The SEC released its Fiscal Year 2015 Annual Report (the “Report”) to Congress on the Dodd-Frank Whistleblower Program on November 16, 2015. The Report analyzes the tips received over the last twelve months by the SEC’s Office of the Whistleblower (“OWB”), provides additional information about the whistleblower awards to date, and discusses the OWB’s efforts to combat retaliation against whistleblowers.
Renee B. Phillips
Renee Phillips, a senior associate in the New York office, is a member of the employment law group. Renee's practice includes a full range of employment litigation and counseling, with particular emphasis on Sarbanes-Oxley/Dodd-Frank whistleblower issues and internal investigations.
Renee has successfully defended employers in federal and state court litigations as well as administrative proceedings and arbitrations involving claims of discrimination, harassment, wrongful termination, whistleblowing, trade secret misappropriation and other employment-related claims. She regularly counsels employers on a variety of employment-related issues and assists clients in creating and implementing human resources policies, whistleblower policies, negotiating and drafting executive contracts, restrictive covenants and other employment agreements, and conducting internal investigations.
Renee is the co-author of the leading treatise on Sarbanes-Oxley/Dodd-Frank whistleblower law, Corporate Whistleblowing in the Sarbanes-Oxley/Dodd-Frank Era. She regularly writes and speaks on whistleblower and other employment topics.
On September 9, 2015, Sean McKessy, Chief of the SEC’s Office of the Whistleblower (OWB) spoke at Thomson Reuters’ 4th Annual Corporate Whistleblower Program in New York. With the standard disclaimer that his comments and opinions were his own and not the official comments of the agency, McKessy spoke candidly about the SEC whistleblower program’s progress, challenges, and priorities as it enters FY2016.
On August 4, 2015 the Securities and Exchange Commission issued interpretive guidance elaborating its view that the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply equally to tipsters who claim retaliation after reporting internally, as well as those who are retaliated against after reporting information to the SEC. The guidance reflects that there is a split among federal courts over whether Dodd-Frank’s whistleblower retaliation provisions apply to internal as well as external reporting, and recognizes that the only circuit court to decide the issue to date, the Fifth Circuit, has taken a contrary position to that of the Commission in Rule 21F, the regulation the SEC adopted to implement the whistleblower legislation, holding that internal reports are not protected by Dodd-Frank. Whether internal reports qualify for Dodd-Frank coverage has important implications because, among other things, Dodd Frank provides enhanced recoveries (including two times back pay) and longer time frames (six years) for bringing a retaliation claim than would be available under the anti-retaliation provisions in the Sarbanes-Oxley Act of 2002.
On May 28, 2015, the Sixth Circuit in Rhinehimer v. U.S. Bancorp Investments, Inc. affirmed a $250,000 jury verdict in favor of a former financial advisor for U.S. Bancorp Investments (“USBII”) who alleged that he had been terminated in violation of the Sarbanes-Oxley Act (“SOX”) whistleblower provisions. In doing so, the Sixth Circuit rejected the “definitively and specifically” standard for proving protected activity under SOX and abrogated its prior SOX decision in Riddle v. First Tennessee Bank Nat’l Assoc., 497 F. App’x 588 (6th Cir. 2012) to the extent it relied upon the standard.
Playboy Enterprises is suing its former defense counsel Sheppard Mullin after being hit with a $6 million jury verdict in a SOX whistleblower case, the highest jury award in a SOX case to date. In Zulfer v. Playboy Enterprises, Inc., Playboy’s former Controller Catherine Zulfer claimed her employment was terminated in part because she objected to an improper instruction by Playboy’s CFO to accrue $1 million in discretionary bonuses for executives when those bonuses had not been approved by Playboy’s Board. A jury agreed and found that Playboy unlawfully retaliated against Zulfer by firing her for her protected reports under SOX and also terminated her employment in violation of public policy under California law. The jury awarded $6 million in unspecified damages with no allocation between the SOX claim and the California wrongful termination claim.
In a much-anticipated move, the SEC on April 1, 2015 commenced a cease-and-desist action against KBR (formerly Kellogg Brown & Root) alleging its confidentiality agreements violated Dodd-Frank’s whistleblower regulations. KBR simultaneously agreed to settle the matter for $130,000. This is the first such case brought by the SEC, which had indicated over the last year or more that it was actively seeking examples of such alleged violations in order to enforce its Rule 21F-17, which provides, “No 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…” In unofficial comments, SEC staff had expressed the view that standard confidentiality and non-disparagement provisions found in many employer agreements might violate the Rule to the extent they did not have express carve-outs stating that nothing in those provisions prevented employees from going directly to the Commission with concerns.
On March 2, 2015, the SEC announced a whistleblower bounty award of between $475,000 and $575,000, its 15th under the Dodd-Frank whistleblower program. While the SEC’s order is scant on detail, it does disclose that the award will go to a corporate officer, making it the first award to go to an officer under the program. This award is in keeping with the SEC’s approach to demonstrate in the relatively small number of awards made to date that a broad range of individuals can get bounties for providing original information of corporate wrongdoing under Dodd-Frank.
On January 20, the United States Supreme Court denied certiorari in CLS Transportation Los Angeles LLC v. Iskanian, leaving intact a decision by the California Supreme Court holding that representative Private Attorney General Act (PAGA) claims cannot be waived in arbitration agreements. Enacted in 2004, PAGA deputizes private citizens to seek penalties on behalf of the state by bringing representative suits for workplace violations.
In Berman V. Neo@Ogilvy LLC, 1:14-cv-523 (Dec. 4, 2014), Judge Gregory Woods of the Southern District of New York dismissed a Dodd-Frank whistleblower retaliation claim on the ground that internal reporting is not protected under the statute. In so holding, the court rejected the reasoning of a majority of district courts to address the issue to date (including several Southern District of New York decisions), as well as the SEC’s interpretation of the statute, and instead adopted the reasoning of the Fifth Circuit in Asadi v. GE Energy (USA), L.L.C. and a minority of district courts, which have held that “the language of the statute unambiguously requires that a person provide information to the [SEC] in order to qualify as a whistleblower under the Act.” You can find our prior blog posts on the split over this issue here (March 4, 2014), here (January 28, 2014), here (October 3, 2013), and here (July 18, 2013).
Thus, until the Second Circuit and other Circuit courts weighs in on this issue, the answer of whether internal reporting is protected under Dodd-Frank may hinge largely upon which district judge is assigned the case.
In Khazin v. TD Ameritrade, No. 14-1689, 2014 WL 6871393 (3rd Cir. Dec. 8, 2014), the Third Circuit affirmed a lower court’s decision compelling arbitration of a Dodd-Frank whistleblower retaliation claim. This is the first circuit court decision to address whether such claims are arbitrable, and the decision is consistent with two district court opinions that have previously addressed the issue.