Category: Whistleblower

SEC Issues Two Whistleblower Awards for Independent Analysis

On February 18, the U.S. Securities and Exchange Commission (SEC) announced two whistleblower awards issued to individuals who provided independent analysis to the SEC which contributed to a successful enforcement action. One whistleblower received an award of $375,000 while the other received $75,000.

According to the award order, the whistleblowers “each voluntarily provided original information to the Commission that was a principal motivating factor in Enforcement staff’s decision to open an investigation.”

Through the SEC Whistleblower Program, qualified whistleblowers, individuals who voluntarily provide original information which leads to a successful enforcement action, are entitled to a monetary award of 10-30% of funds recovered by the government.

A 2020 amendment to the whistleblower program rules established a presumption of a statutory maximum award of 30% in cases where the maximum award would be less than $5 million and where there are no negative factors present. The SEC notes that this presumption did not apply to the two newly awarded whistleblowers. According to the SEC, the first whistleblower unreasonably delayed in reporting their disclosure and the second whistleblower only provided limited assistance.

In the award order, the SEC justifies its decision to grant the first whistleblower a larger award than the second. According to the SEC, the first whistleblower’s disclosure included high quality about an issue which “was the basis for the bulk of the sanctions in the Covered Action” whereas the second whistleblower’s disclosure did not touch on this pivotal issue. Furthermore, the first whistleblower provided significant ongoing assistance to the SEC staff while the second whistleblower did not.

Since issuing its first award in 2012, the SEC has awarded approximately $1.2 billion to 247 individuals. Before blowing the whistle to the SEC, individuals should first consult an experienced SEC whistleblower attorney to ensure they are fully protected under the law and qualify for the largest award possible.

Article By Mary Jane Wilmoth of Kohn, Kohn & Colapinto. Geoff Schweller also contributed to this article.

For more whistleblower and white collar crime legal news, click here to visit the National Law Review.

Copyright Kohn, Kohn & Colapinto, LLP 2022. All Rights Reserved.

How Many Whistleblowers Does It Take to Make Flying Safe?

Answer: at least seven. Seven whistleblowers who are either current or former employees of the Federal Aviation Administration (FAA), Boeing, and GE came forward to the U.S. Senate Committee on Commerce, Science, and Transportation (“Committee”) to report safety issues related to “aircraft safety and certification environment at the FAA and within the industry.” In response to these whistleblowers sharing their experiences as aviation industry engineers and the safety issues they observed, the Committee drafted the Aircraft Certification, Safety, and Accountability Act, which was enacted in December 2020.

Whistleblowers initially reported concerns to the Committee following two Boeing 737 MAX-8 catastrophes in 2018 and 2019, incidents which the Committee investigated extensively. The Aircraft Certification, Safety, and Accountability Act extended Federal whistleblower protections to employees, contractors, and suppliers of aircraft manufacturers. Since the passage of the Act, whistleblowers continued to engage with the Committee, alerting the Committee to continuing issues within the aviation industry.

According to the December 2021 “Aviation Safety Whistleblower Report” from the Democratic staff of the Committee, the major issues whistleblowers highlighted include:

Undue pressure on line engineers and production staff

  • One of the whistleblowers reported being in an “untenable position” of both having to test for the FAA and prepare aircraft engines to pass the FAA’s tests.

Line engineers with technical expertise ignored

  • Engineers who raised safety concerns and supply chain non-compliances at Boeing were “sidelined.”

Boeing oversight office in Seattle lacks enough safety engineers

  • Office was “chronically understaffed with only 25 engineers and technical project managers to oversee approximately 1,500 Boeing engineers who act on behalf of FAA.”

FAA certification processes do not require compliance with latest airworthiness standards

  • One whistleblower pointed out that the FAA was using “dated airworthiness standards” to certify aircraft safety and that some issues were “creatively hidden or outright withheld” from the FAA.

FAA’s strong oversight eroded under the Organization Design Authorization (ODA) program

  • The report alleges that the FAA has “over time, increasingly delegated away its authority” which leads to “safety issues at significant costs” in human lives and reputational harm.

FAA and industry struggle with technical engineering capacity necessary for complex aircraft systems

  • Automation in aviation manufacturing presents new safety challenges and demands “a significant amount of technical knowledge at the FAA,” said one of the whistleblowers.

If You See Something, Say Something

Fortunately, the whistleblowers offered recommendations for actions the FAA could take to implement fully the key provisions of the Aircraft Certification, Safety, and Accountability Act. They proposed more direct supervision of ODA staff by the FAA and that the FAA should ensure engineers with sufficient technical expertise are part of Boeing’s Aviation Safety Oversight Office (BASOO). As the whistleblowers pinpointed that some of the safety issues with the Boeing 737 MAX-8 may have stemmed from rushed production schedules and “undue pressure,” they recommended a review of Boeing’s safety culture. Other sections of the Aircraft Certification, Safety, and Accountability Act that the whistleblowers allege FAA has not yet addressed include: requiring that aviation manufacturers implement safety management systems, limiting delegation of certain safety tasks, performing an annual safety culture assessment within the Administration, and mandating an “integrated aircraft safety analysis of designs.”

These whistleblowers are a prime example of industry insiders using their expertise to highlight safety issues and possible wrongdoing that affect taxpayers (funding the FAA) and consumers (everyone who flies on an airplane). The Committee’s report notes, “Whistleblowers perform a critical public service by exposing wrongdoing in the government and private sector.” Aviation manufacturing insiders with information about safety violations are encouraged to step forward, as they can help thwart wrongdoing and preserve the future of safe air travel.

This article was written by Eva Gunasekera and Renee Brooker  of Tycko & Zavareei law firm. For more articles about whistleblowing, please click here.

 

Sixth Circuit Clarifies When Statute of Limitations Commences in False Claims Act Whistleblower Retaliation Cases

On January 10, 2022, the Sixth Circuit held in El-Khalil v. Oakwood Healthcare, Inc., 2022 WL 92565 (6th Cir. Jan 10, 2022) that the statute of limitations period for a False Claims Act whistleblower retaliation case commences when the whistleblower is first informed of the retaliatory adverse employment action.

