The SEC’s Office of the Whistleblower (“OWB”) released its Fiscal Year 2019 Annual Report (the “Report”) to Congress on the Dodd-Frank Whistleblower Program on November 15, 2019. The Report analyzes the tips received over the last twelve months by the OWB, provides additional information about the whistleblower awards to date, and discusses the OWB’s efforts to combat retaliation and other actions that muzzle whistleblowers. To date, the SEC has recovered over $2 billion in total monetary sanctions from its enforcement actions arising from whistleblower tips, including more than $1 billion in disgorgement of ill-gotten gains and interests, and it has or is scheduled to return almost $500 million to harmed investors. READ MORE
Last week, the Financial Industry Regulatory Authority (“FINRA”) filed its first disciplinary action involving cryptocurrencies, conforming with its stated 2018 goal of monitoring and supervising the largely unregulated cryptocurrency market. FINRA’s actions reflect a long-anticipated and increased scrutiny on entities—including employers—dealing with cryptocurrency.
In the September 11 disciplinary complaint, FINRA alleged that a former Massachusetts broker, Timothy Tilton Ayre, committed securities fraud by avoiding registration requirements and selling an unregistered, cannabis-focused cryptocurrency security called HempCoin. Ayre purchased HempCoin in June 2015 and immediately advertised as “the first minable coin backed by marketable securities.” Ayre transformed the cryptocurrency into a security tied to his company, Rocky Mountain Ayre (“RMTN”), valuing each HempCoin as 0.1 shares of RMTN and trading over the counter. Investors mined over 81 million HempCoins through late 2017. However, Ayre failed to register HempCoin with the U.S. Securities and Exchange Commission (“SEC”).
FINRA’s action, coupled with recent joint statements by the Commodity Futures Trading Commission (“CFTC”) and the SEC addressing plans for heightened oversight of virtual currency regulation, reflect potential obstacles entities may face in dealing with cryptocurrency, or blockchain technology more broadly.
Growing start-ups or legacy companies with new industry sectors should be particularly mindful of the novel and transformative legal issues related to these emerging areas. For instance, although blockchain technology is generally expected to make data more secure, employers should continue to monitor their use of this technology for data privacy concerns related to information storage and programs for employment-related decisions. Further, employers should note that cryptocurrency is not currently recognized as legal tender in the United States.
The Federal Labor Standards Act (“FLSA”) mandates “payments of the prescribed wages, including [minimum wage and] overtime compensation, in cash or negotiable instrument payable at par.” 29 CFR § 531.27(a). The phrase “payable at par” allows cryptocurrencies to be a lawful method of payment under the FLSA, but employers should proceed with care if considering whether to use cryptocurrency to pay employee wages, particularly due to challenges with minimum wage and overtime calculations. Indeed, the legal designation for tax purposes is also unsettled: the SEC classifies cryptocurrency as a security; the CFTC says cryptocurrency is a commodity; and since 2014, the IRS has defined cryptocurrency as taxable property.
Given these ambiguities and emerging issues, employers dealing with cryptocurrency and incorporating blockchain technology into their practices should be aware of the potential legal implications and oversight in areas beyond the traditional employment law arena.
On September 6, the SEC issued awards totaling more than $54 million to two whistleblowers who provided critical information and continued assistance to the agency in an enforcement action. This large award follows another composite mega-award of $83 million to three whistleblowers in a single enforcement action on March 19, 2018.
The September 6 award of $39 million to one claimant constitutes the second-largest award in the SEC whistleblower program’s history. The agency awarded the second whistleblower $15 million. Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated that whistleblowers “serve as invaluable sources of information, and can propel an investigation forward by helping [the SEC] overcome obstacles and delays in investigation.” READ MORE
On June 28, the Securities Exchange Commission (“SEC” or “Commission”) voted to propose amendments to its whistleblower program. As SEC Chair Jay Clayton explained, the proposed changes would “strengthen the whistleblower program by bolstering the Commission’s ability to more appropriately and expeditiously reward those who provide critical information that leads to successful enforcement actions.” The SEC issued a press release outlining the proposed rules, which would: (1) provide the Commission with additional tools in making whistleblower awards; (2) clarify the requirements for anti-retaliation protection under the whistleblower statute; (3) provide interpretive guidance to help clarify the meaning of “independent analysis”; (4) increase efficiencies in the whistleblower claims review process; and (5) clarify various miscellaneous policies and procedures. READ MORE
Earlier this month, the Seventh Circuit affirmed dismissal of a CEO’s whistleblower retaliation claims in a decision that should provide corporate defendants ammunition to fight SOX and Dodd-Frank whistleblower cases going forward.
