Advising a Whistleblower After Dodd-Frank

Who Is a Whistleblower?

Qualifying for Retaliation Protections Under Dodd-Frank

The whistleblower provisions are relatively straightforward. A whistleblower is any individual or group of individuals that provides the SEC with original information that is derived from independent knowledge and not already known to the SEC or solely derived from public sources. Although the alleged violation need not be proven, the individual must possess a reasonable belief that the information reported to the SEC, pursuant to its procedures, involves a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur. Like most other whistleblower statutes, a “reasonable belief” means that the whistleblower genuinely believes, as any similarly situated employee would, that the reported conduct constitutes a possible securities violation. With regard to the type of violation required, any violation of the federal securities laws qualifies. The conduct may have occurred anywhere in the world, at either a public or private organization, and involve either domestic or international violators. As a general matter, the most common type of securities violation involves a misrepresentation or omission of important information regarding a security during the purchase or sale of that security. A “security” is broadly defined, and includes, in addition to traditional stocks and bonds, investment contracts, notes, and other non-traditional investments. See, e.g., 17 CFR ' 240.3a-10. Other common violations include manipulating the price and/or market for the sale of securities; stealing customers' funds or securities; violating broker-dealers' responsibility to treat customers fairly; insider trading; selling unregistered securities; and bribing foreign officials.

A whistleblower meeting the above criteria is then entitled to the protection of the anti-retaliation provisions of Dodd-Frank, regardless of whether the whistleblower is ultimately entitled to a financial award. It is important to note, however, that internal reporting alone does not entitle the employee to these protections; rather, the employee-whistleblower must actually report the possible securities violation to the SEC, using the Commission's online reporting procedure, or by submitting a Form TCR in accordance with SEC rules. See 17 CFR ' 240.21F-9(a). Accordingly, based upon the unique facts and circumstances of each client's case, employment counsel should carefully evaluate whether and when a whistleblower submission would be advantageous for their client.

In conducting an evaluation of a potential client's case, employment lawyers must now consider a new approach, and one that differs from the traditional focus on potential state and federal employment violations against the client's employer. This new approach should be made with the Dodd-Frank whistleblower program in mind, and appropriate consideration should be given to whether the client might qualify as a whistleblower. Some easy-to-implement steps include:

• Ask the client or potential client if he or she is personally aware of, suspects, or has heard that his or her employer has engaged in any misconduct. Significantly, because many employees do not necessarily know what constitutes a securities violation, and because conduct that might constitute a securities violation does not always involve securities, misconduct should be defined broadly, to include any wrongdoing. For example, a company that is intentionally over-selling its products in an effort to increase sales numbers, but then receives above-normal returns, might also be committing a securities violation, depending on other factors. Or a company that is violating some state or federal law that is completely unrelated to the securities laws might also be engaging in a securities violation, if the violation was material and not reported in the company's financials.
• If the client or potential client does have information about potential misconduct, the next step is to have the client or possible client provide as much detail as possible about the misconduct. Use open-ended questions to allow for more open-ended, informative answers. Also, it is important to ask for documents and the names of potential witnesses to corroborate the client or potential client's story. Significantly, it is vital that the client or potential client have proof that the individuals engaging in the misconduct did so knowingly, or that they should have known and were therefore reckless in not knowing that their conduct was unlawful. This latter information is so critical because, to establish fraud, the SEC must prove that the wrongdoers acted with “scienter,” which is “a mental state embracing intent to deceive, manipulate or defraud.”
• Finally, when a possible violation has been reported, determine whether any of the following factors, while not necessarily required for an enforcement action, are present: whether investor funds are or were involved; if the violator is regulated by the SEC; and if stock traded or currently trades on any U.S. securities exchanges.

Dodd-Frank Expands Pre-existing Retaliation Protection

Dodd-Frank not only provides robust whistleblower protection, but it has revived pre-existing whistleblower claims. The False Claims Act (FCA), once limited to individuals who were “original sources” with “direct and independent knowledge,” has been expanded to cover individuals with either information or analysis. Section 1079(b) of Dodd-Frank amends the FCA by expanding the concept of protected activity to include “lawful acts done by the employee, contractor, or agent or associated others in furtherance of an action under this section or other efforts to stop one or more violations of [the False Claims Act].” As a result, the FCA now encompasses a more expansive range of activities that could further a potential qui tam action, including protections against associational discrimination. Section 1079B of Dodd-Frank also clarifies that the statute of limitations for FCA retaliation actions is three years.