El-Khalil’s False Claims Act Whistleblower Retaliation Claim

While working as a podiatrist at Oakwood Healthcare, El-Khalil saw  employees submit fraudulent Medicare claims, which he reported to the federal government. In 2015, Oakwood’s Medical Executive Committee (MEC) rejected El-Khalil’s application to renew his staff privileges.  After commencing a series of administrative appeals, El-Khalil found himself before Oakwood’s Joint Conference Committee (JCC) on September 22, 2016. The JCC, which had the authority to issue a final, non-appealable decision, voted to affirm the denial of El-Khalil’s staff privileges.  On September 27, 2016, the JCC sent El-Khalil written notice of its decision.

Three years later, on September 27, 2019, El-Khalil sued Oakwood for retaliation under the False Claims Act whistleblower retaliation law.  Oakwood moved for summary dismissal on the basis that the claim was not timely filed in that the JCC’s decision became final when it voted on September 22, 2016 and therefore the filing on September 27, 2019 was outside of the 3-year statute of limitations. The district court granted Oakwood’s motion and El-Khalil appealed.

Sixth Circuit Denies Relief

In affirming the district court, the Sixth Circuit held that the text of the FCA anti-retaliation provision (providing that an action “may not be brought more than 3 years after the date when the retaliation occurred”) is unequivocal that the limitations period commences when the retaliation actually happened. It adopts “the standard rule” that the limitations period begins when the plaintiff “can file suit and obtain relief,” not when the plaintiff discovers the retaliation. The retaliation occurred on September 22 when the JCC voted to affirm the denial of El-Khalil’s staff privileges, and the JCC’s September 27 letter merely memorialized an already final decision.

In addition, the Sixth Circuit held that the False Claims Act’s whistleblower protection provision does not contain a notice provision. As soon as Oakwood “discriminated against” El-Khalil “because of” his FCA-protected conduct, he had a ripe “cause of action triggering the limitations period.” The court noted that if an FCA retaliation plaintiff could show that the employer concealed from the whistleblower the decision to take an adverse action, the whistleblower might be able to avail themself of equitable tolling to halt the ticking of the limitations clock.

Implications for Whistleblowers

Some whistleblower retaliation claims have a short statute of limitations and therefore it is critical to promptly determine when the statute of limitations starts to run.  For most whistleblower retaliation claims that are adjudicated at the U.S. Department of Labor, the clock for filing a complaint begins to tick when the complainant receives unequivocal notice of the adverse action.  Udofot v. NASA/Goddard Space Center, ARB No. 10-027, ALJ No. 2009-CAA-7 (ARB Dec. 20, 2011).  If a notice of termination is ambiguous, the statute of limitations may start to run upon the effective date of the termination as opposed to the notice date.  Certain circumstances may justify equitable modification, such as where:

  1. the employer actively misleads or conceals information such that the employee is prevented from making out a prima facie case;
  2. some extraordinary event prevents the employee from filing on time;
  3. the employee timely files the complaint, but with the wrong agency or forum; or
  4. the employer’s own acts or omissions induce the employee to reasonably forego filing within the limitations period.

See Turin v. AmTrust Financial Svcs., Inc., ARB No. 11-062, ALJ No. 2010-SOX-018 (ARB March 29, 2013).

When assessing the statute of limitations for whistleblower retaliation claims, it is also critical to calculate the deadline to timely file a claim for each discrete adverse action or each act of retaliation.  However, in an action alleging a hostile work environment, retaliatory acts outside the statute of limitations period are actionable where there is an ongoing hostile work environment and at least one of the acts occurred within the statute of limitations period.  And when filing a retaliation claim, the whistleblower should consider pleading untimely acts of retaliation because such facts are relevant background evidence in support of a timely claim.

Article By Jason Zuckerman of Zuckerman Law

For more whistleblower and business crimes legal news, click here to visit the National Law Review.

© 2022 Zuckerman Law

CFPB Solicits Whistleblowers to Strengthen Enforcement of Consumer Financial Protection Laws

In its revamped whistleblower webpage, the CFPB is enlisting the help of whistleblowers to provide tips about the following issues:

  • Any discrimination related to consumer financial products or services or small businesses
  • Any use of artificial intelligence/machine learning models that is based on flawed or incomplete data sets, that uses proxies for race, gender, or other group characteristics, or that impacts particular groups or classes of people more than others;
  • Misleading or deceptive advertising of consumer financial products or services, including mortgages
  • Failure to collect, maintain, and report accurate mortgage loan application and origination data
  • Failure to provide or use accurate consumer reporting information
  • Failure to review mortgage borrowers’ loss mitigation applications in a timely manner
  • Any unfair, deceptive, or abusive act or practice with respect to any consumer financial product or service.

The CFPB has also announced that it seeks tips to help it combat the role of Artificial Intelligence in enabling intentional and unintentional discrimination in decision-making systems.  For example, a recent study of algorithmic mortgage underwriting revealed that Black and Hispanic families have been more likely to be denied a mortgage compared to similarly situated white families.

Proposed CFPB Whistleblower Reward Program

Currently, there is no whistleblower reward program at the CFPB and sanctions collected in CFPB enforcement actions do not qualify for SEC related action whistleblower awards.  In light of the success of the SEC’s Whistleblower Program as an effective tool to protect investors and strengthen capital markets, the CFPB requested that Congress establish a rewards program to strengthen the CFPB’s enforcement of consumer financial protection laws.

In September 2021, Senator Catherine Cortez Masto introduced the Financial Compensation for Consumer Financial Protection Bureau Whistleblowers Act (S. 2775), which would establish a whistleblowers rewards program at the CFPB similar to the SEC Whistleblower Program.  It would authorize the CFPB to reward whistleblowers between 10% to 30% of collected monetary sanctions in a successful enforcement action where the penalty exceeds $1 million.  And in cases involving monetary penalties of less than $1 million, the CFPB would be able to award any single whistleblower 10% of the amount collected or $50,000, whichever is greater.

The Financial Compensation for CFPB Whistleblowers Act is cosponsored by Chairman of the Senate Banking, Housing, and Urban Affairs Committee Senator Sherrod Brown and Senators Dick Durbin, Elizabeth Warren, Jeff Merkley, Richard Blumenthal, and Tina Smith. In the House, Representative Al Green introduced a companion bill (H.R. 5484).

