SEC Charges Financial Services Firm with Violating Rule Protecting Whistleblowers

On June 23, 2021, the SEC announced settled charges against broker-dealer Guggenheim Securities for violating SEC Rule 21F-17, which prohibits taking action to impede a whistleblower from communicating with the SEC staff about potential securities law violations. See Order here. The SEC’s order found that the firm, in its compliance manual and in training presentations, instructed employees that they could not initiate contact with a regulator without approval from the firm’s legal or compliance department. In response to the SEC’s inquiry, the firm removed the objectionable language¹ and added language advising employees of their right to contact regulators.² The firm agreed to a cease-and-desist order and paid a civil penalty in the amount of $208,912 as part of the settlement of the matter.

SEC Whistleblower Program Awards Break Another Record in Second Quarter of 2021

The SEC Whistleblower Program distributed awards, in the second quarter of 2021, totaling approximately $178 million to whistleblowers who provided information that led to successful enforcement actions by the SEC and related actions by other federal agencies. This topped the previous record of $176 million in awards paid in the fourth quarter of 2020. Notable awards issued this quarter include:

• On June 21, 2021, the SEC announced an award of nearly $4 million to a whistleblower who provided information to the SEC that caused the opening of an investigation. The whistleblower participated in hours of telephonic interviews, communicating dozens of times with the SEC. The whistleblower also identified key witnesses and provided documents to the SEC.

• On June 2, 2021, the SEC announced awards of approximately $13 million and $10 million, respectively, to two whistleblowers whose substantial information and assistance led to successful actions by the SEC and another federal agency. The assistance provided included submitting information and documents, participating in interviews, and identifying key individuals who engaged in “a complex and fraudulent scheme involving multiple individuals and tens of millions of dollars in ill-gotten gains,” according to Emily Pasquinelli, the Acting Chief of the SEC’s Office of the Whistleblower.

• On May 19, 2021, the SEC announced an award in excess of $28 million to a whistleblower who voluntarily provided information in connection with an SEC enforcement action and a related action by another federal agency.

• On May 17, 2021, the SEC announced an award of almost $27 million to two claimants who provided SEC staff with new information and assistance during an existing investigation, including meeting with the staff in person on multiple days, resulting in an enforcement action that returned millions of dollars to investors. Lawyers for the whistleblower later said the award related to the settlement of Foreign Corrupt Practices Act claims against a subsidiary of Panasonic Corporation.

• On May 10, 2021, the SEC announced awards of $18 million and $4 million, respectively, to two whistleblowers who provided the SEC with information that was critical to a successful SEC enforcement action against a financial services firm. One whistleblower received $18 million in recognition of being the initial source of the investigation, while the second whistleblower submitted helpful information after the investigation was underway.

Congress Addresses CFTC Whistleblower Program Funding

President Biden signed into law on July 6, 2021, a bipartisan temporary funding bill for the Commodity Futures Trading Commission Whistleblower Program, Pub. L. No. 117-25. The law will allow the CFTC to continue operating while also paying out a whistleblower award of $100 million to a former Deutsche Bank AG executive. The contemplated award is in connection with information the whistleblower provided that helped the CFTC and the Justice Department in investigations concerning Deutsche Bank’s alleged manipulation of the London interbank offered rate (Libor), which led to roughly $2.5 billion in settlements in 2015. Without the new law, a $100 million award could have shuttered the Program, which pays for both operating expenses and whistleblower awards out of a single operating fund that is itself capped at $100 million. Pursuant to the Dodd-Frank Act, all proceeds from successful enforcement actions in excess of $100 million are diverted typically to the U.S. Treasury. Under the new law, the CFTC is allowed to divert up to $10 million from this operating fund into a separate account to pay operating expenses, thereby freeing potentially $100 million from the original fund to pay whistleblower awards. This arrangement is set to expire on October 1, 2022.

The timing of this law comes shortly after the CTFC Whistleblower Program marked the milestone of $1 billion in sanctions from successful enforcement actions associated with whistleblowers, on April 23, 2021, after awarding approximately $3 million to an individual who voluntarily provided original information that led to a successful enforcement action.

New Jersey District Court Transfers SOX and Dodd-Frank Whistleblower Claims to Texas for Improper Venue Despite Plaintiff’s Employment and Termination in New Jersey

In Vuoncino v. Forterra, Inc., No. 18-CV-02437, 2021 WL 1589356 (D. N.J. Apr. 22, 2021), the court found venue was improper in New Jersey for whistleblower retaliation claims brought by a New Jersey-based plaintiff against his former employer, a Delaware corporation headquartered in Florida, and its parent company, a Delaware corporation headquartered in Texas. The plaintiff alleged he worked primarily from his home in New Jersey, engaged in protected activity complaining about the company’s practices on the phone and by email from New Jersey, and was terminated at the Newark, New Jersey airport. Despite these connections to New Jersey, the court emphasized, “the question is whether a substantial part of those events or omissions [giving rise to the claims] occurred in this district.” 2021 WL 1589356, at *9 (emphasis in original). Considering the defendants’ motion to dismiss or to transfer venue, the court concluded that “no retaliation occurred in New Jersey.” Id. at *8. To the contrary, because the plaintiff’s “chain of command flowed through [the parent company defendant’s] headquarters in Irving, Texas,” and the allegedly improper conduct occurred there, the court ruled the Northern District of Texas was a proper transferee district for plaintiff’s suit.

Federal District Court Dismisses SOX Whistleblower Claim Because Plaintiff Was Terminated as Part of Reduction-In-Force, Not in Retaliation

In Wickens v. Rite Aid Headquarters Corp., No. 19-cv-02021 (M.D. Pa. Apr. 21, 2021), the court found on summary judgment that the plaintiff, an in-house attorney terminated in a reduction-in-force, had failed to establish a disputed issue of material fact in response to the defendant’s affirmative defense. The plaintiff asserted he had been terminated for reporting insider trading by certain executives. The court disagreed, finding the defendant eliminated plaintiff’s position, along with dozens of other positions, in a reduction-in-force when defendant sold thousands of its retail locations. The court noted the plaintiff had not been replaced but that his responsibilities were “easily” reallocated to others. The plaintiff’s subjective belief that he was terminated as a result of expressing concerns regarding potential insider trading by executives was not enough to overcome the defendant’s motion for summary judgment.

¹ The objectionable language in question provided as follows: “Employees are also strictly prohibited from initiating contact with any Regulator without prior approval from the Legal or Compliance Department. This prohibition applies to any subject matter that might be discussed with a Regulator, including an individual’s registration status with FINRA. Any employee that violates this policy may be subject to disciplinary action by the Firm.” Order 5.

² The revised advisory language included the following: “…nothing in [the GS Manual] prohibits or restricts any person in any way from reporting possible violations of law or regulation to any governmental agency or entity, or otherwise prevent anyone from participating, assisting, or testifying in any proceeding or investigation by any such agency or entity or from making other disclosures that are protected and/or permitted under law or regulation. …Nothing in this Manual, any agreement between GS and its employees, or any GS policy or program requires a person to obtain prior authorization from GS to make any such reports or disclosures to any governmental agency or entity or to notify GS that an individual intends to make or has made such reports or disclosures.” Id., 13-14.