Whistleblowers on Wall Street: A Guide to SEC Whistleblower Rewards and Protections

Whistleblowers on Wall Street

www.JohnHowleyEsq.com

Understanding the SEC Whistleblower Program


Disclaimer and CopyrightThese slides are designed to give you a basic overview of the SEC Whistleblower program. They are not intended as legal advice. Depending on when you read these slides, they may or may not contain current information . And, of course, I have not become your lawyer merely because you read my slides.

If you think you might have a claim, you should consult with me or another lawyer immediately to protect your rights. Do not delay. All whistleblower claims are subject to strict time limits and procedural requirements. Failure to comply with those time limits or procedural requirements could result in the loss of your claims.

These slides are copyright © 2016 by John Howley, Esq. All rights are reserved.


Types of Whistleblowers• National Security and Civil Liberties• Government Misconduct and Mismanagement• Fraud in Government Programs and Contracts• Tax Fraud and Evasion• Violations of the Securities Laws


SEC Whistleblower Laws• The Sarbanes-Oxley Act of 2002 (SOX)• The Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010 (Dodd-Frank)

Dodd-Frank Whistleblowers


Eligible Whistleblowers• For purposes of recovering a whistleblower award under the

Dodd-Frank Act, an “Eligible Whistleblower” is:• a person who, alone or jointly with others,• voluntarily provides• original information • about a possible violation of the federal securities laws• to the Securities and Exchange Commission• after July 21, 2010.

17 C.F.R. § 240.21F-2


Eligible Whistleblowers• A “person” is limited to a natural person; corporations and

organizations do not qualify as whistleblowers under Dodd-Frank.

• More than one person may qualify as a whistleblower in the same case.

• Whistleblowers do not have to be employees of the company; any person with relevant information may qualify.


Eligible Whistleblowers• “Voluntary” disclosure means the information is provided

before a “request, inquiry, or demand that relates to the subject of your submission” is directed to you or anyone representing you:• by the SEC;• in connection with an investigation, inspection, or examination

by the Public Company Accounting Oversight Board or a self-regulatory agency; or

• in connection with an investigation by Congress, another federal agency, or state Attorney General or securities regulator.

17 C.F.R. § 240.21F-4(a)


Eligible Whistleblowers• “Original information” means information that is:• based on your independent knowledge and not derived from

public sources; or• derived from your independent analysis of facts that may or

may not be publicly available.

17 C.F.R. § 240.21F-4(b)(1)


Eligible Whistleblowers• The “original source” of information is still eligible for a

whistleblower award even if the information is disclosed to the SEC, in the media, in judicial or administrative proceedings, or in government reports, hearings, audits, or investigations.

17 C.F.R. § 240.21F-4(b)(1)


Qualifying Disclosures• Possible Violations of the Securities Laws• 18 U.S.C. § 1341 (mail fraud)• 18 U.S.C. § 1344 (bank fraud)• 18 U.S.C. § 1348 (securities and commodities fraud)• SEC rules and regulations• Other federal laws relating to fraud against shareholders

18 U.S.C. § 1514A


Qualifying Disclosures• Examples of Securities Law Violations• Fraudulent corporate disclosures and financial statements• Material misrepresentations and omissions in securities

offerings• Insider trading• Market manipulation• Ponzi schemes• Improper tax treatment of a merger that could result in

substantial, unreported tax liability. See Wong v. CKX, Inc., 890 F. Supp. 2d 411, 416 (S.D.N.Y. 2012).


Qualifying Disclosures• Not Violations of the Securities Laws• Violations of banking laws such as 18 U.S.C. § 1005, 18 U.S.C. §

1007, and 12 U.S.C. § 5536. See Zillges v. Kenney Bank & Trust, No. 13-C-1287, 2014 WL 2515403 (E.D. Wisc. June 4, 2014).

