of Appeals.
So now we have an appellate court opinion holding that if whistleblowing was a “contributing factor” to the retaliation, that is sufficient for an award under Dodd-Frank. Further, the employee is not required to prove motive. Well-known whistleblower expert Jordan Thomas also explained in the Eisinger article, “Whistleblowers can be victims of retaliation even if they are ultimately proved wrong, as long as they have a ‘reasonable’ belief that the company was doing something wrong.”
White concluded her remarks at Northwestern by saying, “The bottom line is that responsible companies with strong compliance cultures and programs should not fear bona fide whistleblowers, but embrace them as a constructive part of the process to expose the wrongdoing that can harm a company and its reputation.” Her remarks and the Medendez decision make clear that the Dodd-Frank Act favors, encourages, and protects whistleblowers.
From preventing companies from trying to stop whistleblowing via confidentiality agreements to monetary awards for retaliation even where no SEC or government action is taken to the award to whistleblowers as a part of an SEC settlement for retaliation by their former employers—through all of this, the SEC makes clear that it will test how your company treats whistleblowers. While compliance practitioners probably understand this concept, many corporate officers may not.
White was pretty much as clear as she could be. The SEC will continue to encourage whistleblowers and protect them. She ended her speech by saying, “Either there are no questionable accounting entries or false offering materials to be reported in the first place, or companies themselves self-report the unlawful conduct to the SEC.” She could not have spoken more plainly.