According to the article, despite SEC Rule 21F-17(a) making it illegal to “impede” someone from communicating directly with the SEC about a possible securities law violation, many employers are seeking to include clauses in severance agreements that have the effect of doing just that.  Specifically, many employers have sought to include clauses in employment or severance contracts which either (a) force the employee to renounce the right to any award the SEC might provide as a result of the employee’s information, or (b) require the employee to disclose any communications she might have with a government agency and to cooperate with the company in the event of an investigation.

While clauses such as these may not be enforceable, there is little doubt that their inclusion in severance and settlement agreements will have a chilling effect on the willingness of former employees to report a company’s fraudulent activities to the SEC.  As the article implores, the SEC should act now to stem the growth of an apparent effort to discourage whistleblowers from providing information to the commission, which is what Congress sought to incentivize through the SEC whistleblower-reward program that it established through the Dodd-Frank Act.

Cohen pointed out in the New York meeting that this was no reason for concern.  According to an article in Thomson Reuters, Cohen told the audience, “People should take absolutely nothing, absolutely nothing, from the fact that there has been (only) one award.”  Cohen continued, “It’s really the wrong question to ask, quite frankly, for a few years at least.  The rewards will follow, I’m quite sure of that.”  Cohen’s point is a good one, as it generally takes a significant amount of time for the SEC to investigate a tip, take enforcement action, and end up with a successful judgment or judicially approved settlement, particularly when the defendants are large, publicly traded companies with vast resources and formidable teams of lawyers and accountants defending their positions.

Cohen also noted that most of the whistleblowers he had talked to, while perhaps being partially motivated by the potential of a financial reward, were people who were simply tired of having management ignore the concerns they raised internally.  According to Cohen, “the most common thread … almost to a T, is that they believed they tried to tell management about the problem and have it corrected, and were not listened to.”  Cohen also noted that the whistleblower program has significantly aided the SEC’s enforcement efforts, allowing the commission to focus on specific allegations of wrongdoing, rather than wading through large volume of materials generated by broadly written subpoenas.

According to Thomson Reuters, several panelists expressed their concern that companies still might work harder to discredit whistleblowers than address the securities violations that whistleblowers reported them.  However, that is exactly the kind of activity that the anti-retaliation provisions in the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd-Frank Act of 2010 were designed to prevent.  If courts continue to issue decisions interpreting that legislation to create broad protections from retaliation for whistleblowers, as the Third Circuit did recently in Wiest v. Lynch, it will continue to grow increasingly difficult for companies to retaliate against whistleblowers for raising concerns.

Jones was employed as the chief financial officer (“CFO”) of SouthPeak Interactive Corp. when, in May 2009, she became aware of a discrepancy in SouthPeak’s financial reporting, in which Terry Phillips, the company’s Chairman of the Board, advanced $307,400 of his personal funds to enable the stocking of the company’s inventory, but did not report this liability in the company’s financial statements.  Jones made numerous attempts to report the activity internally between June and August of 2009, and finally, on August 12, 2009, filed a complaint with the Securities and Exchange Commission (“SEC”) reporting the company.  Just two days later, Jones was terminated.

Jones filed a complaint with the Occupational Safety and Health Administration (“OSHA”) of the Department of Labor (“DOL”) on October 5, 2009, and on July 23, 2010, after no action on OSHA’s part, notified the agency of her intent to remove the case to district court.  Jones then filed her complaint alleging whistleblower retaliation under SOX and Dodd-Frank with the district court on June 18, 2012, almost three years after her alleged retaliation.

The company advanced two theories upon which the district court should dismiss Jones’ SOX claim, and one theory upon which it should dismiss Jones’ Dodd-Frank claim: (1) Jones failed to exhaust her administrative requirements as to Phillips and SouthPeak’s chief executive officer (“CEO”), Melanie Mroz, prior to filing suit; (2) Jones failed to file her complaint within the two-year statute of limitations applicable to fraud claims; and (3) Dodd-Frank should not apply retroactively to retaliation that occurred prior to the passage of the lawsuit.  The Court addressed each in turn.