A whistleblower reward program at the CFPB could significantly augment enforcement of consumer financial protection laws, including laws barring unfair, deceptive, or abusive acts and practices.  The CFPB has authority over a broad array of consumer financial products and services, including mortgages, deposit taking, credit cards, loan servicing, check guaranteeing, collection of consumer report data, debt collection associated with consumer financial products and services, real estate settlement, money transmitting, and financial data processing.  In addition, the CFPB is the primary consumer compliance supervisory, enforcement, and rulemaking authority over depository institutions with more than $10 billion in assets.

Hopefully, Congress will act swiftly to enact the Financial Compensation for CFPB Whistleblowers Act.

Protection for CFPB Whistleblowers

Although Congress did not establish a whistleblower reward program when it created the CFPB, it included a strong whistleblower protection provision in the Consumer Financial Protection Act of 2010 (CFPA).  The anti-retaliation provision of the Consumer Financial Protection Act provides a cause of action for corporate whistleblowers who suffer retaliation for raising concerns about potential violations of rules or regulations of the CFPC.

Workers Protected by the CFPA Anti-Retaliation Law

The term “covered employee” means “any individual performing tasks related to the offering or provision of a consumer financial product or service.”  The CFPA defines a “consumer financial product or service” to include “a wide variety of financial products or services offered or provided for use by consumers primarily for personal, family, or household purposes, and certain financial products or services that are delivered, offered, or provided in connection with a consumer financial product or service . . . Examples of these include . .. residential mortgage origination, lending, brokerage and servicing, and related products and services such as mortgage loan modification and foreclosure relief; student loans; payday loans; and other financial services such as debt collection, credit reporting, credit cards and related activities, money transmitting, check cashing and related activities, prepaid cards, and debt relief services.”

Scope of Protected Whistleblowing About Consumer Financial Protection Violations

The CFPA protects disclosures made to an employer, to the CFPB or any State, local, or Federal, government authority or law enforcement agency concerning any act or omission that the employee reasonably believes to be a violation of any CFPB regulation or any other consumer financial protection law that the Bureau enforces. This includes several federal laws regulating “unfair, deceptive, or abusive practices . . . related to the provision of consumer financial products or services.”

Some of the matters the CFPB regulates include:

  • kickbacks paid to mortgage issuers or insurers;
  • deceptive advertising;
  • discriminatory lending practices, including a violation of the Equal Credit Opportunity Act (“ECOA”);
  • excessive fees;
  • any false, deceptive, or misleading representation or means in connection with the collection of any debt; and
  • debt collection activities that violate the Fair Debt Collection Practices Act (FDCPA).

Some of the consumer financial protection laws that the CFPB enforces include:

  • Real Estate Settlement Procedures Act;
  • Home Mortgage Disclosure Act;
  • Equal Credit Opportunity Act;
  • Truth in Lending Act;
  • Truth in Savings Act;
  • Fair Credit Billing Act;
  • Fair Credit Reporting Act;
  • Electronic Fund Transfer Act;
  • Consumer Leasing Act;
  • Fair Debt Collection Practices Act;
  • Home Owners Protection Act; and
  • Secure and Fair Enforcement for Mortgage Licensing Act

Reasonable Belief Standard in Banking Whistleblower Retaliation Cases

The CFPA whistleblower protection law employs a reasonable belief standard.  As long as the plaintiff’s belief is reasonable, the whistleblower is protected, even if the whistleblower makes a mistake of law or fact about the underlying violation of a law or regulation under the CFPB’s jurisdiction.

Prohibited Retaliation

The CFPA anti-retaliation law proscribes a broad range of adverse employment actions, including terminating, “intimidating, threatening, restraining, coercing, blacklisting or disciplining, any covered employee or any authorized representative of covered employees” because of the employee’s protected whistleblowing.

Proving CFPA Whistleblower Retaliation

To prevail in a CFPA whistleblower retaliation claim, the whistleblower need only prove that his or her protected conduct was a contributing factor in the adverse employment action, i.e., that the protected activity, alone or in combination with other factors, affected in some way the outcome of the employer’s decision.

Where the employer takes the adverse employment action “shortly after” learning about the protected activity, courts may infer a causal connection between the two.  Van Asdale v. Int’l Game Tech., 577 F.3d 989, 1001 (9th Cir. 2009).

Filing a CFPA Financial Whistleblower Retaliation Claim

CFPA complaints are filed with OSHA, and the statute of limitations is 180 days from the date when the alleged violation occurs, which is the date on which the retaliatory decision has been both made and communicated to the whistleblower.

The complaint need not be in any particular form and can be filed orally with OSHA. A CFPA complaint need not meet the stringent pleading requirements that apply in federal court, and instead the administrative complaint “simply alerts OSHA to the existence of the alleged retaliation and the complainant’s desire that OSHA investigate the complaint.” If the complaint alleges each element of a CFPA whistleblower retaliation claim and the employer does not show by clear and convincing that it would have taken the same action in the absence of the alleged protected activity, OSHA will conduct an investigation.

OSHA investigates CFPA complaints to determine whether there is reasonable cause to believe that protected activity was a contributing factor in the alleged adverse action.  If OSHA finds a violation, it can order reinstatement of the whistleblower and other relief.

Article By Jason Zuckerman of Zuckerman Law

For more financial legal news, click here to visit the National Law Review.

© 2021 Zuckerman Law

SEC Report Details Record-Shattering Year for Whistleblower Program

On November 15, the U.S. Securities and Exchange Commission (SEC) Whistleblower Program released its Annual Report to Congress for the 2021 fiscal year. The report details a record-shattering fiscal year for the agency’s highly successful whistleblower program. During the 2021 fiscal year, the SEC Whistleblower Program received a record 12,200 whistleblower tips and issued a record $564 million in whistleblower awards to a record 108 individuals. Over the course of the year, the whistleblower program issued more awards than in all previous years combined.

“The SEC’s Dodd-Frank Act whistleblower program has revolutionized the detection and enforcement of securities law violations,” said whistleblower attorney Stephen M. Kohn. “Congress needs to pay attention to this highly effective anti-corruption program and enact similar laws to fight money laundering committed by the Big Banks, antitrust violations committed by Big Tech, and the widespread consumer frauds often impacting low income and middle class families who are taken advantage of by illegal lending practices, redlining, and credit card frauds.”