• Violations of 18 U.S.C. § 1513E. See id.• Violations of the Foreign Corrupt Practices Act (FCPA). See Liu

v. Siemens A.G., 978 F. Supp. 2d 325, 330 (S.D.N.Y. 2013); In re Gupta, Case No. 2010-SOX-54, 2011 WL 121916, at *5 (Dep’t of Labor Jan. 7, 2011).

• Defrauding customers by overbilling or providing poor quality work. See Safarian v. American DG Energy Inc., No. 10-CV-6082, 2014 WL 1744989, at *4 (D.N.J. Apr. 29, 2014)

Unless these violations result in false or misleading representations or omissions that violate the Securities laws.


Qualifying Disclosures• The information provided must “lead to” a successful SEC

action resulting in more than $1 million in monetary sanctions.

• “Lead to” means the information causes the SEC to:• open a new investigation;• re-open a closed investigation;• pursue a new line of inquiry in connection with an ongoing

investigation; or• the information significantly contributes to the success fo an

SEC enforcement action.


Reporting Procedures• Information must be submitted:• online by completing the SEC’s Tips, Complaints, and Referrals

questionnaire; or• by mailing SEC Form TCR to the SEC Office of the

Whistleblower.


Reporting Procedures• Confidentiality• SEC will not disclose the whistleblower’s identity in response to

Freedom of Information Act requests• Information provided by the whistleblower may be used in the

SEC’s investigation and shared with other government agencies• Documents or information produced in court or administrative

proceedings may reveal the whistleblower’s identity


Reporting Procedures• Anonymous Submissions are Permitted• must be done through an attorney• whistleblower must give the attorney a completed Form TCR

signed under penalty of perjury


Internal Compliance Reports• Use of internal corporate compliance procedures is not

required.• When internal corporate compliance procedures are used,

the whistleblower must report the information to the SEC within 120 days to remain eligible for an award.


Internal Compliance Reports• Benefits of Using Internal Compliance Procedures• All information developed during the company’s internal

investigation will be credited to the whistleblower when calculating the whistleblower’s award.

• For purposes of determining who provided “original information,” the SEC will use the date the whistleblower first reported the information internally.

• Use of internal compliance procedures is a “plus” factor when the SEC determines the amount of the whistleblower’s award.


Internal Compliance Reports• Internal Compliance Procedures and Retaliation Claims• Use of internal compliance procedures puts the employer on

notice for purposes of any retaliation claim.• But could trigger retaliation.• Fifth Circuit holds that a whistleblower does not engage in

protected activity unless the information is provided to the SEC. See Asadi v. GE Energy (USA), LLC, 720 F.3d 620, 623-30 (5th Cir. 2013).

• The Second Circuit and most district courts disagree. See, e.g., Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).


Claiming Awards• The SEC contacts whistleblowers or their attorneys when an

enforcement action results in sanctions of $1 million or more.

• The SEC also posts on its web site notices of enforcement actions resulting in sanctions of $1 million or more.

• Individuals who believe they may be eligible for a whistleblower award must apply within 90 calendar days.

• Applications are submitted by mail or fax to the Office of the Whistleblower using Form WB-APP.


Calculating Awards• In administrative and judicial proceedings resulting in

sanctions exceeding $1 million, the SEC must award between 10% and 30% of the monetary sanctions to qualified whistleblowers.

• The SEC has discretion to consider the unique facts and circumstances of each case when determining the amount of the whistleblower award.