The Court first found that Jones had satisfied the administrative requirement to notify OSHA of the potential parties to the lawsuit by listing them in a paragraph entitled “The names and addresses of the company(s) and person(s) who are alleged to have violated the Act (who the complaint is being filed against).”  OSHA then failed to notify the individual defendants that Jones had filed an OSHA complaint against them, but the Court did not find the defendants’ lack of notice dispositive.  Instead, the Court found that “the key question was not whether the defendant was placed on notice that he had allegedly violated the law, rather the OSHA complaint must serve to put OSHA on notice that it was required to investigate the defendants’ actions.”  The Court further noted that it would “simply be wrong to impute to Jones, OSHA’s incompetence.”

The Court next rejected the defendants’ argument that Jones had failed to file within what they stated should be a two-year statute of limitations.  Defendants argued that the statute of limitations should be derived from 28 U.S.C. § 1658(b), which governs private rights of action involving claims of fraud.  The Court found, however, that other courts had restricted the application of the statute of limitations from § 1658(b) to claims that required “proof of fraudulent intent.  This requirement does not exist in SOX retaliation claims, which require a plaintiff only to show that she communicated her subjective and objectively reasonable belief that was occurring.  Accordingly, the Court found that the two-year statute of limitations provided by 28 U.S.C. § 1658(b) does not apply to SOX whistleblower retaliation claims. Instead, the four-year statute of limitations set forth in 28 U.S.C. § 1658(a) governs.

Finally, the Court dismissed Jones’ Dodd-Frank claim, finding that the Dodd-Frank anti-retaliation provision should not apply retroactively.  The Court first noted that courts apply a “robust presumption against statutory retroactivity.”  The Court then turned to the inclusion in Dodd-Frank of a provision allowing for retroactivity for violations of securities laws that occurred prior to the passage of the bill.  The Court noted that rather than this serving as evidence that the anti-retaliation provision should be applied retroactively, the provision actually “appears to cut against Jones’ argument, because the statutory text limits the retroactivity to violations of the provisions of the securities laws, and not retaliations for reporting them . . . courts have generally been willing to infer an intention not to apply a statutory provision retroactively where other provisions in the same statute have been made explicitly retroactive.”  Accordingly, the Court dismissed Jones’ Dodd-Frank claim on the basis that the retaliation alleged occurred prior to the passage of Dodd-Frank.

The plaintiff in the case was Carl Genberg, formerly employed by the pharmaceutical company Ceragenix as a Senior Vice President for Research and Development.  Genberg alleged that he was terminated for informing Ceragenix’s upper-level management that Steven Porter, the company’s chief executive officer, had engaged in insider trading and that Ceragenix had violated several federal securities violations.  The defendants in the lawsuit, Porter and other former executives at Ceragenix (the company has filed Chapter 11 bankruptcy making it judgment proof), argued that the company terminated Genberg for encouraging a friend who owned a large portion of company stock to contact the company’s Board of Directors about Genberg’s accusations, which the defendants argued constituted an attempt to coerce a hostile takeover of the company.

The Court first decided the threshold matter of Genberg’s motion to compel arbitration, dismissing it for failure to prove alter ego or third-party beneficiary status.  The Court then examined Genberg’s claim of retaliation under the Dodd-Frank Act.  Specifically, Genberg alleged that Porter and Jeffrey Sperber, another former Ceraganix executive, retaliated against him in violation of Dodd-Frank by failing to pay Genberg post-termination wages mandated by Genberg’s employment contract.  The defendants responded by arguing that (1) Genberg did not qualify as a “whistleblower” under Dodd-Frank because he did not provide information to the SEC; and, (2) Ceragenix’s failure to pay Genberg’s post-termination wages was not retaliation, it was the result of Ceragenix’s bankruptcy proceedings.

While the Court ultimately agreed with the second contention made by the defendants, and dismissed the case for that reason, it held that Genberg qualified as a “whistleblower” under the Dodd-Frank Act because the term included not just employees who reported information to the SEC, but also employees who make internal disclosures that are “required or protected under the Sarbanes-Oxley Act of 2002.”  Such a clarification is necessary because there exists some tension within the Dodd-Frank Act in that it appears to offer two conflicting definitions of the term “whistleblower” for the purposes of determining who is protected from retaliation by the Act.

Thus far, all four courts to consider the issue have adopted the broader interpretation.  For an in-depth discussion about another court’s analysis of this conflict, see our blog post on the decision by the United States District Court for the District of Connecticut in the case of Kramer v. Trans-Lux Corp.  In Kramer, the Court decided to adopt the broader interpretation largely on grounds of public policy – that the broader interpretation would more effectively enable courts to achieve the statute’s goals of “improve[ing] the accountability and transparency of the financial system.”  In Genberg, on the other hand, the Court relied more heavily on the principles of statutory construction laid out by the Supreme Court in its 2001 decision in TRW Inc. v. Andrews: that a statute “ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.”  In this case, the Court held, adopting the more narrow definition of “whistleblower” would render the section extending whistleblower protections to employees who make SOX disclosures “inoperable and moot,” thus making it the disfavored construction.