“The report documents that whistleblowing works, and works remarkably well, both in the United States and worldwide,” continued Kohn. “The successful efforts of the SEC to use whistleblower-information to police Wall Street frauds is a milestone in the fight against corruption. Every American benefits from this program.”

In the report, Acting Chief of the Office of the Whistleblower Emily Pasquinelli states “[t]he success of the Commission’s whistleblower program in landmark FY 2021 demonstrates that it is a vital component of the Commission’s enforcement efforts. We hope the awards made this year continue to encourage whistleblowers to report specific, timely, and credible information to the Commission, which will enhance the agency’s ability to detect wrongdoing and protect investors and the marketplace.”

Read the SEC Whistleblower Program’s full report.

Geoff Schweller also contributed to this article.

Copyright Kohn, Kohn & Colapinto, LLP 2021. All Rights Reserved.
For more on SEC Whistleblower Rewards, visit the NLR White Collar Crime & Consumer Rights section.

Don’t Use “Build Back Better” to Sabotage the False Claims Act

Congress is on the verge of setting a dangerous precedent.  As part of the Build Back Better Act, it has added two provisions equivalent to a “get out of jail free card” for Big Banks that violate federal law when they hand out billions in federal mortgage-related benefits.   The two provisions create exemptions to False Claims Act liability by creating blanket immunity from liability when banks fail to exercise due diligence, violate FHA housing regulations, or even directly violate federal laws such as the Truth in Lending Act.

It is obvious why banks want to have their federally sponsored mortgage practices immunized from exposure to the False Claims Act (“FCA”).  The FCA works remarkably well and is widely recognized as “the most powerful tool the American people have to protect the government from fraud.”   The law has directly recovered over $64.450 billion in sanctions from fraudsters since Congress modernized it in 1986.  During the debates on the massive trillion-dollar infrastructure laws enacted or debated this year, corporate lobbyists have been extremely active in successfully preventing Congress from adding any new anti-fraud measures to protect taxpayers from fraud.  As part of these efforts, they targeted the False Claims Act as enemy #1 and already have blocked one key amendment needed to close some weaknesses in that law.

With the Build Back Better Act, these corporate lobbyists have taken their opposition to effective anti-fraud laws to a higher level.  Instead of trying to repeal the FCA, they are simply exempting Big Banks from liability under that law in two new programs.  It is obvious why the Big Banks want the exemption from FCA liability.  As a result of illegal or irresponsible lending and foreclosure practices, such as those that fueled the 2008 financial collapse, banks have had to pay billions in sanctions to the United States.

Two words explain why the FCA is “the most powerful tool” protecting taxpayers from fraud:  Whistleblowers and sanctions.  If you accept federal taxpayer monies, you are required to spend that money according to your contractual agreement or the law.  The FCA’s first secret weapon is whistleblowers.  The law encourages whistleblowers, known as qui tam “relators,” to report violations of the FCA.  Whistleblowers disclosures trigger the overwhelming majority of FCA cases, and the law incentivizes employees to risk their careers to serve the public interest. The second secret weapon is how you prove liability.  Second, when an institution accepts federal monies (such as banks that operate various federally sponsored loan programs), liability can attach if the institution acts in “deliberate ignorance of the truth” when spending federal dollars.  Similarly, if payments are made with “reckless disregard of the truth,” liability can attach.  In other words, corporations (including banks) that accept federal money must ensure that these monies are spent as required by law, regulation, or contract.  Safeguards must be in place to prevent fraud.  If a bank does not have adequate compliance programs to protect against fraud, it cannot plead ignorance when the law is broken and taxpayers are ripped off.

These two key elements of the False Claims Act are precisely what the banking lobby is attempting to undermine through the Build Back Better Act.  The tactics employed by the Big Banks are somewhat devious.  They are doing an end-run around the False Claims Act by exempting themselves from having to engage in any due diligence when spending billions in federal dollars.  The banks are seeking to add language to the Build Back Better Act that will immunize themselves from liability under the False Claims Act when they make payments in “reckless disregard” to the legality of those payments.  The immunities they are seeking legalize “deliberate ignorance” in the use of taxpayer money, in complete defiance of the False Claims Act. Thus, whistleblowers who report these frauds will be stripped of protections they have under the False Claims Act, and the federal government will have no effective way to recover damages from these frauds.

What language in the Build Back Better Act creates an exemption to False Claims Act liability?

Two highly technical provisions are deeply buried within the 2135 pages of the Build Back Better Act’s legislative text. The provisions are sections 40201 and 40202 of the Build Back Better Act.  These two sections establish helpful programs that will provide needed financial support to first-generation homebuyers.  Section 40201(d)(5) would provide $10 billion in down payment assistance. Section 40202(f) would give an interest rate reduction on new FHA 20-year mortgage products to first-time homeowners with a potential value of $60 billion.  But the banking lobby has corrupted these otherwise well-meaning programs. The exemptions obtained by the banks are incubators for massive fraud.  It permits the Big Banks to escape any liability when they abuse the generosity of taxpayers and dole out billions to unqualified individuals.

How do the exemptions work?  To qualify for these taxpayer-financed benefits, an applicant simply has to “attest” that they are first-time/first-generation homebuyers.  That would be the end of the inquiry a bank would need to approve making a payment from the billions allocated in these two programs. Anyone could simply stroll into a bank and “attest” to being such a first-time homebuyer and would thereafter qualify for the federal benefits.  The banks would not be required to do any diligence of their own to confirm the borrower’s eligibility.  Willful ignorance would be legalized.  Reckless disregard in the handling of taxpayer monies would be permitted under this law.  Safeguards, such as requiring banks to adhere to the Truth in Lending Act, which requires verification of a borrower’s statements, would not apply.

Under Sections 40201(d)(5) and 40202(f), banks will not be held liable once they are lied to, even if the bank has reason to know that the borrower is not eligible for the federal payout.  Banks can spend taxpayer money even if the information on an applicant’s loan application directly contradicts the borrower’s attestation that they are a first-time homeowner.  Given the lack of any compliance standards, the temptation to engage in fraud in these programs will be overwhelming.

