Quarterly Securities Enforcement Briefing
- Zombie Whistleblowers and Other New Developments in the SEC’s Dodd-Frank Whistleblower Program
- 2nd Circuit Narrows Reach of Whistleblower Protections
- Crackdown on CEOs and Companies for Stock Reporting Failures
- DOJ Turning Target on Bank Executives for Financial Fraud Prosecutions
Zombie Whistleblowers and Other New Developments in the SEC’s Dodd-Frank Whistleblower Program
By Jeffrey B. Coopersmith
In past issues, we have reported on the SEC’s Dodd-Frank whistleblower program. As we previously noted, under this program the SEC can pay a whistleblower who provides original information leading to SEC monetary remedies of more than $1 million between 10 and 30 percent of the amount the SEC collects. There were several developments with this program in the third quarter of 2014.
First, on Aug. 29, 2014, the SEC announced its first ever whistleblower award to an employee with a compliance function at a company. The announcement stated that the SEC awarded the compliance and audit employee $300,000 under the program. Under SEC Rule 21F-4(b)(4)(v), 17 C.F.R. 240.21F-4(b)(4)(v), compliance employees are generally barred from receiving whistleblower awards except when: (1) the employee has a reasonable basis to believe that the company is engaging in conduct that will harm investors or the entity; 2) the company is engaging in conduct that is obstructing an investigation of the misconduct; or (3) when 120 days have elapsed since the employee reported the conduct internally. In the case announced on Aug. 29, the SEC said that the compliance employee reported the matter internally but the company took no action. This underscores the importance of conducting an investigation or reasonable inquiry in the event that compliance or audit personnel, or any other employees, bring a matter to the attention of management.
Second, on Sept. 22, 2014, the SEC SEC announced that it made an award of $30 million to a whistleblower, its largest award ever. The SEC commented that the award might have been higher had the employee come forward earlier. Also of note is that the whistleblower resided outside the United States. Although such foreign whistleblowers are eligible for awards under the SEC program, they do not enjoy the protections of Dodd-Frank’s anti-retaliation provisions, according to the 2nd Circuit Court of Appeals’ Aug. 14, 2014 decision in Liu v. Siemans AG. The Liu case is discussed more fully elsewhere in this briefing.
Third, just in time for Halloween, the SEC argued before the 2nd Circuit on Sept. 29, 2014, that so-called “zombie” whistleblowers are not entitled to awards under the SEC program. In this case, the whistleblower, Larry Stryker, provided information to the SEC prior to enactment of the Dodd-Frank whistleblower law on July 21, 2010, and claims entitlement to an award. The 2nd Circuit’s ruling will determine, at least within its jurisdiction, whether such zombie whistleblowers can come back to life and claim entitlement to awards from the SEC.
2nd Circuit Narrows Reach of Whistleblower Protections
By John A. Goldmark
The 2nd Circuit has ruled that Dodd-Frank’s whistleblower protections, previously reported here, do not apply to tipsters outside the United States. In Liu v. Siemens AG, a former lawyer and compliance officer sued Siemens, alleging he was demoted and eventually fired in retaliation for his internal complaints about improper payments by Siemens employees to officials in North Korea and China. The employee’s claims sought extraterritorial application of Dodd-Frank, as he did not allege that any of the events related to his firing occurred within the United States.
The 2nd Circuit found “no indication Congress intended the whistleblower protection provision [of Dodd-Frank] to have extraterritorial application,” and therefore, affirmed the lower court’s dismissal of the employee’s claims. The court, however, declined to reach what many considered the bigger issue on appeal—whether the employee’s reporting of the alleged fraud internally (as opposed to the SEC) qualified him for whistleblower protection under Dodd-Frank. The 2nd Circuit dodged that issue by ruling that Dodd-Frank did not apply to conduct overseas in the first place, leaving open the growing dispute over whether internal reporting is covered by the law’s anti-retaliation provisions.