Dodd-Frank, similarly, has provided the Sarbanes-Oxley Act (SOX) with the teeth it was intended to have. Dodd-Frank expanded SOX coverage beyond just public companies to employees of affiliates and subsidiaries of publicly traded companies “whose financial information is included in the consolidated financial statements of such publicly traded company.” Id. at ' 929(a). Included in this measure are foreign subsidiaries and affiliates of U.S. public companies. Id. at ' 929P(b). Thus, Dodd-Frank now provides extraterritorial reach in actions brought by the SEC and the Department of Justice (DOJ). Id. at '929P(c). Dodd-Frank further expands SOX coverage to employees of nationally recognized statistical ratings organizations. Covered organizations include Moody's Investors Service Inc., A.M. Best Company Inc., and Standard & Poor's Ratings Service. Furthermore, Dodd-Frank doubles the statute of limitations for SOX whistleblower claims from 90 days to 180 days. It also provides for independent jurisdiction of a jury trial for claims brought under SOX whistleblower protections. Finally, Section 922(c) declares void any “agreement, policy form, or condition of employment, including a predispute arbitration agreement” that waives the rights and remedies afforded to SOX whistleblowers.

Without the Dodd-Frank Act, the FCA and SOX would have remained lifeless. Dodd-Frank not only revived these familiar federal statutes, but it created additional whistleblower protections. Dodd-Frank granted new protections for employees who report possible violations of the Securities Exchange Act and Commodity Exchange Act. Whistleblowers that bring violations to the SEC or the CFTC are granted a private right of action in federal court as long as they bring their claim within two years from the date of the retaliation. Id. at ' 748(h)(1)(C).

New Anti-Retaliation Protections under Dodd-Frank

Under Dodd-Frank, an employer may not take retaliatory action against an employee who provides information to the SEC, initiates, testifies in, or assists in an investigation or judicial or administrative action, and makes disclosures that are required or protected under the law. Retaliatory acts by employers include: discharge, demotion, harassment, suspension, threats, and other discrimination as a result of any lawful act by the whistleblower. Id. at ' 922 (h)(1)(A). In the event of a retaliatory act, section 922(h) grants a private right of action to all employees (as opposed to just employees of publicly traded companies and its subsidiaries) in federal court without the need to exhaust administrative remedies before filing. Id. at ' 922 (h)(1)(A)(i)-(iii). Remedies under this section include reinstatement (with the same seniority), double back pay, and litigation costs (including attorneys' fees and expert witness fees). Id. at ' 922(h)(1)(C)(i)-(iii). An employee has six years from the retaliatory conduct or three years from when the employee knew or reasonably should have known of the retaliatory conduct to file a claim (not to exceed 10 years after the date of the violation). Id. at ' 929(a); ' 922(h)(1)(B)(iii). To further protect whistleblowing employees, the employee may remain anonymous until an award is made if s/he is represented by counsel.

Congress also expanded coverage to financial service employees by creating the Bureau of Consumer Financial Protection to protect whistleblowing employees from retaliation. Employers covered as “financial products or services” include any company that: extends credit or service or broker loans; provides real estate settlement services or performs property appraisals; provides financial advisory services to consumers relating to proprietary financial products (including credit counseling); and collects, analyzes, maintains, or provides consumer report information or other account information in connection with any decision regarding the offering or provision of consumer financial product or service. Id. at ' 1002(15)(A) Employees who work for such companies cannot be retaliated against for: testifying or willing to testify in a proceeding for administration or enforcement of Dodd-Frank; filing, instituting or causing to be filed or instituted, any proceeding under any federal consumer financial law; and objecting to, or refusing to participate in any activity, practice, or assigned task that the employee reasonably believes to be a violation of any law, rule, standard, or prohibition subject to the jurisdiction of the Bureau. Id. at ' 1057(a)(1)-(4).

An employee of a “financial products or services” company who is subject to retaliation must file a complaint within 180 days of the retaliatory conduct with the Secretary of Labor and may file in district court seeking de novo review within 120 days of the Secretary of Labor's determination (or 210 days after filing with the Secretary of Labor. Filing a retaliation claim only requires an employee to show (by a preponderance of the evidence) that the protected conduct was a “contributing factor” to the retaliation. Id. at '1057(c)(3)(c). If shown, the burden shifts to the employer to show (by clear and convincing evidence) that it would have taken the same action in the absence of the employee's protected activity.