Permitting banks to escape liability under the False Claims Act opens the door to paying billions of dollars in benefits to unqualified persons.  Such payments rip off the taxpayers and severely hurt all honest first-generation homebuyers denied benefits.  For every fraudster who benefits from this program, an honest homebuyer will be left in the cold due to the reckless disregard of the banks.

Congress should never use a back-door procedure to undermine the False Claim Act, as it sets a dangerous precedent.  It is a devious way to undermine America’s “most effective” anti-fraud law.  Instead of undermining the False Claims Act by granting immunities to Big Banks, Congress should be strengthening anti-fraud laws to protect the taxpayers and ensure that the trillions of dollars spent on COVID-19 relief programs and infrastructure improvement are lawfully spent in the public interest.

Copyright Kohn, Kohn & Colapinto, LLP 2021. All Rights Reserved.
For more articles about banking and finance, visit the NLR Financial, Securities & Banking section.

SEC Awards $40M to Two Whistleblowers: Lessons for Prospective SEC Whistleblowers

On October 14, 2021, the SEC announced that it awarded $40M to two whistleblowers.  According to the order, both whistleblowers provided original information to the SEC that led to a successful enforcement action and provided extensive assistance during the SEC’s investigation.  The first whistleblower received an ward of approximately $32 million and the second received an award of approximately $8 million.  Why did one whistleblower receive an award that is four times greater than the award provided to the second whistleblower? And what can prospective whistleblowers learn from this award determination?

Although the SEC’s order is appropriately sparse (to protect the confidentiality of whistleblowers), it offers some important reasons for the disparity in the two awards:

  • The first whistleblower reported promptly and provided a tip that caused the SEC to open an investigation.
  • The second whistleblower provided important new information during the course of the investigation and was a valuable first-hand witness, but waited several years to report to the SEC. Due to the unreasonable delay in reporting the violations, the SEC reduced the second whistleblowers’ award percentage.
  • Both whistleblowers provided extensive, ongoing cooperation that helped the SEC to stop the wrongdoing, but the first whistleblower provided the information that enabled the SEC to devise an investigative plan and craft its initial document requests. The first whistleblower also “made persistent efforts to remedy the issues, while suffering hardships.”

Lessons for Prospective SEC Whistleblowers

Early Bird Gets the Worm

To be eligible for an award, a whistleblower must first submit “original information.” Original information can be derived from independent knowledge (facts known to the whistleblower that are not derived from publicly available sources) or independent analysis (evaluation of information that may be publicly available but which reveals information that is not generally known).  A prospective whistleblower who delays reporting a violation risks becoming ineligible for an award (another whistleblower may come forward first).

And an unreasonable delay in reporting a violation may cause the SEC to reduce an award.  In making this determination, the SEC considers:

  • whether the whistleblower failed to take reasonable steps to report the violation or prevent it from occurring or continuing;
  • whether the whistleblower was aware of the violation but reported to the SEC only after learning of an investigation into the misconduct;
  • whether the violations identified by the whistleblower were continuing during the period of delay;
  • whether investors were being harmed during that time; and
  • whether the whistleblower might profit from the delay by ultimately obtaining a larger award because the failure to report permitted the misconduct to continue, resulting in larger monetary sanctions.

According to OWB Guidance for Whistleblower Award Determinations, one or more of these circumstances, in the absence of significant mitigating factors, would likely cause the SEC to recommend a substantially lower award amount.

Common reasons that weigh against determining that a delay was unreasonable include:

  • the whistleblower engaging for a reasonable period of time in an internal reporting process;
  • the delay being reasonably attributable to an illness or other personal or family circumstance; and
  • the whistleblower spending a reasonable amount of time attempting to ascertain relevant facts or obtain an attorney in order to remain anonymous.

The significant disparity between the two awards announced on October 14th underscores why whistleblowers should report promptly.

A Whistleblower Can Qualify for an Award for Assisting with an Open investigation

Even though the second whistleblower delayed a few years reporting the violation to the SEC and came forward when the SEC already commenced an investigation, the whistleblower received an award for providing information and documents, participating in staff interviews, and providing the staff a more complete picture of how events from an earlier period impacted the company’s practices.  That result underscores how the SEC’s whistleblower rules permit the SEC to pay awards to whistleblowers that provide information in an existing investigation.  In other words, the fact that the SEC has already commenced an investigation should not cause a prospective whistleblower to forego providing a tip to the SEC.

A whistleblower can qualify for an award if their tip “significantly contributes” to the success of an SEC enforcement action, including where the information causes staff to (i) commence an examination, (ii) open or reopen an investigation, or (iii) inquire into different conduct as part of a current SEC examination or investigation, and the SEC brings a successful judicial or administrative action based in whole or in part on conduct that was the subject of the individual’s original information.

In determining whether an individual’s information significantly contributed to an enforcement action, the SEC considers factors such as whether the information allowed the SEC to bring the action in significantly less time or with significantly fewer resources, additional successful claims, or successful claims against additional individuals or entities.

Whistleblowers are Welcome at the SEC

The SEC issued this $40M award shortly after announcing that it reached a milestone of paying $1B in awards to whistleblowers under the Dodd-Frank SEC whistleblower program.  As of October 14, 2021, the SEC has awarded approximately $1.1B to 218 individuals.

Since assuming the position of SEC Chair earlier this year, Gary Gensler has made several public statements and taken specific actions that suggest that he is a strong proponent of the SEC whistleblower program and is determined to utilize the program to detect, investigate, and prosecute violations of the securities laws.  When the SEC announced that it paid $1B in awards, Chair Gensler stated, “The assistance that whistleblowers provide is crucial to the SEC’s ability to enforce the rules of the road for our capital markets.”

And in remarks for the National Whistleblower Day Celebration, Chair Gensler stated:

The tips, complaints, and referrals that whistleblowers provide are crucial to the Securities and Exchange Commission as we enforce the rules of the road for our capital markets . . . the whistleblower program helps us to be better cops on the beat, execute our mission, and protect investors from misconduct . . . Investors in our capital markets have benefited from the critical information provided by whistleblowers. . . . We must ensure that whistleblowers are empowered to come forward when they see misbehavior; that they are appropriately compensated according to the framework established by Congress; and that those who report wrongdoing are protected from retaliation.

