Tag Archives: Whistleblower

Supreme Court Holds 5-Year Statute of Limitations Applies to SEC Disgorgement

On June 5, 2017, by unanimous decision, the U.S. Supreme Court determined that disgorgement – a remedy that generated $3 billion in 2015 – is a “penalty” thereby subjecting it to the 5-year statute of limitations that applies to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.” Kokesh v. SEC, No. 16-529, slip op. at 1 (June 5, 2017) (quoting 28 U.S.C. §2462). The Court’s decision relieved Kokesh of a $30 million disgorgement order entered in the lower court.

The SEC had argued that disgorgement is a different animal – it simply places the defendant in the same position as he or she would have been but for the offense. The Court strongly disagreed noting the deterrent qualities of disgorgement, which is a hallmark of a penalty, “[s]anctions imposed for the purpose of deterring infractions of public laws are inherently punitive.” Id. at 8. The Court observed that the victims (if there are any) of a securities law violation need not participate in the enforcement action and may not even support it. In addition, money that is disgorged to the Treasury often stays there; i.e., there is no absolute requirement that the money that is recovered be distributed to the purportedly aggrieved investors.

Going forward, the SEC is faced with having to speed up its investigations and charging decisions.  That can be a challenge, especially in complex cases where the Enforcement Division would prefer to thoroughly build out a case in advance.

Here is the decision:

https://www.supremecourt.gov/opinions/16pdf/16-529_i426.pdf

 

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Senate Bill Would Increase SEC Penalties To $1 Million And Up

Under a Senate bill, the SEC would be able to administratively impose a maximum $1 million per violation penalty on individuals and a maximum $10 million per violation penalty on financial firms for the most serious (e.g., fraud, deceit) violations.  The current levels are substantially lower — at $181,071 for individuals and $905,353 for firms — though the SEC is empowered to go to federal court to get the equivalent of the ill-gotten gains in a given case.

Under the proposed measure, the SEC would not have to go to federal court to get large remedies, though the total remedy per violation would be capped – the maximum penalty for an individual could not exceed, for each violation, the greater of (i) $1 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.  The maximum amount that could be obtained from entities could not exceed, for each violation, the greater of (i) $10 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.

In addition, individuals and firms that were found civilly or criminally liable for securities law violations in the 5 years leading up to a new violation could face up to three times the new caps, e.g., penalties of $3 million/$30 million.

It is important to note that SEC administrative or “in-house” courts have faced substantial constitutional challenges recently and are often considered subject to agency bias.  At a minimum, it is clear that the SEC courts lack some of the procedural safeguards provided in federal court.  If the Senate bill becomes law, the SEC will have significantly increased leverage in negotiations with respondents not only because of the amounts involved but because the Enforcement staff would not need to go to federal court to get such amounts.

 

 

Employers Beware – SEC Charges Company for Stifling Whistleblower Activity

Employers conducting internal investigations often have employees sign agreements requiring them to acknowledge the confidential nature of employee interviews. Less common are agreements that prohibit employees from discussing the interview with anyone outside the company on the pain of possible termination for such disclosure. On April 1, 2015, the SEC found such an agreement, required by a global engineering firm, to violate SEC Rule 21F-17. That Rule, adopted pursuant to Dodd-Frank, prohibits companies from taking, “any action to impede an individual from communicating directly with the [SEC] about a possible securities violation, including … threatening to enforce a confidentiality agreement.”

The firm, KBR Inc., had required witnesses in internal investigations to sign confidentiality statements with language warning that they could face discipline or be fired if they discussed the matters with persons outside KBR. Although there was no evidence that KBR had actually sought to enforce the confidentiality statement, KBR nonetheless agreed to pay a $130,000 penalty and amend its confidentiality statement to make clear that employees may report potential securities violations to the SEC and other federal agencies without fear of retribution.

Bottom line: Companies conducting internal investigations that want to have witnesses acknowledge the confidential nature of interviews should amend their agreements and statements to reflect that employees may report potential violations to the Government without fear of any adverse employment action. In fact, companies seeking to avoid this problem may want to consult the amended language adopted by KBR in the SEC Order –   http://www.sec.gov/litigation/admin/2015/34-74619.pdf.

SEC Awards Whistleblower-Executive A Half-Million Dollars For “Reporting Out.”

The SEC has doled out over $50 million in awards to 15 individuals since it inaugurated the Dodd-Frank mandated whistleblower program 3 years ago. That program permits whistleblower awards of 10% to 30% of the total money recovered from a securities law violator provided the sanctions exceed $1 million. Whistleblower awards are usually restricted to individuals who provide original information derived from their independent knowledge or analyses. Failure to be deemed an “original” source of information is ordinarily the end of a whistleblower claim.

