Category: Whistleblower

The Denver office of the Securities and Exchange Commission has rolled up a bunch more whistleblower rule violations. This follows up with last week’s settlement with Nationwide Planning for impeding clients from reporting violations to the SEC.

In response to a Congressional mandate in Dodd-Frank, the Securities and Exchange Commission adopted Rule 21F-17 in August 2011, which provides:

(a) 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 . . . with respect to such communications.

In prior enforcement actions, the SEC has aggressively pursued actions against firms who have tried to limit the ability of its customers or employees to report violations. Against CBRE, the SEC did not like its form of separation agreement that had a representation that the departing employee had not already filed a compliant. The SEC did not like that Monolith Resources tried to limit whistleblowers by allowing them to report, but not retain any financial rewards for reporting. Nationwide Planning tried to allow clients to talk with the SEC, but only if the SEC started the talk.

In these cases, Smart for Life, LSB, IDEX, Acadia, and Brands Holding took the path of allowing employees to report a violation but preventing employees from getting any financial award from a whistleblower complaint path. The SEC doesn’t like that.

Transunion and AppFolio tried to prevent employees from getting any financial award from a whistleblower complaint. And also addied that the employees give the company notice before disclosing anything.

As with the off-channel communications cases, there is no charge of fraud. The cases merely cite a violation of the rule.

Sources:

• SEC Charges Seven Public Companies with Violations of Whistleblower Protection Rule
• Order – a.k.a. Brands Holding Corp.
• Order – Acadia Healthcare Company, Inc
• Order – AppFolio, Inc.
• Order – IDEX Corporation
• Order – LSB Industries, Inc.
• Order – Smart for Life, Inc.
• Order – TransUnion
• Whistleblower case against Nationwide

In response to a Congressional mandate in Dodd-Frank, the Securities and Exchange Commission adopted Rule 21F-17 in August 2011, which provides:

(a) 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 . . . with respect to such communications.

In prior enforcement actions, the SEC has aggressively pursued actions against firms who have tried to limit the ability of its customers or employees to report violations. Against CBRE, the SEC did not like its form of separation agreement that had a representation that the departing employee had not already filed a compliant. The SEC did not like that Monolith Resources tried to limit whistleblowers by allowing them to report, but not retain any financial rewards for reporting.

A recent case is the first I recall that is taken against a broker-dealer or investment adviser. The order found that Nationwide Planning Associates, Inc. and investment adviser NPA Asset Management, LLC, and state-registered investment adviser Blue Point Strategic Wealth Management, LLC, impeded brokerage customers and advisory clients from reporting securities law violations to the SEC.

The offending language:

“The Recipient represents that [she / he] shall forever keep completely confidential all of the above terms of this Agreement and shall direct all those in privity with them (including their attorneys, CPAs, etc.) to keep the same completely confidential. The Recipient further represent[s] that [she / he] will forever refrain from any discussion, narration, or disclosure of any transaction, circumstance, conversation, or any other aspect of the Recipient relationship with any and all of the Company, with any person or entity.” …

“The confidentiality and non-disclosure provision does not prohibit the Recipient from responding to any unsolicited inquiry (i.e., an inquiry not resulting from or attributable to any actions taken by Recipient or by any third party at Recipient’s direction) about the Agreement or its underlying facts and circumstances initiated by any state, federal or self-regulatory commission or authority that regulates the business or activities of registered investment advisers or their representatives.”

I believe its okay to have the confidentiality provision in the first paragraph, as long as you have a carve-out for reporting to regulators.

These firms tried to get cute by saying the confidentiality provision didn’t apply if the regulators initiated the inquiry. It would still prevent reporting to the regulators by the client.

That’s an impediment to reporting an a violation of Rule 21F-17.

Sources:

• NJ-based firms impeded clients from voluntarily reporting information to the SEC
• SEC Order
• Rule 21F-17

For the second week in a row, the Securities and Exchange Commission brought a “pre-taliation” charge against a company for bad provisions in its employee separation agreements. This time it was the real estate company CBRE that had a bad provision.

In response to a Congressional mandate in Dodd-Frank, the SEC adopted Rule 21F-17 in August 2011, which provides:

(a) 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 . . . with respect to such communications.