Negotiating Settlement Agreements

To negotiate a claim covered by Dodd-Frank effectively, employee advocates must be aware of the numerous changes made to existing whistleblowing laws in order to evaluate any offer competently and implement an effective strategy. Several points worth considering:

• First, the previous urgency to settle or file has been mitigated by Dodd-Frank's longer statute of limitations (180 days under SOX, but six years from the retaliatory conduct or three years upon discovery of the conduct under Dodd-Frank).
• Second, these claims are now worth substantially more due to the expanded back pay awards of double damages. Third, be aware that Dodd-Frank invalidates any agreement that has the effect of waiving rights and remedies available to whistleblowers. So make sure there are appropriate carve-outs in the settlement agreement for these claims.

Conclusion

The Dodd-Frank whistleblower program has initiated a new era in securities regulation. While the program is in its infancy, there is no doubt that, with the prospect of large financial rewards and strong anti-retaliation protections, individuals will come forward to report violations. The program thus presents new and exciting opportunities for employees, but also new challenges as well. By understanding the incentives and protections available under the new whistleblower program, employment lawyers can improve the effectiveness of their advocacy for their clients.

Tammy Marzigliano, a partner at Outten & Golden LLP, represents employees in litigation and negotiation in all areas of employment law. She is Co-Chair of the firm's Financial Services Practice Group and its Whistleblower and Retaliation Practice Group. Jordan A. Thomas is a partner at Labaton Sucharow LLP and serves as Chair of the Whistleblower Representation Practice. A former Assistant Director and Assistant Chief Litigation Counsel at the SEC, he played a leadership role in the development of the agency's Whistleblower Program and exclusively represents SEC whistleblowers.

On July 21, 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most significant financial reform effort since the Great Depression. 17 CFR ' 240.21F-1, et seq. Part of that legislation directed the Securities and Exchange Commission (SEC) to establish a whistleblower program that pays monetary rewards to eligible whistleblowers, and prohibits work-place retaliation by employers against whistleblowers. The program arose in response to a long series of corporate scandals that defrauded countless investors and shook investor confidence. To become eligible for the monetary reward, the whistleblower must voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to a successful enforcement action in which the SEC obtains monetary sanctions over $1 million. Whistleblowers who provide such information are eligible for an award of 10% to 30% of the monetary sanctions.

The potential for this type of monetary reward is revolutionary in securities enforcement, and since the enactment of the whistleblower program, the offer of monetary rewards has garnered the lions share of attention from commentators. But the robust anti-retaliation provisions contained in the guidelines are just as ground-breaking and equally important. These provisions prohibit employers from retaliating against individuals who provide the SEC with information about possible federal securities law violations, and victims of such retaliation are granted an independent cause of action with significant potential remedies. In addition, whistleblowers are permitted to report securities violations anonymously if they are represented by counsel.

The anti-retaliation protections will increase the number of employees that will come forward and become whistleblowers, as fear of retaliation has always been a significant reason that employees would remain silent. As a result, a new set of legal issues will arise and confront employment lawyers representing both employers and employee-whistleblowers. This article examines the retaliation protections provided by Dodd-Frank and how employment lawyers might deal with their impact.

Who Is a Whistleblower?

Qualifying for Retaliation Protections Under Dodd-Frank

The whistleblower provisions are relatively straightforward. A whistleblower is any individual or group of individuals that provides the SEC with original information that is derived from independent knowledge and not already known to the SEC or solely derived from public sources. Although the alleged violation need not be proven, the individual must possess a reasonable belief that the information reported to the SEC, pursuant to its procedures, involves a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur. Like most other whistleblower statutes, a “reasonable belief” means that the whistleblower genuinely believes, as any similarly situated employee would, that the reported conduct constitutes a possible securities violation. With regard to the type of violation required, any violation of the federal securities laws qualifies. The conduct may have occurred anywhere in the world, at either a public or private organization, and involve either domestic or international violators. As a general matter, the most common type of securities violation involves a misrepresentation or omission of important information regarding a security during the purchase or sale of that security. A “security” is broadly defined, and includes, in addition to traditional stocks and bonds, investment contracts, notes, and other non-traditional investments. See, e.g., 17 CFR ' 240.3a-10. Other common violations include manipulating the price and/or market for the sale of securities; stealing customers' funds or securities; violating broker-dealers' responsibility to treat customers fairly; insider trading; selling unregistered securities; and bribing foreign officials.