Chair Gensler has also taken action to carry out his commitment to encouraging whistleblowers to come forward.  On August 2, 2021, Chair Gensler suspended the implementation of two recent amendments to the SEC whistleblower rules because these amendments could discourage whistleblowers from coming forward. He directed the staff to prepare for the Commission’s consideration potential revisions to these two rules.

© 2021 Zuckerman Law
For more on SEC and whistleblowing, visit the NLR financial Securities & Banking section.

Protections for Whistleblowers Who Share Company Documents

Frances Haugen, a former product manager at Facebook, recently revealed her identity as the whistleblower who reported Facebook to the U.S. Securities and Exchange Commission (SEC) and provided internal Facebook documents to Congress and to the press. Questions have arisen about what kinds of protections she and other whistleblowers have when it comes to sharing documents with government regulators, Congress, and news outlets. Whistleblowers have a number of protections that allow them to disclose documents, even those that may be deemed confidential; however, the availability of these protections depends on the nature of the documents, the scope of what the whistleblower takes from the company, and to whom she provides these documents.

Documents Related to Securities Violations

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and the Sarbanes-Oxley Act of 2002 (SOX) provide anti-retaliation protections for whistleblowers who share information with specific recipients to report possible securities violations. The SOX anti-retaliation provision, 18 U.S.C. § 1514A, protects employees who report fraud or securities violations to (1) federal regulatory or law enforcement agencies, like the SEC; (2) to a person in the company with supervisory authority over the employee; or (3) to any Congressperson or any committee of Congress. The Dodd-Frank Act’s anti-retaliation provision, 15 U.S.C. § 78u-6(h)(1)(A), prohibits retaliation by an employer against an employee who provides information to the SEC; initiates, testifies in, or assists any SEC action or investigation; or, makes required or protected disclosures regarding securities violations. Under both laws, an employer is prohibited from discharging, demoting, threatening, harassing, or in any way discriminating against whistleblowers as it relates to their employment.

If their employer retaliates against them, whistleblowers may pursue different avenues of relief. Under SOX, whistleblowers may file a complaint with the Secretary of Labor and seek “all relief necessary to make the employee whole,” including reinstatement, back pay, and compensation for any special damages. 18 U.S.C. § 1514A(c). If dissatisfied with the outcome, the whistleblower can seek further administrative and judicial review, but first must exhaust these administrative remedies. 18 U.S.C. § 1514A(b)(2)(A). Under Section 922 of the Dodd-Frank Act, whistleblowers have a private right of action. If an employer violates this provision, the whistleblower may sue directly in federal court. If the whistleblower is successful, she would be entitled to reinstatement, two times the amount of back pay otherwise owed to her, and compensation for litigation costs and attorneys’ fees.

Relevant SEC regulations, such as Commission Rule 21F-17, 17 C.F.R. § 240.21f-17, also protect whistleblowers. This regulation prohibits employers from impeding communications with the SEC about possible securities violations, including by enforcing or threatening to enforce confidentiality agreements. This rule permits an individual to share documents, even those that the company may consider to be confidential, with the Commission in order to report possible securities violations. In Ms. Haugen’s case, according to the Wall Street Journal, Facebook has a confidentiality agreement in place that generally prohibits her from sharing proprietary information, but it allows her to communicate with regulators, Congress, and law enforcement. Other companies may have confidentiality agreements that are written more broadly, which might violate SEC Rule 21F-17.

Only the SEC can enforce this Rule 21F-17, and it has enforced it against companies with confidentiality agreements that impede an employee’s communications with the SEC. In one instance, a company had a provision in its severance agreement that required the departing employee to notify the company about any third-party disclosures. The SEC determined that the agreement violated Rule 21F-17 because it did not exempt communications with the Commission, and therefore created an impediment to a potential whistleblower’s communications with the SEC. The SEC Division of Examinations has also affirmatively reviewed companies’ documents, including compliance manuals, employment agreements, and severance agreements, to ensure that these polices are consistent with the protections afforded to whistleblowers under Rule 21F-17. Therefore, even where there are contractual prohibitions against sharing information with third parties, whistleblowers are nonetheless protected when they share internal documents with the Commission to report possible securities violations.

In addition to anti-retaliation protections, the Dodd-Frank Act created the SEC Whistleblower Program, which incentivizes individuals to come forward with information about possible securities violations. The Program offers monetary awards to whistleblowers who provide the SEC with original information leading to an enforcement action that results in over $1 million in monetary sanctions. A whistleblower’s right to seek an award under the Program cannot be waived by contract, such as a severance agreement, as the Commission concluded in a past order, because the SEC views such a prohibition as an impediment to the whistleblower’s communications with the Commission and therefore a violation of Rule 21F-17.

Documents Related to Fraud on the Government

Government contractors working in the tech industry may also be protected by the False Claims Act (FCA), 31 U.S.C. § 3729, et seq., if they report fraud on the government. The FCA prohibits the intentional presentation of false claims to the government for payment, which can include providing false information in connection with any claim for payment, and it allows private citizens to file a lawsuit on behalf of the government, known as a qui tam action. The FCA also includes an anti-retaliation provision, which prohibits retaliation against individuals who undertake “lawful acts . . . in furtherance of” a qui tam action or “other efforts to stop one or more violations” of the FCA.

In pursuing claims under the FCA, whistleblowers, known as relators in the qui tam context, may disclose documents to the government that their employers consider confidential when these documents are reasonably necessary to support the fraud allegations. For example, a court dismissed counterclaims for breach of contract alleging that an employee-whistleblower violated the confidentiality agreement by disclosing documents to the government and noted the strong public policy that protects whistleblowers from retaliation for reporting allegations of fraud to the government.[1]  However, whistleblowers must be careful not to take documents beyond those that show fraud, and relators who have indiscriminately taken large quantities of documents have not been afforded protections from claims by the employer for breach of contract.[2]

Limitations and Potential Risks of Document Disclosures

While the FCA, SOX, and the Dodd-Frank Act provide robust protections to whistleblowers who report wrongdoing to government regulators, law enforcement agencies, or Congress, these laws do not provide absolute protection. The availability of protection for taking confidential documents depends on what the whistleblower takes, how much material she takes, and to whom she gives it.

