On August 5, 2015, the Securities and Exchange Commission approved its final rule subjecting most public companies to the so-called “Pay Ratio Disclosure” mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC voted 3-2 to approve the measure, with the panel’s two Republican members opposing it. In the split vote, the SEC finally put into place one of the most controversial rules mandated by Dodd-Frank. In the years since the SEC began working on the rule, it has attracted an intense measure of both public scrutiny and advocacy, drawing more than 286,000 public comments.
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 July 17, 2015, the SEC announced a whistleblower award of over $3 million to a company insider who provided information that “helped the SEC crack a complex fraud.” This payout represents the third highest award under the SEC’s whistleblower program to date. The SEC has made two of the three highest payments to clients of the same law firm – Phillips & Cohen LLP. (The SEC paid roughly $14 million to a whistleblower in October 2013, and nearly $30 million to a foreign whistleblower represented by Phillips & Cohen in September 2014.). This latest multi-million dollar payout suggests that the SEC’s whistleblower program is in full swing, and that legal representation of whistleblowers may be on the rise.
Last week, the SEC scored a victory in its battle to defend the use of administrative proceedings in enforcement actions seeking penalties against unregulated entities or persons. On June 30, 2015, Southern District of New York Judge Ronnie Abrams denied Plaintiffs Lynn Tilton, Patriarch Partners LLC, and affiliated entities’ motion for a preliminary injunction halting the SEC’s administrative proceedings against them. Judge Abrams’ decision in Tilton v. SEC is the latest in a string of challenges to the SEC’s use of administrative proceedings in enforcement actions (also discussed in earlier posts from July 31, 2014 and October 28, 2014). As we have written, the SEC has faced mounting scrutiny for its increasing use of administrative proceedings, including criticism that the Administrative Law Judges (ALJs) presiding over the proceedings are biased in favor the SEC’s Enforcement Decision and that defendants subjected to administrative proceedings are entitled to fewer due process protections, including limited discovery and no right to a jury trial. The SEC began increasing its use of administrative proceedings after the 2010 Dodd-Frank Act enabled the Commission to file actions against unregulated entities or persons in its in-house forum, rather than in federal courts, as it had traditionally been required to do.
The defense bar recently won a significant victory in the battle to challenge the SEC’s expanded use of administrative proceedings, following the 2010 enactment of the Dodd-Frank Act, to seek penalties against unregulated individuals and entities. As we previously wrote in SEC’s Administrative Proceedings: Where One Stands Appears to Depend on Where One Sits and There’s No Place Like Home: The Constitutionality of the SEC’s In-House Courts, SEC administrative proceedings have recently faced growing scrutiny, including skepticism about whether the administrative law judges (ALJs) presiding over these cases are inherently biased in favor of the SEC’s Division of Enforcement. The Wall Street Journal recently reported that ALJs rule in favor of the SEC 90% of the time in administrative proceedings. Administrative proceedings have also been criticized for the ways in which they differ from federal court actions, including that respondents are generally barred from taking depositions, counterclaims are not permissible, there is no equivalent of Rule 12(b) motions to test the allegations’ sufficiency, and there is no right to a jury trial.
On Friday June 5, 2015, the SEC made incremental progress toward finalizing the “pay ratio” rule required by the 2010 Dodd-Frank Act by publishing a memo from the Division of Economic and Risk Analysis (DERA memo) that addresses questions about how that pay ratio will be calculated for the purposes of the law.
Last week the SEC announced an award of between $1.4 to $1.6 million to a whistleblower who provided information that assisted the SEC in an enforcement action. The enforcement action against the whistleblower’s company resulting in monetary sanctions exceeding $1 million. This marks the second award to a whistleblower with an internal audit or compliance function at a company. The first was back in August 2014, when the SEC awarded a whistleblower in internal auditing/compliance with over $300,000. Here, as with the prior award, the officer had a reasonable basis for believing that disclosure to the SEC was necessary to prevent imminent misconduct from causing substantial financial harm to the company or investors. In both cases, responsible management was made aware of the potential harm that could occur, yet failed to take steps to prevent it.
For the first time in the nearly five years since Dodd-Frank went into effect, the SEC last week took action against a company over concerns that the company was preventing its employees from potentially blowing the whistle on illegal activity. The action is significant because the SEC was targeting seemingly innocuous language in a confidentiality agreement and there were no allegations that the company, KBR, Inc., was otherwise breaking the law.
Last week, the Securities and Exchange Commission announced an award payout of between $475,000 and $575,000 to a former company officer who reported information about an alleged securities fraud. While this is by no means the largest of the 15 payouts the SEC has made since the inception of the whistleblower program in fiscal year 2012 (the SEC awarded approximately $14 million to a whistleblower in October 2013, and roughly $30 million to a foreign whistleblower almost a year later), it is the first time that the SEC provided a whistleblower bounty award under the new program to an officer who learned about the alleged fraud through another employee, rather than firsthand.
In an amicus brief filed earlier this month in Berman v. Neo@Ogilvy LCC, the SEC asked the Second Circuit to defer to the Commission and hold that individuals who report misconduct internally are covered by the anti-retaliation protections of the Dodd-Frank Act of 2002, regardless of whether they report the information to the SEC.