Calculating Awards• Factors Favoring a Higher Award Percentage• the significance of the whistleblower’s information to the

success of the proceeding• the extent of assistance provided by the whistleblower during

an investigation and proceeding• the law enforcement interest in deterring violations by

rewarding whistleblowers• whether the whistleblower participated in a company’s internal

compliance systems before or at the same time the information was reported to the SEC

17 C.F.R. § 240.21F-6


Calculating Awards• Factors Tending to Reduce Award Percentages• the whistleblower was a participant or culpable in the

securities law violations• unreasonable delays in reporting the violations to the SEC• interference with the company’s internal compliance and

reporting systems

17 C.F.R. § 240.21F-6


Recent Dodd-Frank Awards• Five awards between $14 million and $35 million• Multiple awards between $1 million and $6 million• Most awards at or near the 30% maximum• SEC takes the position that 30% is the aggregate limit even

when more than one whistleblower is entitled to an award


Recent Dodd-Frank Awards• Several awards were denied or reduced because the

whistleblower delayed reporting to the SEC• One award was denied because the whistleblower provided

information only to the U.S. Department of Housing and Urban Development (HUD), not to the SEC

• One claimant was permanently barred from the Dodd-Frank whistleblower program for submitting 196 frivolous claims

• Numerous claims were denied because the whistleblowers provided information before the effective date of Dodd-Frank


Calculating Awards• Appeals of Whistleblower Award Determinations• Awards between 10% and 30% of the total monetary

sanctions are generally not appealable• Denials of an award may be appealed within 30 days of the

SEC’s final decision• Appeals are taken to the U.S. Court of Appeals for the D.C.

Circuit or to the Circuit Court of Appeals where the whistleblower resides or has her principal place of business


Retaliation Remedies• Employers may not take adverse employment action against

a person who:• engaged in lawful acts;• to provide information to the SEC or• to assist in an SEC investigation or proceeding based on the

information provided; and• reasonably believed that the information relates to a possible

securities law violation.

17 C.F.R. § 240.21F-2(b)


Retaliation Remedies• The SEC may bring an enforcement action against an

employer who retaliates against a Dodd-Frank whistleblower. 17 C.F.R. § 240.21F-2

• The employee may bring a separate action against the employer in federal court. 15 U.S.C. § 78(u)-6(h).


Retaliation Remedies• Caution: Dodd-Frank anti-retaliation protections do not

apply extraterritorially. See Liu v. Siemens A.G., 978 F. Supp. 2d 325, 328-29 (S.D.N.Y. 2013), aff’d, 763 F.3d 175 (2d Cir. 2014).

• Taiwanese resident employed by Chinese subsidiary of a German company with ADRs traded on an American exchange.

• Court cautioned against “intrusion into the employment law of a foreign nation.” Id. at 329.


Retaliation Remedies

Paradigm Capital Management• First SEC anti-retaliation enforcement action• Hedge fund ordered to pay $2.2 million fine for retaliating against

an employee who reported securities law violations• Employee was terminated in August 2012• Fine was imposed in June 2014• Employee filed a separate retaliation lawsuit in federal court


Retaliation Remedies• Private Actions for Retaliation Under Dodd-Frank• Filed directly in federal court• No need to exhaust administrative remedies• Arbitration agreements are not enforceable for Dodd-Frank

retaliation claims• Remedies include reinstatement, double back pay, litigation

costs and attorneys’ fees• 6 year statute of limitations from the date of the retaliatory act

(or 3 years after the material facts are known)


Retaliation Remedies• Private Actions for Retaliation Under Sarbanes-Oxley (“SOX”)• employee engaged in protected conduct;• the employer “knew or suspected, actually or constructively”

that the employee engaged in protected conduct;• the employee suffered an “unfavorable personnel action”; and• the circumstances are sufficient to raise an inference that the

protected conduct “was a contributing factor in the unfavorable action.”

29 C.F.R. § 1980.104(b)(1)


Retaliation Remedies• Procedures for Retaliation Claims Under SOX• OSHA has 180 days of exclusive jurisdiction• employee files a complaint with OSHA• OSHA has 60 days to determine whether “reasonable cause”

exists to find retaliation occurred• a party may request a hearing before an ALJ• ALJ decisions may be reviewed by the Administrative Review

Board

29 C.F.R. § 1980.105 - 1980.114


John Howley, Esq.The Howley Law Firm P.C.

350 Fifth Avenue, 59th FloorNew York, New York 10118

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