If a whistleblower has information that may be deemed attorney-client privileged, for example, she should be careful not to disclose this information to any third party and should speak with a whistleblower attorney before making such a disclosure. Similarly, disclosures made to news outlets are not afforded the same protections as disclosures made to regulators, law enforcement agencies, or Congress. Nearly a decade ago, the Ninth Circuit held that disclosures to media outlets were not protected by SOX.[3]  Whistleblower protections for disclosures made to the press vary depending on the particular state or federal law, as well as the specific context and circumstances of the disclosure,[4] so it is important to proceed cautiously and to seek the advice of a whistleblower attorney before sharing information with media outlets.

Further, if a whistleblower takes information that constitutes an employer’s trade secrets, the employer could sue for misappropriation of trade secrets. Such whistleblowers may have protection under the Defend Trade Secrets Act (the “DTSA”), which includes a safe harbor provision for whistleblowers in certain circumstances. The DTSA provides immunity from civil or criminal liability under any federal or state trade secret law for disclosure of a trade secret that is made either: (1) in confidence to government officials or to an attorney “solely for the purpose of reporting or investigating a suspected violation of law” or (2) in a complaint or other document in a legal proceeding, if that document is filed under seal. Whistleblowers may invoke this immunity when faced with an employer’s claim for misappropriation of trade secrets, but only if they disclosed the documents in one of these two circumstances.[5]

Potential whistleblowers also should consider whether their actions might violate the Computer Fraud and Abuse Act (“CFAA”) if they use their computers to access their employer’s documents to provide support for their whistleblower claims. In general, whistleblowers should not fear prosecution under the CFAA so long as they access a computer with authorization and do not obtain information located in areas on the computer to which their access is prohibited. In Van Buren v. United States, 141 S.Ct. 1648 (2021), the Supreme Court held that an individual violates the law only when she accesses information that she is prohibited from accessing. This ruling protects whistleblowers, who prior to the Court’s opinion may have faced a CFAA claim by the employer for gathering documentary evidence for the purpose of supporting a whistleblower claim even though the whistleblower had not exceeded her authorized access on the employer’s computer. Even so, the interpretation of the CFAA under Van Buren means whistleblowers should be careful not to access areas of a computer that are off limits to them (i.e., specific folders with restricted access for only certain levels of employees to which the whistleblower does not belong), regardless of whether their purpose is to gather evidence to support their whistleblower claim.

Finally, employees should understand that the whistleblower laws discussed above do not protect disclosures to the press. In the case of Ms. Haugen, it is possible that Facebook could pursue an action against her for providing internal documents to media outlets, including claims for breach of contract or misappropriation of trade secrets. KMB partner Lisa Banks spoke with CNN about these potential risks in Ms. Haugen’s case.

Conclusion

Whistleblowers like Ms. Haugen are integral to holding companies accountable and assisting state and federal agencies in investigations against companies that may have engaged in serious misconduct. Strong public policy favors allowing whistleblowers to raise complaints without fear of retaliation from their employers. Whistleblowers have a number of protections available to them if they share documents with government regulators, law enforcement, or Congress, yet they should proceed cautiously and consult with an attorney before disclosing documents to the press. An experienced whistleblower lawyer can assist employees in understanding the scope of their rights and how to proceed in a manner that maximizes the protections and incentives available to them.

[1] See U.S. ex rel. Cieszynski Lifewatch Servs., Inc., 2016 WL 2771798, at *5 (N.D. Ill. May 13, 2016)

[2] See, e.g., U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1062 (9th Cir. 2011) (concluding that the relator’s “grabbing of tens of thousands of documents” was too overbroad and unreasonable to warrant protection from liability for breach of contract for violating the employer’s confidentiality agreement).

[3] Tides v. The Boeing Co., 644 F.3d 809 (9th Cir. 2011).

[4] Compare Pacheco v. Waldrop, 84 F. Supp. 3d 606, 609 (W.D. Ky. 2015) (holding that complaints made to newspapers did not qualify as protected disclosures for the purpose of protections under the Kentucky Whistleblower Act) with Dep’t of Homeland Sec. v. MacLean, 574 U.S. 383, 398-99 (2015) (holding that the federal employee-whistleblower’s public disclosures made to media were not “specifically prohibited by law” and were therefore entitled to protections under the Whistleblower Protection Act); Chambers v. Dep’t of Interior, 602 F.3d 1370, 1378-79 (Fed. Cir. 2010) (concluding that statements made by a federal government employee to a newspaper about a substantial and specific danger to public health or safety were protected disclosures under the Whistleblower Protection Act).

[5] See FirstEnergy Corp. v. Pircio, — F. Supp. 3d —, 2021 WL 857107, at*4-5 (N.D. Ohio Mar. 8, 2021) (concluding that the defendant-employee who shared documents with his attorney, who then provided documents to the government, was protected by the immunity provision of the DTSA because he provided these documents solely for the purpose of reporting a violation of the law).

Copyright Katz, Marshall & Banks, LLP

Article By Alia Al-Khatib of Katz, Marshall & Banks, LLP

For more articles on whistleblowers, visit the NLR Criminal Law / Business Crimes section.

Protections for Employees Who Report Workplace Discrimination

While thousands of employees each year submit complaints of discrimination against their employers, many more experience workplace discrimination and do not submit a formal complaint or even report it internally. A 2016 study by the Equal Employment Opportunity Commission (EEOC) noted that three out of four individuals who experienced harassment never spoke with a supervisor, manager, or union representative about the harassment. Other studies estimate that only one percent of people who experience workplace discrimination file a formal discrimination charge.

Types of Discrimination Charges Filed

Even with a high level of underreporting of harassment and discrimination in the workplace, the EEOC reported that workers filed 67,448 charges of workplace discrimination in fiscal year 2020.[1] The EEOC breaks down the data by the characteristics of the individual who filed the complaint. The breakdown reflects the various bases for protection under federal anti-discrimination laws, specifically disability, race, sex, age, national origin, color, religion, and genetic information. In the EEOC data from fiscal year 2020, retaliation claims made up 55.8% of all charges filed, which was the most common claim asserted. Retaliation claims are often coupled with claims of discrimination because they generally require complaints about, or opposition to, discrimination in the workplace. Because of this overlap in claims and the reality that workers may have multiple characteristics or identities that entitle them to protections, the total of the percentages of the types of claims asserted is greater than 100%.

