CFTC Pays $2.5 Million Whistleblower Award after “Unreasonable Delay”

In June 2019, the U.S. Commodity Futures Trading Commission (CFTC) announced its award of about $2.5 million to a whistleblower who reported a violation of U.S. trading laws after waiting a significant amount of time before reporting. As a result of that reporting delay, the CFTC reduced the whistleblower’s award by an undisclosed amount. In making its announcement, the CFTC hoped to communicate to the public the importance of whistleblowers timely reporting violations. James McDonald, the director of the CFTC’s Division of Enforcement, said in the statement, “[The CFTC] hope[s] this case illustrates the importance of reporting violations to the CFTC as soon as reasonably possible…. Reporting early lessens the harm violators can inflict on the public and hastens [the CFTC’s] investigations to bring the culprits to justice.”

The CFTC’s announcement did not detail how long the whistleblower waited before reporting to the CFTC. Christopher Ehrman, the director of the CFTC’s Whistleblower Office, stated that while regulators like the CFTC understand there may be good reasons for whistleblowers to delay in reporting, there is a “point at which a delay becomes unreasonable…. The facts in this case indicated that the whistleblower unreasonably delayed in reporting information, which resulted in a diminished award.”

The CFTC whistleblower program protects whistleblowers’ identities and provides those whistleblowers with legal protections against retaliation. As such, the CFTC did not identify the enforcement action in support of which the whistleblower provided information, nor did it disclose the exact dollar amount of the award granted.

SEC Makes First-of-its-Kind $4.5 Million Award to Whistleblower, Based on Internal Tip, and Makes $3 Million Award to Whistleblowers Who Reported Issues Internally

In both May and June of 2019, the SEC made awards that represented the first of their respective kinds.

On May 24, 2019, the SEC announced its $4.5 million award to a whistleblower who raised concerns internally with a company and also alerted regulators. These reports ultimately led to two enforcement actions after the company investigated the allegations and self-reported to the same agencies, including the SEC. In its order related to the award, the SEC disclosed that the whistleblowers tipped off individuals within the company and submitted the same information directly to the SEC and another regulatory agency. The company itself later reported the same information to the SEC and the other regulatory agency, and turned its findings from its own internal investigation of those allegations over to those regulators.

The SEC reported that this whistleblower award is the first given pursuant to a provision of its whistleblower regulations that aim to encourage internal reporting by whistleblowers who also bring those concerns to the agency within a certain amount of time. The whistleblower was ultimately rewarded for the results of the enforcement actions against the company because the whistleblower’s allegations were reported to the SEC within 120 days of the whistleblower’s internal report to the company.

On June 3, 2019, the SEC announced a $3 million award to two whistleblowers who “repeatedly reported internally” and to the agency a securities violation that affected retail investors and assisted the SEC in investigating and prosecuting their employer for that conduct. According to the SEC, the whistleblowers, who jointly submitted their report to the SEC, received a collective single payment for having “provided original information” that resulted in a successful enforcement action. As is its custom, the SEC did not provide any further information that the whistleblowers provided about the nature of the violation.

According to the SEC’s announcement, the two whistleblowers were each employed in positions that would have made them the ones responsible for responding to a query letter sent to their employer by a different agency. Their employer received that letter before they had reported their tip to the SEC, which rendered their tip technically involuntary and did not qualify them for a whistleblower award, according to the SEC. As stated in the SEC’s order, “[N]onetheless, [the SEC] ha[s] determined that it is appropriate in the public interest and consistent with the protection of investors that we exercise our discretionary authority…to waive the ‘voluntary’ requirement…in light of the unique facts and circumstances of this case.” This decision was partially due to the fact that the whistleblowers did not learn of the agency’s investigation until after they had reported to the SEC, according to the SEC’s order.

Including these settlements, 64 total whistleblowers have received awards totaling more than $684 million, pursuant to the SEC’s whistleblower program, since the program’s inception in 2012.

House of Representatives Financial Services Committee Advances Bill that Would Amend Dodd-Frank’s Whistleblower Provisions

On May 8, 2019, the House Financial Services Committee passed H.R. 2515, entitled the “Whistleblower Protection Reform Act of 2019.” H.R. 2515 would amend Section 922 of Dodd-Frank to extend the statute’s anti-retaliation protections to whistleblower employees who report alleged misconduct internally. This amendment aims to clarify that Dodd-Frank’s anti-retaliation provision applies equally to employees who report alleged misconduct directly to the SEC and to employees who only report alleged misconduct to their employers. In 2018, the United States Supreme Court ruled in Digital Realty Trust, Inc. v. Somers, 583 U.S.___, 138 S.Ct. 767 (2018) that the plain language of Section 922 extends anti-retaliation protection to those who report misconduct directly to the SEC.