Back in 2016 the Securities and Exchange Commission filed a series of cases against companies that restricted departing employees from contacting government authorities. Some of the language the SEC found illegal was broad non-disparagement clauses that forbid former employees from engaging “in any communication that disparages, denigrates, maligns or impugns” the company. Companies responded by adding carve-outs that explicitly stated that employees could contact government regulators to reporting possible wrongdoing.

CBRE had an appropriate carve-out:

Nothing in this Agreement shall be construed to prohibit Employee from filing a charge with or participating in any investigation or proceeding conducted by the Equal Employment Opportunity Commission, National Labor Relations Board, the Securities and Exchange Commission, the Department of Justice, or a comparable federal, state or local agency.

What the SEC did not like is a representation earlier in the form separation agreement:

Employee represents and acknowledges [t]hat Employee has not filed any complaint or charges against CBRE, or any of its respective subsidiaries, affiliates, divisions, predecessors, successors, officers, directors, shareholders, employees, representatives or agents (hereinafter collectively “Agents”), with any state or federal court or local, state or federal agency, based on the events occurring prior to the date on which this Agreement is executed by Employee.

The SEC’s view was that the carve-out was prospective in application and did not fix the representation.

Last week’s whistleblower pre-taliation case against Monolith was clearly problematic. Allowing a complaint, but disallowing any financial rewards is clearly too cute and deters a whistleblower.

The CBRE language is not so obviously problematic. Some would argue that its fair to ask an employee if they’ve filed a complaint in the exit process.

If the form had a left a blank for an employee to fill in any exceptions to the representation, would that make the form okay? Probably not, based on this case. I think the case is trying to say that even asking if the employee has filed a complaint would be a deterrent and would violate Rule 21F-17.

Will these two be the last of the whistleblower cases form the SEC? The SEC’s fiscal year is fast approaching so we should expect a flurry of cases conclusions over the next week and a half..

Sources:

• SEC Charges CBRE, Inc. with Violating Whistleblower Protection Rule
• SEC Order
• CBRE Busted on Pre-taliation Clauses by Matt Kelley in Radical Compliance
• A New Regulatory Action to Help Potential Whistleblowers

Section 924(d) of Dodd-Frank requires the Securities and Exchange Commissions Office of the Whistleblower to report annually to Congress on Office’s activities, whistleblower complaints received, and the response of the SEC to those complaints. In addition, Section 21F(g)(5) of the Exchange Act requires the SEC to submit an annual report to Congress. The SEC published the whistleblower report on November 15.

According to the report, the Office received slightly fewer tips and awarded significantly less to whistleblowers in FY 2019, as compared to FY 2018.

This past year, the SEC received 5,212 tips. That’s a slight decrease from FY 2018. That brings the total number of tips since the program started to over 33,000.

California, Pennsylvania, New York, Texas and Florida had the highest number of tips domestically. The only surprise in that list is Pennsylvania. The other four states would be on this list based on population. It seems to me that the Pennsylvania whistleblowers are more active.

For the year, the SEC handed out $60 million in awards to whistleblowers. That is a decrease from the $168 million in FY 2018. Most of that was taken by the $37 million award granted in March 2019 and $13 million award to another person for the same action. The other six recipients split the remaining $10 million.

The numbers are not good for whistleblowers. Over 5,000 complaints were made and that lead to only 8 awards. Of those 8, seven reported the problems internally before going to the SEC. That should eb a warning to ignoring internal whistleblowers.

Sources:

• Whistleblower Program 2019 Annual Report to Congress

The Securities and Exchange Commission announced awards totalling $50 million to whistleblowers who brought high-quality information to the SEC and assisted in bringing a successful enforcement action.

As with all whistleblower awards, the order is heavily redacted as to the company involved, what happened, and when it happened. I’m not sure I can identify which case the awards tie to.

Two things caught my attention about the awards.

One, the order discusses approval or rejection of awards for Claimant #1, Claimant #2, Claimant #4, and Claimant #7. I take it that at least seven people submitted tips to the SEC for the bad acts involved in the case. That is a lot of people sending information to the SEC. I’m not if it’s because a lot of people knew about the problem or a lot of people knew they could make money by reporting the problem.

