Tag: Form TCR

Whistleblower Only Has to Believe There is Something Wrong

Whistleblower rights are growing stronger. The recent award of a reward in excess of $100 million to a whistleblower will certainly attract those looking for financial reward. Dodd-Frank not only increased the chances of getting a reward, it also provided broader rights to employees and the courts are starting to rule strongly in favor of employees. A recent ruling highlights the new legal world of whistleblowers.

An employee wrote a letter to the Securities and Exchange Commission and reported that the company had failed to submit its 2009 amendment to the pension plan to its board of directors for approval and had failed to file its amendment with the SEC. The employee, Richard Kramer, was a human resources officer and member of the pension plan committee. Kramer had also told the company that there needed to be three member of the committee, not just the two in place at that time.

Kramer argues that as a result of his complaints, the company disciplined him, reduced his responsibilities, and eventually fired him.

The Dodd-Frank Act provides this protection against whistleblower retaliation:

No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower —

(i) in providing information to the Commission in accordance with this section;
(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002, the Securities Exchange Act of 1934, including section 10A(m) of such Act, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

A “whistleblower” is defined as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. § 78u-6(a)(6)

The company first argues that Kramer is not a whsitleblower because he did not us the SEC’s new method of reporting on Form TCR. Mailing a regular letter is insufficient. The court did not believe that it is unambiguously clear that the Dodd-Frank Act’s whistleblower retaliation provision is limited to those individuals who have provided information relating to a securities violation to the SEC, and have done so in a manner established by the SEC. In the court’s view, the company’s interpretation would dramatically narrow the available protections available to potential whistleblowers. I suspect that the use of Form TCR will be required for whistleblower payouts, but not required for retaliation claims.

The company that argued that it had filed the form with the SEC on the date of the 2009 amendment to the plan. There was no securities law violation.

The court noted that in order to qualify for whistleblower protection the employee need only demonstrate that he reasonably believed there had been a violation. There need not be an actual violation of securities laws. The court found that the employee may have reasonably believed the company to be committing violations of SEC rules or regulations.

The ruling was just on the motion to dismiss and amend claims, so it is not over. It does appear to be the first Dodd-Frank whistleblower claim to survive a motion to dismiss in federal court.  I expect it will not be the last.

Sources:

SEC’s Whistleblower Annual Report

Sean McKessy, Chief Office of the Whistleblower

Dodd-Frank added Exchange Act Section 21F(g)(5) and requires that SEC’s Office of the Whistleblower to report to Congress annually on the whistleblower program. It’s due each October 30. I’m sure the SEC wanted to be in compliance, so they released the first annual report on the Dodd-Frank Whistleblower program (.pdf).

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Exchange Act and directs the Commission to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1,000,000. Awards are required to be made in the amount of 10% to 30% of the monetary sanctions collected and be paid from the SEC’s Investor Protection Fund.

However, the final whistleblower rules became effective on August 12, leaving only 7 weeks of data under the new program for this report, running to September 30.

Vanessa Schoenthaler notes that “during the seven weeks for which data is available, the Commission received 334 whistleblower tips. Among these, the most common complaints related to market manipulation (54), offering fraud (52) and corporate disclosures and financial statements (51). These tips were categorized by the whistleblowers themselves, not the Commission, and there are 84 that were submitted under the category of “other” or without a category at all, so it’s hard to say how accurate this information really is.”

The whistleblower was able to designate a location, with 37 states and 11 foreign countries in the mix. Although, almost 1/4 left the location blank. The most popular: China, California, Florida, Maryland, New York, and Texas.

The seven weeks of data shows over 20 tips per week coming in on Form TCR.  What will be more interesting is how many of this filings turn into meaningful investigations and how many are unfounded claims from disgruntled employees trying to get back at their company.

Sources:

Proposed Rules for Implementing the Whistleblower Provisions From Dodd-Frank

The SEC has released the text of its proposed new rules for implementing the whistleblower provisions of Section 21F of the Securities Exchange Act of 1934: Release No. 34-63237.

In fashioning these proposed rules, the Commission has considered and weighed a number of potentially competing interests that are presented in implementing the statute. Among them was the potential for the monetary incentives provided to whistleblowers by Section 21F of the Exchange Act to reduce the effectiveness of a company’s existing compliance, legal, audit and similar internal processes for investigating and responding to potential violations of the federal securities laws. With this possible tension in mind, we have included provisions in the proposed rules intended not to discourage whistleblowers who work for companies that have robust compliance programs to first report the violation to appropriate company personnel, while at the same time preserving the whistleblower’s status as an original source of the information and eligibility for an award. At the same time, the proposed rules would not prohibit a whistleblower in a compliance function from reporting information to the Commission where the company did not provide the information to the Commission within a reasonable time or acted in bad faith.

At this point, it is merely a proposed rule. Comments should be submitted on or before December 17, 2010.

There will be a new Form TCR for submitting a tip, complaint or referral and a new Form WB-DEC, Declaration Concerning Original Information Provided Pursuant to §21F of the Securities Exchange Act of 1934, signed under penalty of perjury, for submission to the SEC to meet the standards of the new regulations.