Whistleblower Developments is a periodic report covering significant cases, decisions, proposals, and legislation related to whistleblower statutes and how they may impact your business. Recent developments include:

• SEC Enforcement Landscape Could Be Particularly Active Post-Pandemic

• SEC Whistleblower Awards Show No Signs of Slowing

• Recent Department of Labor Decision Affirms that SOX Whistleblower Protections Do Not Apply to Employees Who Work Outside the United States

• New York Federal Court Dismisses Dodd-Frank Whistleblower Action Due to Lack of Protective Activity and Causation

SEC Enforcement Landscape Could be Particularly Active Post-Pandemic

In the wake of the COVID-19 pandemic, and the economic swings uncertainty brings, businesses subject to SEC oversight can expect the SEC’s enforcement arm will remain active.  

The SEC already has taken public and preliminary steps to stop potential issues instead of initiating full investigations, including suspending the trading of certain stocks and issuing investor alerts warning of coronavirus-related investment scams.  Between April 3 and April 10, for example, the SEC suspended trading in securities for 10 different entities “due to questions and concerns regarding the adequacy and accuracy of publicly available information.”  The SEC’s concerns, in each case, stem from public claims each of those companies made over the preceding weeks, including those related to: (1) the development of a COVID-19 vaccine that will be available in the next three to six months; (2) the availability of “FDA-approved” home COVID-19 tests; (3) the ability to distribute personal protective equipment; (4) the production and distribution of a “Coronavirus (COVID-19) Prevention Products Line;” and (5) the commercialization of cedar leaf oil as a “promising treatment” for COVID-19. 

Stephanie Avakian and Steven Peikin, co-directors of the SEC’s enforcement division, also issued a statement at the end of March noting that material nonpublic information “may hold an even greater value than under normal circumstances,” implying a lower materiality threshold during the pandemic.  Whistleblower tips – always a font of information otherwise unknown to the government -- can be expected to hold particular value to the SEC’s Office of the Whistleblower. 

SEC Whistleblower Awards Show No Signs of Slowing

Between January and the time of this publication, the SEC announced many whistleblower awards, with the majority of those announcements occurring between March 23 and April 16.  

On January 22, 2020, the SEC announced two whistleblower awards in connection with two separate enforcement actions.  According to the SEC’s announcement, both whistleblowers provided significant information that helped the SEC shut down fraudulent schemes aimed at retail investors.  In the first action, the whistleblower alerted the SEC to the fraudulent scheme, and received an award of more than $277,000.  In the second action, the whistleblower (a wronged investor) provided the SEC with critical information that enabled the agency to recover assets that were later returned to victims.  That whistleblower received an award of $45,000.  

On February 28, 2020, the SEC announced an award of more than $7 million to a whistleblower who provided information and assistance that were critical to a successful enforcement action.  The SEC specified that this whistleblower provided “extensive and sustained assistance,” including identifying witnesses.  

On March 23, 2020, the SEC announced it had awarded more than $1.6 million to a whistleblower who provided information that alerted the agency to securities law violations that would have been difficult for the agency to detect otherwise.  The SEC highlighted that the information the whistleblower provided helped form the basis for charges brought in a successful enforcement action.         

On March 24, 2020, the SEC announced awards totaling over $570,000 to two whistleblowers who the agency said provided significant information and assistance that helped it bring multiple successful enforcement actions.  The first whistleblower received an award of about $478,000, and the second whistleblower received an award of about $94,000.  In announcing these awards, the agency emphasized that “[t]he substantially higher award granted to the first whistleblower demonstrates the importance of providing information early in the investigation and the benefit to whistleblowers where the information leads to multiple enforcement actions.”  

On March 30, 2020, the SEC announced a $450,000 award to a whistleblower whose significant information helped focus an ongoing investigation on the violations the agency ultimately charged. The agency specified that this whistleblower had compliance-related responsibilities, and was eligible for an award because he or she reported concerns about the relevant conduct internally within the company, then waited 120 days before reporting to the SEC.  The SEC also highlighted this was the third award it had made to a whistleblower who had compliance or internal audit responsibilities.  The SEC noted in its announcement that “[t]o ensure that important information about securities laws violations is reported to the SEC when appropriate corrective action is not taken by the company, the rules permit awards to compliance professionals in certain limited circumstances.”  The SEC further elaborated that this particular whistleblower “made reasonable efforts to work within the company’s compliance structure, suffered unique hardships as a result, and reported to the commission after the requisite time period had passed, ultimately providing meaningful assistance to the commission’s investigation and subsequent enforcement action.”  

On April 3, 2020, the SEC announced a payment of approximately $2 million to a whistleblower who provided vital information and assistance that substantially contributed to an ongoing investigation.  The agency noted the information this whistleblower provided would have been difficult for it to obtain without the tip.  