Second, the two successful claimant had attorneys involved in the whistleblowing process.

Claimant #1 had his or her attorney approach the SEC first before formally submitting the tip. That ended up hurting the award because the SEC found the delay unreasonable and investors were continuing to be harmed. Somehow, Claimant #1 “passively financially benefited” from the misconduct during the delay.

Claimant #2 met with the SEC with his or her attorney. According to the order, Claimant #2 had the “smoking gun” evidence that indisputably showed the problem.

Claimant #2 also received a whistleblower award from another agency in connection with the action. I would guess it was this CFTC award.

Putting those two things together, lots of whistleblowing and lots of lawyers, whistleblowing is becoming a new industry and there is growing population of professional whistleblowers and their service providers.

Matt Kelly pointed out the slick graphic the SEC now seems to be appending to whistleblower award press releases. I have to be a bit snarky and point out the shortcomings of the fancy map showing the quantity of tips by state.

In my snarkiness, I’m going to point out that that the map also shows the most populous states. More people=>more companies=>more tips.

Sources:

• SEC Awards $50 Million to Two Whistleblowers
• SEC Order
• Award Process and Top 10 Awards
• $50M SEC Whistleblower Award by Matt Kelly

In 2016, the Securities and Exchange Commission opened its doors to the professional whistleblower when it first granted a whistleblower award to a company outsider. It’s becoming more lucrative.

Last week the Commodity Futures Trading Commission announced an award of approximately $30 million to a whistleblower who voluntarily provided key original information that led to a successful enforcement action. Previously, the highest award amount paid to a CFTC whistleblower was in March 2016 of more than $10 million (see CFTC Press Release 7351-16 CFTC Announces Whistleblower Award of More Than $10 Million.)

The SEC has preliminarily approved a $48 million payout in the same matter.

Unlike many whistleblowers, the recipient of those award came forward. Edward Siedle is a former lawyer for the Securities and Exchange Commission who has turned forensic investigator.

The award comes from a $267 million settlement between JPMorgan and the SEC. In a parallel action, JPMorgan Chase Bank agreed to pay an additional $40 million penalty to the U.S. Commodity Futures Trading Commission. The bank was investigated for steering high-net-worth clients toward its own proprietary investment funds that could cost more rather than those managed by other institutions. OF course, that could have been (maybe) addressed in a disclosure to clients.

Sources:

• The Rise of the Professional Whistleblower
• Could Whistleblowing Be The New Short-Selling?
• Feds award JPMorgan Chase whistleblower a record $30M by Kevin Dugan
• Whistleblower gets record $30M for exposing JPMorgan scam by Anthonty Noto
• Press Release: CFTC Announces Its Largest Ever Whistleblower Award of Approximately $30 Million
• Welcome To The Whistleblower Winner’s Circle by Edward Siedle
• J.P. Morgan to Pay $267 Million for Disclosure Failures

Seven years ago the Securities and Exchange Commission opened its Office of the Whistleblower under the authorization of the Dodd-Frank Act. Since then the SEC has received over 22,000 whistleblower tips, obtained over $1.4 billion in financial remedies related to those tips, and ordered over $266 million in whistleblower awards to 55 individuals. Now, the SEC wants to tweak the program and offered up a series of regulatory revisions.

More Settlements Would Eligible

The first change is to expand the scope of actions that are subject to whistleblower awards. The current SEC whistleblower rules do not address whether the SEC can pay an award when the information that leads to a Deferred Prosecution Agreement or Non-Prosecution Agreement entered into by DOJ or a state attorney general in a criminal proceeding. The SEC is also looking for the discretion to award whistleblower claims based on public information using independent evaluation and analysis.

More for Smaller Settlements

The second change is to push for a higher award in smaller cases. According to the SEC, 60% of the whistleblower awards have been less than $2 million. The SEC is trying to set a $2 million floor, subject to the Section 922 cap of 30% of the award. The purpose of the change is to reward meritorious whistleblowers and incentivize future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award.

Less for Bigger Settlements

The third change is related to the remaining 40% of funds paid out in claims. That 40% represents just three awards. For big cases, the SEC wants to be able to cap the award at $30 million, subject to the Section 922 floor of 10% of the award.