In Verfuerth v. Orion Energy Systems, Inc., No. 16-3502 (7th Cir. Jan. 11, 2017), the plaintiff, founder and former CEO of Orion, claimed that Orion’s Board of Directors terminated him for cause in retaliation for making whistleblower complaints about perceived fraud on SEC reports and other managerial decisions. Orion asserted that it terminated Verfuerth for numerous legitimate reasons, including falling stock prices, Verfuerth’s intimidating leadership style, high rates of senior management turnover, and other business disagreements such as reimbursement for Verfuerth’s costly divorce. READ MORE
On June 28, 2017, three prominent whistleblower law regulators spoke at PLI’s Corporate Whistleblowing in 2017, which was co-chaired by Orrick partners Mike Delikat and Renee Phillips. With the standard disclaimer that their comments and opinions were their own and not the official comments of their respective agencies, each spoke candidly about their agencies’ whistleblower program’s progress, challenges, and priorities.
SEC’s Office of the Whistleblower
The Chief of the SEC’s Office of the Whistleblower (“OWB”), Jane Norberg, kicked off the panel with her views on the current status and priorities of the OWB in the new administration: “From my point of view, the SEC’s whistleblower program is open for business and we are moving forward as we have in the past.” She elaborated on the program’s results to date, noting that the Commission has received over 18,000 tips and awarded over $154 million to 44 tipsters, reflecting over $1 billion recovered through the SEC’s enforcement actions and related actions arising from whistleblower tips. Norberg explained, “the real value of the program comes from individuals who help prevent ongoing fraud at a company while also giving victims a chance to recover some of what they lost.” READ MORE
When Donald Trump was elected President of the United States in November, he vowed to “dismantle” the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). In its place, Trump promised to replace the law “with new policies to encourage economic growth and job creation.” Now a bill known as the Financial CHOICE Act may initiate the process to do just that. But at least with respect to Dodd-Frank’s whistleblower provisions, the Financial CHOICE Act would leave largely intact the current bounty programs that have already awarded tipsters over $150 million in the U.S. and abroad.
The Commodity Futures Trading Commission (CFTC), published updated regulations Monday to bring its whistleblower bounty efforts more in line with the SEC’s. The rules were proposed last August and generally provide more robust protections to would-be whistleblowers. According to an agency press release, “In addition to strengthening anti-retaliation protections, the new amendments will add efficiency and transparency to the process of deciding whistleblower award claims and will, in many respects, harmonize the CFTC’s rules with those of the U.S. Securities and Exchange Commission’s whistleblower program.” READ MORE
It is common for employers to require employees whose job duties require access to confidential, sensitive, and/or proprietary information to sign confidentiality and/or non-disclosure agreements as a condition of employment. However, at least in limited circumstances involving whistleblowers, employers are finding that they may not be permitted to enforce such agreements under all circumstances. READ MORE
On March 8, 2017, a divided panel of the Ninth Circuit issued an opinion in Somers v. Digital Realty Trust Inc. that further widened a circuit split on the issue of whether the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply to whistleblowers who claim retaliation after reporting internally or instead only to those who report information to the SEC. Following the Second Circuit’s 2015 decision in Berman v. [email protected] LLC, the Ninth Circuit panel held that Dodd-Frank protections apply to internal whistleblowers. By contrast, the Fifth Circuit considered this issue in its 2013 decision in Asadi v. G.E. Energy (USA), LLC and found that the Dodd-Frank anti-retaliation provisions unambiguously protect only those whistleblowers who report directly to the SEC. READ MORE