A whistleblower meeting the above criteria is then entitled to the protection of the anti-retaliation provisions of Dodd-Frank, regardless of whether the whistleblower is ultimately entitled to a financial award. It is important to note, however, that internal reporting alone does not entitle the employee to these protections; rather, the employee-whistleblower must actually report the possible securities violation to the SEC, using the Commission's online reporting procedure, or by submitting a Form TCR in accordance with SEC rules. See 17 CFR ' 240.21F-9(a). Accordingly, based upon the unique facts and circumstances of each client's case, employment counsel should carefully evaluate whether and when a whistleblower submission would be advantageous for their client.

In conducting an evaluation of a potential client's case, employment lawyers must now consider a new approach, and one that differs from the traditional focus on potential state and federal employment violations against the client's employer. This new approach should be made with the Dodd-Frank whistleblower program in mind, and appropriate consideration should be given to whether the client might qualify as a whistleblower. Some easy-to-implement steps include:

• Ask the client or potential client if he or she is personally aware of, suspects, or has heard that his or her employer has engaged in any misconduct. Significantly, because many employees do not necessarily know what constitutes a securities violation, and because conduct that might constitute a securities violation does not always involve securities, misconduct should be defined broadly, to include any wrongdoing. For example, a company that is intentionally over-selling its products in an effort to increase sales numbers, but then receives above-normal returns, might also be committing a securities violation, depending on other factors. Or a company that is violating some state or federal law that is completely unrelated to the securities laws might also be engaging in a securities violation, if the violation was material and not reported in the company's financials.
• If the client or potential client does have information about potential misconduct, the next step is to have the client or possible client provide as much detail as possible about the misconduct. Use open-ended questions to allow for more open-ended, informative answers. Also, it is important to ask for documents and the names of potential witnesses to corroborate the client or potential client's story. Significantly, it is vital that the client or potential client have proof that the individuals engaging in the misconduct did so knowingly, or that they should have known and were therefore reckless in not knowing that their conduct was unlawful. This latter information is so critical because, to establish fraud, the SEC must prove that the wrongdoers acted with “scienter,” which is “a mental state embracing intent to deceive, manipulate or defraud.”
• Finally, when a possible violation has been reported, determine whether any of the following factors, while not necessarily required for an enforcement action, are present: whether investor funds are or were involved; if the violator is regulated by the SEC; and if stock traded or currently trades on any U.S. securities exchanges.

Dodd-Frank Expands Pre-existing Retaliation Protection

Dodd-Frank not only provides robust whistleblower protection, but it has revived pre-existing whistleblower claims. The False Claims Act (FCA), once limited to individuals who were “original sources” with “direct and independent knowledge,” has been expanded to cover individuals with either information or analysis. Section 1079(b) of Dodd-Frank amends the FCA by expanding the concept of protected activity to include “lawful acts done by the employee, contractor, or agent or associated others in furtherance of an action under this section or other efforts to stop one or more violations of [the False Claims Act].” As a result, the FCA now encompasses a more expansive range of activities that could further a potential qui tam action, including protections against associational discrimination. Section 1079B of Dodd-Frank also clarifies that the statute of limitations for FCA retaliation actions is three years.

Dodd-Frank, similarly, has provided the Sarbanes-Oxley Act (SOX) with the teeth it was intended to have. Dodd-Frank expanded SOX coverage beyond just public companies to employees of affiliates and subsidiaries of publicly traded companies “whose financial information is included in the consolidated financial statements of such publicly traded company.” Id. at ' 929(a). Included in this measure are foreign subsidiaries and affiliates of U.S. public companies. Id. at ' 929P(b). Thus, Dodd-Frank now provides extraterritorial reach in actions brought by the SEC and the Department of Justice (DOJ). Id. at '929P(c). Dodd-Frank further expands SOX coverage to employees of nationally recognized statistical ratings organizations. Covered organizations include Moody's Investors Service Inc., A.M. Best Company Inc., and Standard & Poor's Ratings Service. Furthermore, Dodd-Frank doubles the statute of limitations for SOX whistleblower claims from 90 days to 180 days. It also provides for independent jurisdiction of a jury trial for claims brought under SOX whistleblower protections. Finally, Section 922(c) declares void any “agreement, policy form, or condition of employment, including a predispute arbitration agreement” that waives the rights and remedies afforded to SOX whistleblowers.

Without the Dodd-Frank Act, the FCA and SOX would have remained lifeless. Dodd-Frank not only revived these familiar federal statutes, but it created additional whistleblower protections. Dodd-Frank granted new protections for employees who report possible violations of the Securities Exchange Act and Commodity Exchange Act. Whistleblowers that bring violations to the SEC or the CFTC are granted a private right of action in federal court as long as they bring their claim within two years from the date of the retaliation. Id. at ' 748(h)(1)(C).