The court’s ruling may have a chilling effect on overseas complaints about alleged violations of the Foreign Corrupt Practices Act (FCPA), previously covered here. Because the FCPA contains no private right of action, plaintiffs who claim to be FCPA whistleblowers often bring FCPA claims under Dodd-Frank’s anti-retaliation provision. But the 2nd Circuit’s ruling could discourage whistleblowers outside the United States from bringing FCPA related claims, now that they may become subject to retaliation for doing so.
Crackdown on CEOs and Companies for Stock Reporting Failures
By Conner G. Peretti
In a recent move, the SEC reached 33 settlements with corporate officers, directors, top shareholders, and publicly traded companies for their failures to timely report stock transactions and holdings, as required by federal securities laws and regulations.
The 33 respondents—from Jones Lang LaSalle Inc., to the Royal Bank of Scotland, to 13 individual officers or directors of public companies—paid a total of $2.6 million in penalties. The individual settlements ranged from $25,000 to $150,000. In a release from the Commission, Andrew Calamari, director of the SEC’s New York regional office, remarked that, “The reporting requirements in the federal securities laws are not mere suggestions, they are legal obligations that must be obeyed.”
The settlements resulted from an SEC initiative to enforce reporting requirements under Section 16(a) of the Securities Exchange Act of 1934 and under Section 13(d) or (g) of the Exchange Act. The SEC said that its investigators used quantitative analysis to spot repeat offenders, some of whom had delayed filings by weeks, months, or even years. SEC Enforcement Director Andrew Ceresney said that, “Officers, directors, major shareholders, and issuers should all take note: inadvertence is no defense to filing violations, and we will vigorously police these sorts of violations through streamlined actions.”
FINRA Announces 2015 Regulatory Priorities
By Candice M. Tewell
Finally, it is worth mentioning the Department of Justice’s increasing attention to investigating and prosecuting individual officers at financial institutions, although these cases will not necessarily be in the area of securities enforcement. As Attorney General Eric Holder prepares to leave the Department of Justice, he faces criticism that the DOJ has failed to hold individuals accountable for financial fraud that led to the 2008 financial crisis, focusing instead on extracting massive fines from JPMorgan, Citi, BNP Paribas SA, Credit Suisse AG, Bank of America, and others. Apparently, Holder is not ready to hang up his hat just yet. In a recent speech at New York University’s law school, he said that the DOJ expects to bring charges against individuals involved in the fraudulent activities (particularly in the residential mortgage-backed securities arena) that led to the financial crisis. Holder explained that although the DOJ has resolved civil and criminal cases against several banks, they have almost always reserved the right to continue civil and criminal investigations into the individual executives at the various firms. Holder confirmed that the DOJ expects to bring charges in the coming months.
The DOJ is also shifting resources back toward investigating white-collar crimes and turning to tactics traditionally seen in non-white-collar criminal investigations, like wiretaps and informants. The DOJ has approached banks and urged them to implicate their own employees when alleged criminal behavior has occurred, holding out the promise of more lenient treatment in exchange. A DOJ representative indicated that companies will face harsher consequences if they choose not to cooperate.
The potential increase of rewards for certain financial industry whistleblowers and the renewed effort to pursue criminal financial fraud cases should give executives, particularly bank executives, pause. Although the “actual knowledge” or “conscious avoidance” (of knowledge) standards remain the same, bank leaders may face renewed scrutiny from prosecutors looking to maximize deterrence by making an example of a few alleged bad actors.
Holder also alluded to a potential “responsible corporate officer” doctrine, which has been adopted in the UK and requires banks to designate an officer to be held accountable if something goes wrong. Such a doctrine might be similar to the existing Park doctrine used in the pharmaceutical industry to hold executives criminal responsible for violations of the Food, Drug, and Cosmetics Act involving their company, even if they did not personally participate in or know about the violations. Such strict liability is not available currently as a tool for prosecutors in financial fraud cases. Holder’s statements advocating its development in this context can be read as either a harbinger of things to come, or an admission by DOJ that it has been unable to prosecute corporate officers at financial institutions because evidence of criminal intent is lacking.
In this new era of enforcement, executives should ensure appropriate compliance measures are in place at their companies and are operating correctly. Being proactive and responsive to potential problems can minimize potential liability and protect not just the company, but the executives as well.