Although the district court dismissed Genberg’s Dodd-Frank retaliation claim stemming from the company’s failure to make post-termination payments Genberg alleged he was due, Genberg’s Sarbanes-Oxley claim alleging that his termination was retaliatory survived the motion to dismiss, and he will be given the opportunity to continue to litigate that portion of his case.

Among the study’s other discouraging findings were these: (a) 35 percent of respondents reported feeling pressured by their compensation or bonus plan to violate the law or engage in unethical conduct, and another 25 percent of respondents reported other pressures that might lead to unethical or illegal conduct; (b) over half of hedge fund professionals surveyed reported that the Securities and Exchange Commission (“SEC”) is ineffective in detecting, investigating, and prosecuting securities violations; and (c) 13 percent of respondents reported that it was necessary to engage in unethical or illegal activity to be successful, and another 13 percent responded that they would commit a crime if they could make a guaranteed $10 million and get away with it.

Some positive results from the survey were that: (a) over 90 percent of respondents said that their firms put the best interests of investors first; and (b) over 80 percent of respondents were aware of the Dodd-Frank bounty program, which can provide rewards to whistleblowers who alert the SEC or other government agencies of fraud or illegal activity at their companies.

What can we take away from this survey?  While almost 90 percent of respondents said that they would report illegal activity if they saw it, almost a third said that they had personally witnessed misconduct in the workplace.  Given that, it’s safe to say that we have not seen 26 percent of hedge fund professionals (87 percent of 30 percent) blowing the whistle on workplace misconduct.  This is likely a case where the idea of “doing the right thing” is confronted by  the reality that it is very difficult to report Dave-that-you-play-basketball-with-on-Thursdays for insider trading.  This is why those whistleblowers that do come forward are all the more impressive, and why it is all the more critical that we offer them meaningful protections against retaliation.

On a more substantive level, Ms. Norberg stressed two key points: 1) the importance of the whistleblower protection provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), which provide whistleblowers with safeguards against retaliation from their employers for providing information about possible fraud to the SEC; and 2) the position of the SEC that employers do not have the right to require employers to waive those rights granted to them under the Dodd-Frank Act, or otherwise interfere with the employees ability to report fraud and other misconduct to the SEC.

The Report also gave some encouraging news about developments within the IRS Whistleblower Office during FY 2012.  First, the staff of the Whistleblower Office doubled in size over the course of the year, from 18 at the beginning of the year to 36 at the end, having absorbed the IRS Information Claims Examination (“ICE”) Unit and added additional staff.  Moreover, whistleblower submissions led to the IRS recovering just under $600 million in FY 2012, leading to over $125 million in awards paid to whistleblowers (the great majority of which went to UBS whistleblower Bradley Birkenfeld, whose IRS submission was earned him an award of $104 million).

Tthe Report contained discouraging news as well, at least for whistleblowers who are waiting on awards from the program.  The IRS admits in its report that it typically takes the agency a number of years to analyze, investigate and/or audit, and collect proceeds.  At each stage in the tax administration process, taxpayers have the right to challenge IRS findings, including administrative and judicial appeals, as they should  The IRS notes that the incentive for taxpayers to exercise those rights increases as the amounts in dispute get larger, which can mean a longer timeline for whistleblower submissions alleging larger-dollar noncompliance.  Furthermore, the 671 taxpayers identified as meeting the 7623(b) criteria is the lowest figure in a fiscal year since the initiative began in 2007.

The Report included an important plea to lawmakers for protection against retaliation for IRS whistleblowers.  As the report notes, “Unlike other laws that encourage whistleblowers to report information to the government, section 7623 does not prohibit retaliation against the whistleblower. … [W]histleblowers reporting information under section 7623 may have recourse under state law, but federal law does not appear to provide a remedy.”  The Report goes on to state that while the IRS is committed to protecting whistleblowers’ identities, it is concerned that adverse court decisions could compromise its ability to protect whistleblower confidentiality, and renews its call for Congress to step in and preempt such an issue through preemptive legislation.

