What is perhaps the most controversial section of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as “Dodd-Frank”), the whistleblower bounty provision, just exploded. On October 1, 2013, the Securities and Exchange Commission (the “SEC”) announced a payment of more than $14 million to an unidentified whistleblower. Under the Dodd-Frank whistleblower provision, individuals who report information to the SEC relating to a securities law violation may be entitled to a monetary reward.
To date, three bounty awards have been announced. The first award in August 2012 was for less than $50,000 and was largely ignored, as was a second award a year later for approximately $125,000 that was shared by three individuals. During 2012, the first full year the bounty program was in effect, the SEC reported receiving approximately 3,000 whistleblower submissions as well as more than 3,000 hotline phone calls. With the announcement of this latest, substantial award, however, employees and plaintiff’s lawyers are now paying attention to the bounty program.
Employers, with good reason, are (and if not, they should be), concerned that employees will be lining up to provide the SEC with information pertaining to financial violations and regulatory failures in the hopes of obtaining a large payout. The SEC is encouraging employees to come forward with incriminating evidence to assist its mission to protect investors and enforce federal securities laws with the promise of big cash awards. Here’s generally how it works: An individual, or two or more individuals acting jointly, who voluntarily provides the SEC with original information relating to a securities law violation, which information leads to a successful enforcement action recovering a monetary penalty of more than $1 million, qualifies as a “whistleblower” entitled to receive a financial award between 10 and 30% of the ultimate recovery. Even if the SEC is already aware of the issue or is in the process of investigating, or both, the individual may still be eligible for an award provided that the information supplied materially adds to what is already known. Confidential complaints are allowed as long as the whistleblower has counsel submit and verify the information provided.
In an effort to maximize the willingness of employees to step forward with information, and to protect those who do, the SEC has coupled the bounty provision with robust anti-retaliation provisions. Thus, the SEC is broadcasting to employees the message that it wants their help to root out corruption, will pay generously for their assistance—and the employees will have job protection if they help. The SEC has the power to bring a complaint of retaliation on an employee’s behalf, and its representatives have indicated that they are looking for appropriate test cases.
Dodd-Frank’s anti-retaliation protections have teeth. Retaliation is defined broadly, and covers discharge, demotion, threats, and direct and indirect harassment as well as any other discriminatory conduct. There is, however, active debate as to whether or not foreign nationals can receive protection here – certainly some recent court cases have said no.
It is frightening for employers to contemplate this scenario, but employees may choose to use anti-retaliation protections as a sword rather than a shield, meaning that an employee who anticipates termination, demotion or an adverse employment action for whatever reason may bring information to the SEC in order to immunize him or herself from an adverse action with the protection afforded whistleblowers under the law. Employees do not have to recover a bounty to be protected. Nor do they have to provide information relating to an actual securities violation. Rather, employees simply have to have a “reasonable belief” that the information relates to a “possible” securities violation, a fairly low standard.
However, a small ray of hope for employers is that if employees only complain about alleged violations internally, without going to the SEC – and are then fired or subjected to other adverse employment actions – Dodd Frank’s anti-retaliation provision may not protect them in that situation. Current courts also seem split on this.
Because of that loop hole, however, the fear is that employees will bypass any internal mechanisms and go directly to the SEC. The rules, however, anticipate a hybrid approach to put the employer on notice first. An employee who raises an issue internally first, and then goes to the SEC within 120 days (as required for award eligibility), is supposed to get a higher percentage payout than one who goes straight to the SEC. Nonetheless, unless the award differential is quantified and communicated, it may not have much impact.
What can employers do to counteract the allure of Dodd-Frank’s rewards and protections? There are measures that could hopefully slow down any trend towards circumventing the internal reporting mechanisms and heading straight to the SEC. First and foremost, employers must establish and maintain a culture in which ethics and accountability are valued and rewarded. The workforce should receive training in corporate compliance and where to report concerns about misconduct or compliance lapses. Management should be trained on how to respond to questions, concerns and complaints about ethics, financial irregularities and any other questionable practices and ensure that employee complaints about these issues are treated seriously and not ignored by the mangers receiving them.
Companies must have robust policies and procedures, in multiple languages where appropriate, for employees to make complaints, including anonymous complaints. The complaint procedure should be accessible 24/7, if appropriate. Additionally, employers must establish clear, written procedures for prompt, comprehensive, objective internal investigations. All such policies and procedures must be communicated in writing, at least on an annual basis, to employees. All complaints, and actions taken to investigate and respond to complaints, should be documented, and the investigations should be conducted in an impartial manner. Employees should be encouraged in writing and in periodic training sessions to raise questions and concerns with management. An obligation to report legal violations or compliance lapses should be included in a company’s Code of Conduct. Moreover, a demonstrated commitment to compliance and ethics should be assessed in performance reviews and rewarded as appropriate. Lastly, the commitment towards ethical conduct, compliance, integrity and transparency must be demonstrated at the highest levels of the organization or employees may look elsewhere for relief.
While there is no guarantee that employers can avoid having employees go directly to the SEC with real or imagined violations, taking these actions and creating a culture where ethics and compliance are expected, and respected, could go a long way to helping to protect the company.
By Joel J. Greenwald, Esq., managing partner of Greenwald Doherty, LLP, an Employment and Labor law firm, representing exclusively management.