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 Whistleblower Program Awards Total Over $23 Million in the First Quarter of 2021, Including Award Based on DOJ Non-Prosecution Agreement

Although its awards were substantially lower than those during the record-setting quarter at the end of 2020, the SEC Whistleblower Program distributed sizable awards in the first quarter of 2021 to whistleblowers whose information led to an enforcement actions. Notable awards issued this quarter include the following:

• On February 23, 2021, the SEC announced an award of more than $9.2 million to a whistleblower who provided information that led to successful related actions by the U.S. Department of Justice, including a non-prosecution agreement (NPA) or deferred prosecution agreement (DPA). This is the first SEC award based on DPAs or NPAs, as made permissible by a final rule that went into effect on December 7, 2020. 85 Fed. Reg. 70938, Rule 21F-4(d)(3) (providing DPAs/NPAs are “administrative actions” and the money paid thereunder comprises “monetary sanctions” for purposes of the SEC Whistleblower Program). The rule anticipated it would result in more rewards and “enhance the incentives for whistleblowers to come forward in a timely manner to the extent that it signals to prospective whistleblowers that a wider array of enforcement resolutions may result in awards.” Id. This award begins to bear out that prediction. Chief of the SEC’s Office of the Whistleblower, Jane Norberg, remarked in the press release that “[t]his award reflects the Commission’s determination that a whistleblower’s eligibility for an award should not depend on the procedural vehicle a federal agency selects to resolve an enforcement matter.”

• On March 4, 2021, the SEC announced an award in excess of $5 million to joint whistleblowers whose tips initiated an investigation that resulted in an enforcement action, including concerning misconduct abroad. In the SEC’s press release, Chief Norberg noted that “[w]histleblowers from 130 different countries have provided tips to the Commission since the beginning of the program.”

• On March 29, 2021, the SEC announced an award of more than $500,000 to a whistleblower whose information and assistance allowed the SEC and another agency to quickly file actions, shutting down an ongoing scheme. After first raising concerns internally, the whistleblower then submitted a tip to the SEC within 120 days of the internal report, activating the “safe harbor” provision of the SEC’s whistleblower rules, which treats information as though it had been submitted to the SEC at the same time it was internally reported. With this award – the 40th award in the first half of the SEC’s fiscal year – the SEC surpassed the total number of individuals (39) to whom it issued awards in the entire previous fiscal year.

SEC Makes Second-Largest Whistleblower Award Ever to Joint Whistleblowers Who Helped Stop Unlawful Conduct Involving Highly Complex Transactions

On April 15, 2021, the SEC announced an award of more than $50 million to two whistleblowers for jointly providing information to the SEC that allowed the agency to open an investigation and secure an enforcement action that returned tens of millions of dollars to investors. The SEC noted that the unlawful conduct the whistleblowers identified related to highly complex transactions that would have been difficult for the SEC to detect. The whistleblowers met with the SEC staff on numerous occasions and provided ongoing proactive assistance throughout the SEC investigation. A third whistleblower claimed to have provided pertinent information, but that claim was rejected because none of the information purportedly provided contributed to the success of the SEC’s enforcement action.

Seventh Circuit Rejects Equitable Tolling of SOX Retaliation Claim Where Petitioner Reported to SEC and Sought Whistleblower Award

On March 22, 2021, the Seventh Circuit affirmed a decision by the United States Department of Labor’s Administrative Review Board, dismissing a petitioner’s administrative complaint for whistleblower retaliation under SOX because petitioner had failed to file the complaint within 180 days of his allegedly wrongful termination, pursuant to 18 U.S.C. § 1514A(b)(2)(D). Xanthopoulos v. United States Dep’t of Lab., No. 20-2604, 2021 U.S. App. LEXIS 8321 (7th Cir. March 22, 2021).

Highlighting the differences in the SOX and Dodd-Frank whistleblower regimes, the Seventh Circuit examined the petitioner’s pre-complaint filing of complaint forms on the SEC’s whistleblower website regarding his employer’s allegedly manipulated investment portfolio ratings. Even after being terminated, the complainant filed additional complaint forms using the SEC website. In these forms, the complainant raised securities fraud concerns, sought a whistleblower award, and referenced Dodd-Frank whistleblower protection provisions. The Seventh Circuit ruled that filing SEC complaint forms did not toll the 180-day filing requirement under SOX because the complaints to the SEC were “independent of and separate from” his SOX retaliation claim. Given the many differences between the Dodd-Frank and SOX whistleblower provisions, particularly the different available remedies, the court said this was not a case of filing in the wrong forum, which might have supported equitable tolling of the 180-day filing deadline.

Fifth Circuit Affirms Dismissal of SOX Complaint Because Plaintiff Was Not an Employee of the Defendant

On January 29, 2021, the Fifth Circuit affirmed dismissal of a SOX complaint for retaliation because the plaintiff was not an employee of the defendant company. Moody v. Am. Nat’l Ins. Co., No. 20-40462 (5th Cir., Jan. 29, 2021). The plaintiff was the owner of an insurance agency that had a contract with the defendant to sell insurance products. He alleged he was a “contractor” with the defendant and that his contract was wrongfully terminated after he had alleged that the defendant was violating SEC regulations. The Fifth Circuit noted that in Lawson v. FMR LLC, 571 U.S. 429 (2014) the U.S. Supreme Court confirmed that “contractors” may be covered by SOX, but to be entitled to protection the whistleblower must be an employee of the alleged retaliator. Because the plaintiff could not plead facts showing that he had been terminated by his employer, as required by SOX, the Fifth Circuit affirmed dismissal.

District Court Decisions with Differing Results Highlight “Reasonable Belief” Standard for Alleging SOX Retaliation Claims

In Yang v. Bank of New York Mellon Corp., No. 20-cv-3179, 2021 WL 1226661 (S.D.N.Y., Mar. 31, 2021), the plaintiff alleged that he was retaliated against, and ultimately terminated, for objecting to his supervisors’ directive that his employer, an investment advisor, stop acting as an investment subadvisor for a certain investment fund. The plaintiff complained the unilateral decision to stop acting as the fund’s subadvisor would be a violation of his employer’s fiduciary duties to the investment fund and its individual investors under the Investment Advisers Act of 1940, and would render statements made in the fund’s prospectus materially misleading. The court rejected the defendants’ argument that the plaintiffs’ concerns were not specific enough because the law does not require a plaintiff to have provided specific statutory or regulatory provisions that were violated. Moreover, the court found that the plaintiff, an experienced banking executive familiar with fiduciary duties, had a “reasonable belief” that the directive would violate securities laws, one of the enumerated provisions of SOX.

In Ngai v. Urban Outfitters, Inc., No. 19-1480 (E.D. Pa., March 29, 2021), the plaintiff was a director of sourcing and design, responsible for ensuring that overseas suppliers were executing design requirements while minimizing expenses to the company. The plaintiff complained that certain manufacturers and vendors were intentionally inflating productions costs and there were conflicts of interest in the supply chain, including reportedly paying kickbacks to company employees to secure high-volume orders. The court rejected the plaintiff’s SOX claim because the described concerns regarding misconduct by vendors and manufacturers did not suggest he was reporting legal violations enumerated in Section 806 of SOX. The failure to rectify misconduct by others and potential conflicts of interest might violate the company’s code of conduct (as the plaintiff himself alleged) but did not amount to a reasonable belief that one of the legal violations covered by SOX had occurred.