Citizens of the state of Washington submitted 102 whistleblower tips to the SEC, the fifth highest number from any state in the country.  The four states whose citizens produced a higher number of whistleblower submissions were California, Texas, New York, and Florida – the four largest state economies in the country.  Those four states combine to form almost 35 percent of the nation’s GDP, whereas Washington accounts for just about 2.5 percent of the country’s economy.

The CNBC article entertained a couple reasons for why the state might be playing an outsized role in SEC whistleblower submissions.  One theory advanced is that the numbers were merely a product of chance – the SEC whistleblower program is only one year old, and the 3,000 tip sample is far from unassailable.  The article also noted, however, that the large number of submissions may have come due to a particular corrupt culture at one or more of the very large corporations which call the state their home, including Microsoft, Amazon, Starbucks, Costco, and, of particular interest right now, Boeing.  Readers of our corporate whistleblower blog might have read last week about the fact that Boeing is currently under investigation following recent failures of the company’s newly released 787 Dreamliner.  While the whistleblowers discussed in that article were focused on concerns of air safety rather than the sorts of financial disclosures which would form the basis of an SEC submission, it remains to be seen what more will come to light about the company.

According to the SEC, the alleged wrongdoing took place between 1999 and 2002.  Notwithstanding the five year statute of limitations imposed on the SEC for bringing a case, the SEC did not file its complaint against Gabelli and Alpert until 2008.  Jeffrey Wall, the attorney arguing the case on behalf of the SEC, was taken to task by both liberal and conservative justices for his assertion that the statute of limitations should begin not at the time of the wrongdoing but instead when the SEC was made aware of the misconduct.  Justice Scalia stated that the SEC’s position was “a brand new assertion by the government,” and Justice Breyer added that the SEC’s position raised “enormous consequences” given that the extended statute of limitations might extend to other government agencies as well.

David J. Marshall, a whistleblower attorney at the D.C. law firm of Katz, Marshall & Banks, thought that the justices critiques made an important point for not just the SEC, but to whistleblowers in general.  “This case should serve as a reminder to whistleblowers that they should report securities violations promptly, so as to provide the SEC with ample time to investigate and make the decision to bring an enforcement action,” said Marshall.

According to Dr. Ben-Artzi, Deutsche Bank was improperly valuing credit derivatives held by the bank in an effort to appear to be weathering the financial crisis much better than other banks.  Given that Deutsche Bank held a portfolio of between $120 and $130 billion of the so-called Leveraged Super Senior (“LSS”) tranches of derivatives, making it the largest holder of LSS trades in the marketplace, misrepresenting the value of those derivatives could make a significant difference on the bank’s apparent financial performance.  If Dr. Ben-Artzi is correct about these alleged misrepresentations, countless investors may have been harmed.

In addition to the tip Dr. Ben-Artzi submitted to the SEC, he has also filed a complaint with the Department of Labor (“DOL”) alleging that he was retaliated against when he reported his concerns to his supervisors at Deutsche Bank.  According to GAP, after Dr. Ben-Artzi started to escalate his concerns outside of his direct chain of command, he was subjected to severe hostility, isolated, denied access to records necessary to perform his job, and was stripped of responsibilities. In November 2011, shortly after returning from paternity leave, Deutsche Bank informed Dr. Ben-Artzi that his position had been moved to Europe and laid him off without warning.  Deutsche Bank refused to provide Dr. Ben-Artzi with the chance to move with his job or with the opportunity to find a new position within the financial institution.

In addition to the financial incentives for whistleblowers provided by Section 922 of the Dodd-Frank Act, corporate whistleblowers are also protected from retaliation by the Sarbanes-Oxley Act of 2002 (“SOX”).  Section 806 of SOX created a new civil action for employees of publicly traded companies who faced retaliation for providing information about, or participating in investigations relating to, what they believed to be violations of securities laws on the part of their employers.  Importantly, while the employee must reasonably believe the employer is engaged in fraud or a violation of securities laws, he need not be right in that belief. As long as the employee’s belief is reasonable, the employer cannot retaliate against the employee for speaking out, even if the belief ultimately proves to be wrong.  What this means is that Dr. Ben-Artzi need not successfully prove that Deutsche Bank actually engaged in the systemic securities fraud that he alleged in order to succeed in his retaliation claim.  Instead, he need only prove that his concerns were reasonable and that they played a role in the bank’s decision to terminate him.