Fourth Circuit Vacates Department of Labor Administrative Review Board Ruling Finding Company Violated Sarbanes-Oxley Act in Firing Employee

In a recent decision, the Fourth Circuit Court of Appeal vacated a May 2017 ruling by the Department of Labor’s Administrative Review Board, finding that Northrop Grumman Corp. (Northrop) violated provisions in the Sarbanes-Oxley Act (SOX) prohibiting retaliation against whistleblowers. The whistleblower in that case was an employee who raised concerns to company executives about various internal policies, including the company’s arbitration program and certain ethics requirements.

The three-judge panel of the Fourth Circuit Court of Appeal held that the whistleblower’s activity, which included emailed complaints to Northrop executives, did not fall within the six categories of illegal conduct listed in SOX’s whistleblower provision that whistleblowers are protected for reporting. As a result, the Fourth Circuit remanded the former employee’s SOX case to the Department of Labor with orders that the case be dismissed. In support of its ruling, the Fourth Circuit stated, “…Congress limited the categories of activity to which the [SOX whistleblower] provision applies…. The DOL’s position would in effect ignore the parameters of the statute and improperly expand the scope of the provision beyond the plain limitations of its text.”

SOX’s whistleblower provision protects employees at publicly traded companies who report improper behavior that relates to six types of fraud, including wire fraud, bank fraud, and/or violations of the U.S. Securities and Exchange Commission rules. The Fourth Circuit’s decision emphasized that individuals who pursue SOX whistleblower claims must meet each prong of a four-prong legal test for their claims to proceed, including that they engaged in activity that SOX protects. To do so, employees must show that they reasonably believed that the conduct they were complaining of related to one or more of the six categories of fraud that SOX’s whistleblower provision lists. The Fourth Circuit’s panel further emphasized that “[t]he requirement that the information provided relate to one of the six specified categories is crucial.”

The case is Northrop Grumman Systems Corp. v. Department of Labor, Case Nos. 17-1811 and 17-2204, in the U.S. Court of Appeals for the Fourth Circuit.

S.D. N.Y. Dismisses SOX and Dodd-Frank Whistleblower Claims Asserted Against Private Company

In early June, the U.S. District Court for the Southern District of New York granted an employer’s motion for summary judgment, thereby dismissing whistleblower retaliation claims against it under the Sarbanes-Oxley Act (SOX) and under Dodd-Frank. Importantly, the court explicitly found that the alleged whistleblowing did not involve fraud related to a public company, which is a prerequisite for liability under SOX.

The plaintiff, a former employee of the defendants, was hired as president of one of the defendant entities that developed and provided software used at the defendants’ restaurant and concession facilities in airports. During the plaintiff’s tenure, the defendants ran a test that involved offering video games, for a fee, on iPads at its restaurants in a single airport concourse. Those iPads displayed the logo of the airline located in that particular concourse. The plaintiff alleged that paywall software installed on the iPads potentially violated third-party licensing agreements with video game manufacturers. He reported this potential violation to the defendants’ General Counsel, Chief Technology Officer, and Chief Executive Officer, and claimed that the software was fraudulent and illegal. Shortly thereafter, the plaintiff was fired. The plaintiff then filed his lawsuit claiming that his termination constituted retaliation in violation of SOX’s and Dodd-Frank’s whistleblower protections for reporting the defendants’ allegedly fraudulent scheme.

The defendants argued in their summary judgment motion that they are not subject to SOX because they are not publicly traded companies and were not acting on behalf of the airline in whose concourse they ran their software test (which is a public company) by implementing the paywall system on iPads displaying the airline’s logo. The plaintiff argued that a private contractor, like the defendants, does not need to act on behalf of a public company in order to be subject to SOX’s whistleblower provisions. The court disagreed and dismissed the plaintiff’s SOX claim, ruling that a contractual relationship alone is insufficient to impose liability upon a private company under SOX. The plaintiff otherwise failed to provide evidence that could lead a reasonable juror to infer that the defendants performed the paywall software test on behalf of the airline, or that the airline had any specific involvement with the software test. The court further reasoned that imposing liability on the defendants would be contrary to SOX’s purpose because the alleged fraudulent activity did not relate to a public company. The court went on to dismiss the plaintiff’s Dodd-Frank claims, clarifying that Dodd-Frank only protects whistleblowers from retaliation for making external disclosures required by SOX (i.e., reporting to the SEC).

The case is Tellez v. OTG Interactive, LLC, et al., No. 15 CV 8984-LTS-KNF, in the United States District Court for the Southern District of New York.