New Anti-Retaliation Protections under Dodd-Frank

Under Dodd-Frank, an employer may not take retaliatory action against an employee who provides information to the SEC, initiates, testifies in, or assists in an investigation or judicial or administrative action, and makes disclosures that are required or protected under the law. Retaliatory acts by employers include: discharge, demotion, harassment, suspension, threats, and other discrimination as a result of any lawful act by the whistleblower. Id. at ' 922 (h)(1)(A). In the event of a retaliatory act, section 922(h) grants a private right of action to all employees (as opposed to just employees of publicly traded companies and its subsidiaries) in federal court without the need to exhaust administrative remedies before filing. Id. at ' 922 (h)(1)(A)(i)-(iii). Remedies under this section include reinstatement (with the same seniority), double back pay, and litigation costs (including attorneys' fees and expert witness fees). Id. at ' 922(h)(1)(C)(i)-(iii). An employee has six years from the retaliatory conduct or three years from when the employee knew or reasonably should have known of the retaliatory conduct to file a claim (not to exceed 10 years after the date of the violation). Id. at ' 929(a); ' 922(h)(1)(B)(iii). To further protect whistleblowing employees, the employee may remain anonymous until an award is made if s/he is represented by counsel.

Congress also expanded coverage to financial service employees by creating the Bureau of Consumer Financial Protection to protect whistleblowing employees from retaliation. Employers covered as “financial products or services” include any company that: extends credit or service or broker loans; provides real estate settlement services or performs property appraisals; provides financial advisory services to consumers relating to proprietary financial products (including credit counseling); and collects, analyzes, maintains, or provides consumer report information or other account information in connection with any decision regarding the offering or provision of consumer financial product or service. Id. at ' 1002(15)(A) Employees who work for such companies cannot be retaliated against for: testifying or willing to testify in a proceeding for administration or enforcement of Dodd-Frank; filing, instituting or causing to be filed or instituted, any proceeding under any federal consumer financial law; and objecting to, or refusing to participate in any activity, practice, or assigned task that the employee reasonably believes to be a violation of any law, rule, standard, or prohibition subject to the jurisdiction of the Bureau. Id. at ' 1057(a)(1)-(4).

An employee of a “financial products or services” company who is subject to retaliation must file a complaint within 180 days of the retaliatory conduct with the Secretary of Labor and may file in district court seeking de novo review within 120 days of the Secretary of Labor's determination (or 210 days after filing with the Secretary of Labor. Filing a retaliation claim only requires an employee to show (by a preponderance of the evidence) that the protected conduct was a “contributing factor” to the retaliation. Id. at '1057(c)(3)(c). If shown, the burden shifts to the employer to show (by clear and convincing evidence) that it would have taken the same action in the absence of the employee's protected activity.

Negotiating Settlement Agreements

To negotiate a claim covered by Dodd-Frank effectively, employee advocates must be aware of the numerous changes made to existing whistleblowing laws in order to evaluate any offer competently and implement an effective strategy. Several points worth considering:

• First, the previous urgency to settle or file has been mitigated by Dodd-Frank's longer statute of limitations (180 days under SOX, but six years from the retaliatory conduct or three years upon discovery of the conduct under Dodd-Frank).
• Second, these claims are now worth substantially more due to the expanded back pay awards of double damages. Third, be aware that Dodd-Frank invalidates any agreement that has the effect of waiving rights and remedies available to whistleblowers. So make sure there are appropriate carve-outs in the settlement agreement for these claims.

Conclusion

The Dodd-Frank whistleblower program has initiated a new era in securities regulation. While the program is in its infancy, there is no doubt that, with the prospect of large financial rewards and strong anti-retaliation protections, individuals will come forward to report violations. The program thus presents new and exciting opportunities for employees, but also new challenges as well. By understanding the incentives and protections available under the new whistleblower program, employment lawyers can improve the effectiveness of their advocacy for their clients.

Tammy Marzigliano, a partner at Outten & Golden LLP, represents employees in litigation and negotiation in all areas of employment law. She is Co-Chair of the firm's Financial Services Practice Group and its Whistleblower and Retaliation Practice Group. Jordan A. Thomas is a partner at Labaton Sucharow LLP and serves as Chair of the Whistleblower Representation Practice. A former Assistant Director and Assistant Chief Litigation Counsel at the SEC, he played a leadership role in the development of the agency's Whistleblower Program and exclusively represents SEC whistleblowers.