The most recent award, announced on April 16, 2020, consisted of a payment of more than $27 million to a whistleblower who alerted the SEC to misconduct occurring, in part, overseas.  After providing the initial tip to the agency, the whistleblower provided critical investigative leads that advanced the investigation.  According to the SEC’s announcement, this is the largest whistleblower award announced so far this year, and the sixth largest award overall since the inception of the SEC’s whistleblower program.   

As of the April 16 announcement, the SEC’s whistleblower program has awarded over $425 million to 79 individuals since issuing its first award in 2012.  

Recent Department of Labor Decision Affirms that SOX Whistleblower Protections Do Not Apply to Employees Who Work Outside the United States

On February 13, 2020, the U.S. Department of Labor’s Administrative Review Board applied its own recent precedent to dismiss a former in-house lawyer’s whistleblower retaliation claims under the Sarbanes-Oxley Act (SOX).  

The former in-house lawyer worked entirely in Hong Kong for a foreign subsidiary of a company based in the United States.  In his petition, he complained he was constructively discharged after he objected to certain conduct that he believed violated the federal Foreign Corrupt Practices Act, as well as other federal securities laws.  The company moved to dismiss the action, arguing that the Administrative Review Board’s recent decisions in Hu v. PTC, Inc. (decided on September 18, 2019), and Perez v. Citigroup, Inc. (decided on September 30, 2019) precluded claims by former employees who worked entirely outside of the U.S. under SOX’s anti-retaliation provision.  

The administrative law judge who considered the motion agreed the former in-house lawyer sought to apply SOX’s whistleblower protections extraterritorially.  Under the Administrative Review Board’s recent precedent, a foreign-based employee of a foreign subsidiary of a U.S. company does not qualify for protection under SOX.  In its decision, the Administrative Review Board explained, “the location of the employee’s permanent or principal worksite is the key factor to consider when deciding whether a claim is a domestic or extraterritorial application” of SOX’s anti-retaliation provision and that other factors, “such as the employee’s U.S. citizenship,” are “less critical, if not irrelevant” to determining whether SOX’s anti-retaliation provision applies.  As such, because the former in-house attorney’s permanent worksite was located in Hong Kong, he did not qualify for protection under SOX.  

The case is Garvey v. Morgan Stanley, No. 2017-SOX-00030 (Feb. 13, 2020).  

New York Federal Court Dismisses Dodd-Frank Whistleblower Action Due to Lack of Protective Activity and Causation

In an order issued on February 28, 2020, the U.S. District Court for the Southern District of New York dismissed a former company executive’s whistleblower retaliation claim brought pursuant to the Dodd-Frank Act.  

The plaintiff in this case was the former chief marketing officer of a closely held infrastructure technology company.  The plaintiff alleged that in March of 2019 he filed a complaint with the SEC concerning the conduct of the company’s chief executive officer, who was also the company’s president and majority shareholder.  Plaintiff did not provide details regarding what conduct he reported to the SEC, how any securities laws had been violated, or if he reported those alleged violations to anyone internally at the company.  According to the plaintiff, he was terminated about a week after he submitted his complaint to the SEC.  

The company asked the court to dismiss the lawsuit because the plaintiff had not alleged all of the elements of a Dodd-Frank Act retaliation claim, which are: (1) he engaged in activity protected under the Act; (2) he suffered an adverse employment action; and (3) the adverse action was caused, or at least linked to, the plaintiff’s protected activity.  The federal court agreed with the company, and dismissed the plaintiff’s case because he did not allege that he engaged in protected activity, or that his termination was caused by that protected activity.  

In its order, the court noted that in order to have engaged in protected activity, the plaintiff would have had to demonstrate that he had an objectively reasonable belief that the company’s conduct violated one of the six enumerated provisions of law under the Dodd-Frank Act.  The court further noted that not all conduct falls within the Dodd-Frank Act’s whistleblower protections, and that the plaintiff in this case did not identify a specific provision or section of applicable law that the company may have violated.  

The court also dismissed the plaintiff’s case because the plaintiff did not include any facts in his complaint suggesting his termination was caused by, or at least linked to, his complaint to the SEC.  For example, the plaintiff did not allege he had communicated his concerns about legal violations to anyone within the company.  The court also noted that the SEC maintains all of the complaints it receives as confidential, so there was no way for the court to infer from the plaintiff’s complaint whether the company even knew about the plaintiff’s complaint to the SEC when it terminated the plaintiff.  

This order highlights that would-be whistleblowers under the Dodd-Frank Act must be able to allege facts that meet all of the elements of a claim under the Act, and cannot rely on only implication and inferences in order to do so.    

The case is Cellucci v. O’Leary, No. 19-cv-02752 (S.D. N.Y. 2020).