Digital Realty Fix

In the Digital Realty case decided by the Supreme Court earlier this year, the Court held that the whistleblower provisions of the Exchange Act require a person to report a possible securities law violation to the SEC in order to qualify for protection against employment retaliation.  For purposes of retaliation protection, an individual would be required to report information about possible securities laws violations to the Commission “in writing”.

Others

Besides these four big changes, there are several other smaller changes to increase the efficiency and effectiveness of the whistleblower program.

My Take

I think it’s great that the current SEC is willing re-evaluate its rules and fix them to make them work better. I bet most o fus could point to many parts of the SEC rules that need fixing. I hope they continue this process for other rules.

Sources:

• SEC Proposes Whistleblower Rule Amendments
• SEC proposes to limit whistleblower awards by Francine McKenna
• Statement of Commissioner Piwowar at Open Meeting Regarding Amendments to the Commission’s Whistleblower Program Rule from Commissioner Michael S. Piwowar
• Statement at Open Meeting on Amendments to the Commission’s Whistleblower Program Rule from Chairman Jay Clayton
• Statement on Proposed Amendments to the Commission’s Whistleblower Program Rules by Commissioner Kara M. Stein
• Statement on Proposed Rules Regarding SEC Whistleblower Program by  Commissioner Robert J. Jackson, Jr.
• Statement at Open Meeting on Amendments to the Commission’s Whistleblower Program Rules by Commissioner Hester M. Peirce
• Section 922 of Dodd-Frank: Whistleblower Protection
• The Limit of Whistleblowers

The Supreme Court just decided a case that limits the whistleblower anti-retaliation provisions in Dodd-Frank. The Court handed down its decision in Digital Realty Trust v. Somers.

Dodd-Frank defines “whistleblower” as a person who provides “information relating to a violation of the securities laws to the Securities and Commission.” 15 U. S. C. §78u–6(a)(6). A whistleblower is then eligible for an award if original information provided leads to a successful enforcement action. Under Rule 21F, a whistleblower has to go through particular steps to be able to claim an award, but the anti-retaliation protections apply whether or not the requirements, procedures and conditions to qualify for an award are satisfied.

Mr. Somers reported suspected securities-law violations to senior management of Digital Realty Trust. He was fired. He did not alert the SEC prior to his termination. He didn’t file an administrative complaint within 180 days that is required under the Sarbanes-Oxley whistleblower protections. Nonetheless, he brought suit against the company with a claim of whistleblower retaliation.

The Supreme Court stuck with the clear definition in Dodd-Frank. A whistleblower for securities law violations must report the violation to the SEC to have protection from retaliation.

The Supreme Court pointed out that there is a different definition of whistleblower under the CFPB part of Dodd-Frank. Under 12 U.S.C. §5567(a)(1), a “covered employee” who provides information to the company, the FBI, or any other State, local, or Federal, government authority or law enforcement agency relating to a violation of a law subject to the CFPB’s jurisdiction gets whistleblower protection.

Mr. Somers argued that the limiting whistleblower definition should only apply to eligibility for awards. The Court completely disagreed with that argument and relied on the plain language of the statue. There were two concurring opinions, but they only took different approaches to whether the Court should take into consideration legislative history as part of statutory interpretation. The two concurring opinions agreed with the result, leaving Mr. Somers as a non-whistleblower. The ruling settled a split between the Ninth and Fifth Circuits, reversing the Ninth Circuit’s decision.

There is an obvious impact on compliance programs. As much as we might hope that employees who think there is a problem would tell someone internally first, there is much more incentive to go directly to the SEC.

It’s all confusing in application. A tip left with the SEC is kept anonymous, so a company would not know the identity of the whistleblower. A company could fire an employee who left a tip without knowing that the employee did so. Without a requirement that the employee also tell the company, the company is in the dark and may not even be aware of the problem.

The other piece missing in the arguments is whether there even was an actual securities law problem at Digital Realty Trust.

Sources:

• 15 U.S. Code § 78u-6 – Securities whistleblower incentives and protection
• Rule 21F
• Digital Realty Trust v. Somers
• Supreme Court Narrows Definition Of Whistleblower by Dunstan Prial