On March 2, 2015, however, the SEC approved an award of $475,000 to $575,000 to an unnamed executive who merely passed along original information.[1] That award stemmed from a special carve-out designed to incentivize officers and directors to report out where the company fails to take corrective action. Specifically, an executive may be entitled to a whistleblower award if he or she reports information to the SEC 120 days after alerting upper management of the problem. Similarly, if upper management is already aware of the problem at the time the executive learns of it, the executive-whistleblower must wait 120 days before reporting to the SEC.

The rationale for the 120-day rule is two-fold. On the one hand, the SEC wants to protect companies that have robust compliance programs in place and a strong compliance tone from the top. After all, companies who invest in compliance programs and take potential violations seriously should be afforded a safe harbor whereby they are protected from individuals hoping to make a quick buck by passing information along before the 120-day period expires.

On the other hand, the SEC realizes that executives and directors are uniquely placed to take action when upper management will not remedy the problem. Executives regularly receive management and compliance reports and are often the first persons to whom an employee will turn to report an issue. The SEC wants to incentivize such executives to step forward when upper management refuses to take corrective action.

However, an executive considering becoming a whistleblower risks significant reputational and financial harm. Although the whistleblower process is anonymous, upper management at the company may be able to figure out who reported out and may take retaliatory action against that individual.   Or, the individual may have already resigned due to irreconcilable differences with the company. In either case, there is no guarantee of a whistleblower award. Accordingly, executives and directors thinking about “reporting out” should carefully consider the quality of the information they possess and the potential financial and reputational risks.

[1] https://www.sec.gov/news/pressrelease/2015-45.html#.VP79EIHF87M

Whistleblowers (and Companies) Beware – Court Rules That Employees Must “Report Out” to SEC in Order to Claim Whistleblower Status Under Dodd-Frank

On July 17, 2013, the Fifth Circuit Court of Appeals ruled that an ex-employee of a regulated entity, who internally reported alleged violations of the Foreign Corrupt Practices Act (FCPA) but failed to provide the information to the SEC, is not entitled to “whistleblower” status under Dodd-Frank, 15 U.S.C. § 78u-6(a)–(h), and is therefore cut-off from an anti-retaliation lawsuit and possible recovery of enhanced back pay.[1]   In rendering its decision, the Court explicitly rejected the SEC’s own interpretation of the statute, set forth in a final SEC Rule.[2]  The Court also rejected the decisions of the federal district courts that have considered the issue.[3]

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This has tremendous implications, at least in cases arising in the Fifth Circuit, both for employees and their regulated employers.  Employees who want to be treated as a Dodd-Frank whistleblower and take advantage of its enhanced protections will have to provide information to the SEC of violations by the former employer.[4]  That means that the SEC will be involved much earlier in any internal corporate investigations that may be taking place.  This is a bad idea for two reasons.

First, it undermines the extensive statutory and regulatory scheme already in place, which is designed to encourage companies to conduct rigorous internal investigation and then self-report to the SEC and/or DOJ.  For example, under the Sentencing Guidelines, the DOJ’s Principals of Federal Prosecution of Business Organizations, and the SEC’s Cooperation Initiative, “cooperation” credit may be awarded for self-reporting.  Under Asadi, however, corporations may be forced to race to the SEC or DOJ before an employee does without the benefit of knowing if something wrongful has actually occurred.

Second, the rule in Asadi, if widely adopted, has the potential to undo the detailed compliance programs painstakingly put into place by in-house counsel and compliance officers for internal reporting, review, analysis, and disclosure to the government.  If Asadi becomes the law of the land, corporate law and compliance departments will have to substantially overhaul those programs and deal with the uncertainty that it injects into the compliance realm.


[1] See Asadi v. G.E. Energy (USA), LLC, No. 12-20522, 2013 WL 3742492 (5th Cir. July 13, 2013).

[2] See 17 C.F.R. § 240.21F-2(b)(1).

[3] See, e.g., Kramer v. Trans-Lux Corp., 2012 WL 4444820, at *4 (D. Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 994 n. 9 (M.D. Tenn. 2012); Egan v. TradingScreen, Inc., 2011 WL 1672066, at **4-5 (S.D.N.Y. May 4, 2011).

[4] Such persons are still, however, entitled to a private cause of action for retaliation under Sarbanes-Oxley.  See 18 U.S.C. § 1514A.