Following retaliation claims, discrimination claims based on disability were the most common in fiscal year 2020, making up 36.1% of all workplace discrimination claims. Fiscal year 2020 may have seen an even greater increase in disability-related charges due to the COVID-19 pandemic. The EEOC continues to update its guidance periodically on the impact of COVID-19 on workplace discrimination laws related to disability. Discrimination based on race made up 32.7% of claims, and discrimination based on sex made up 31.7%.

The breakdown by category is consistent with charge filing patterns in past years. One study conducted by the Center for Employment Equity of the University of Massachusetts Amherst analyzed all discrimination charges filed with the EEOC (or a comparable state agency) from 2012 to 2016. It determined that discrimination charges based on disability and race were the most common and that disability-related claims had become more frequent than charges based on other protected categories. In an article published by staff at the Center for Employment Equity, they determined that 63% of employees who filed a complaint eventually lost their jobs.

Protections from Retaliation

The data from the EEOC and Center for Employment Equity underscores an unfortunate reality for employees who come forward to report discrimination—they face the possibility of retaliation by their employer, which, at its most extreme, results in a loss of their job. Fortunately, there are legal protections in place for employees who face retaliation for complaining about workplace discrimination.

Employees who engage in protected activity, either by participating in an investigation of workplace discrimination, complaining of workplace discrimination, or opposing discrimination in the workplace, are protected from retaliation. This means that an employer cannot take any “materially adverse action” against these employees. Such actions include anything that would deter a reasonable worker from coming forward to complain about discrimination in the workplace.  This includes actions short of termination, like demotions or salary reductions. The law protects not only current employees and applicants, but also former employees and third parties who have a close relationship with the employee who experienced discrimination. Employees who face retaliation for reporting discrimination in the workplace may be entitled to monetary compensation for the harm caused by the retaliation, including back wages, reinstatement to their former position if they were terminated, compensation for emotional distress caused by the employer’s actions, and reimbursement of their attorneys’ fees and costs.

While no employee should face retaliation for reporting workplace discrimination or harassment, the data demonstrates that it is an unfortunate reality in workplaces. If you believe you have faced discrimination, harassment, or retaliation, you should contact an employment attorney to determine your options and how to proceed.

Importance of Seeking Legal Counsel

The Center for Employment Equity’s analysis highlighted another reality faced by employees who filed discrimination charges with the EEOC. Upon examining the outcome of each charge and excluding charges that were closed because of administrative reasons, it noted that monetary benefits and changes to workplace practices were relatively infrequent. In less than 20% of charges, employees received a monetary benefit.  Less than 10% resulted in changes to employer practices. This data does not account for employees who made complaints of discrimination and were able to reach a resolution with their employer prior to filing a charge.

This data showing the poor outcomes from filing discrimination charges demonstrates the importance of seeking legal counsel if you believe that you have faced discrimination in the workplace. An attorney can advise you on the merits of your claim as well as the appropriate deadlines for filing a charge and lawsuit, and can advocate for you before the employer, both before and after submitting a discrimination charge. For current employees, such advocacy may help to shield you from retaliation or to exit from your employment on more favorable terms. In addition to seeking legal counsel, you can begin to take other steps to assist your case by doing the following:

  • Document the mistreatment you experience.

  • Create a detailed timeline of instances of discrimination, which will assist an attorney who may assess your potential claims.

  • Retain employment-related documents, like employee manuals; employment offer letters and agreements; and information concerning commission, equity, and benefits plans.

  • Do not record conversations without the consent of the other party and without first seeking advice from legal counsel. Each state has different recording law statutes that require all parties or at least one party to consent to recording. It is important not to violate these laws, which can carry civil and sometimes criminal liability.

This list only identifies basic steps that you can take if you believe you have experienced discrimination or harassment in the workplace. If you have faced workplace discrimination, you should consult with an employment attorney for advice on your potential claims

[1] The number of charges filed has decreased steadily in recent years, with 72,675 charges of workplace discrimination filed with the EEOC in fiscal year 2019 and 76,418 filed in 2018. There may be multiple explanations for this decrease, though this year’s decline may be in part explained by the COVID-19 pandemic, which left many employees without work for much of 2020 and required others to work remotely.

This article was written by Alia Al-Khatib of Katz, Marshall & Banks, LLP.
For more articles regarding workplace discrimination, please visit our Labor and Employment News section.

Whistleblower Rewarded Over $2 Million for Exposing Contractor of Military Helicopters That Provided Unsafe Helicopters, Risking the Lives of Military Members Deployed to War Zones

An Illinois-based aviation services company and its subsidiary in Florida have agreed to pay the government $11,088,000 to resolve allegations that they violated the False Claims Act by breaching their contract to maintain military aircraft that were “fully mission capable.”

The aviation service companies own and maintain helicopters.  They had contracted with the Department of Defense to supply helicopters for use in transporting cargo and personnel in support of missions in Afghanistan and Africa.  However, according to a whistleblower, the aviation companies schemed to maximize profits by failing to provide the resources needed to maintain the helicopters.  This resulted in the helicopters not being airworthy.  Yet, the companies continued to certify the helicopters as “fully mission capable.”  Thus, it was alleged, the companies knowingly risked the lives of military personal who were using the aircraft while deployed in war zones and committing fraud against U.S. taxpayers.

The same companies also paid an additional amount to resolve a separate matter brought by the Federal Aviation Administration (FAA) against them for deficiencies in helicopter maintenance work.

This lawsuit originated from a former employee of the aviation service companies who brought suit under the qui tam, or whistleblower, provisions of the False Claims Act. Whistleblower lawsuits allow private parties, known as “relators,” to bring suit on behalf of the government and to share in any recovery, usually 15% to 25% of the settlement amount.  In this case, the whistleblower will receive $2,162,160.  The False Claims Act allows the government to intervene and prosecute an action, as it did in this case.  Fraud in government contracting is often exposed by individuals with knowledge that the fraud is occurring, as in this case. Whistleblowers may be employees, clients, or competitors of the wrongdoer.  Such individuals can use their inside knowledge to bring fraud to the attention of the government, saving lives and protecting taxpayer money.

© 2021 by Tycko & Zavareei LLP