Whistleblower Development Update for October 2022


First Circuit Denies Extension of SOX Anti-Retaliation Protection to Federal Laws Under SEC’s Enforcement Power

In Baker vs. Smith & Wesson, Inc., No. 21-2019, 40 F.4th 43 (1st Cir. 2022), First Circuit declined to extend SOX’s anti-retaliation protection to whistleblower’s complaint involving violation of “laws within the enforcement authority of the SEC”. The Complainant, a former Smith & Wesson (S&W) employee, reported certain unlawful conduct by S&W employees which he alleged violated a provision of the Foreign Corrupt Practices Act relating to accounting and internal controls. SOX Section 1514A limits whistleblower anti-retaliation protection to claims regarding certain fraud laws as well as “any rule or regulation of the Securities and Exchange Commission.” The plaintiff asserted that the statute’s protections extend beyond the “rules and regulations” of the SEC to “laws within the enforcement authority of the SEC.” The court disagreed. First, the court found that the plain text of Section 1514A “does not include federal laws, such as the FCPA.” Second, the court observed that “any rule or regulation of [SEC]cannot extend to federal laws “because the SEC does not have the power to enact laws.” Finally, the court identified that elsewhere in Section 1514A, Congress specifically cited particular federal laws, none of which included the FCPA at issue. The court overturned the district court’s refusal to grant summary judgment to S&W and remanded it with instructions to enter summary judgment in favor of S&W.

The second circuit requires demonstration of “retaliatory intent” under the SOX anti-retaliation provision

In Murray v UBS Securities, LLC, No. 20-4202 (2d Cir. 2022), the Second Circuit held that SOX Section 1514A requires that an anti-retaliation claim require demonstration of the employer’s retaliatory intent by a preponderance of the proof. Specifically, such intent is intent to “discriminate against an employee…due to” lawful whistleblower activity. The plaintiff, a former strategist in UBS Securities’ commercial mortgage-backed securities business, alleged that two of his superiors “pressured him to misrepresent his research”, and he was later fired in retaliation for reporting this conduct to his direct supervisor. At trial, the district court did not direct the jury that the plaintiff must prove intent to retaliate and dismissed UBS’s objection to that omission. The Second Circuit agreed with UBS that the instruction regarding the intent to retaliate should have been given to the jury. The court found that the ordinary meaning of Section 1514A requires a demonstration of intent to retaliate based on the terms of the statute:discriminate against an employee. due to» denunciation. According to the court, “discriminating” requires a “conscious decision to act” and “due to” means “due to” or “motivated by”. The court found that this amounted to a demonstration of intent to retaliate. The court further observed that its interpretation of Section 1514A requiring such presentation is consistent with its interpretation of the federal Railroad Safety Act, 49 USC § 20109(a). The Second Circuit overturned the jury’s verdict and remanded for a new trial.

The second circuit requires an SEC-covered action as a precondition to the related stock grant

In Hong vs. SEC, No. 21-529, 41 F.4th 83 (2d Cir. 2022), the Second Circuit denied Plaintiff’s motion to review the SEC’s denial of a whistleblower award. The plaintiff had requested a reward after submitting a Report, Complaint, or Reference (TCR) form to the SEC regarding possible violations of securities laws by his former employer. The Federal Housing Finance Agency and the Department of Justice, each investigating the plaintiff’s former employer, learned of the plaintiff’s tip and met with the plaintiff. Although the FHFA and DOJ reached settlements with the former employer, the SEC never sued and never contacted the plaintiff about his tips. In denying the plaintiff’s request for a whistleblower award, the SEC concluded that the FHFA and DOJ actions were not covered actions – that is, actions “brought by the [SEC] under securities laws,” as required by Section 21F of the SEC’s Whistleblower Program Rules. The SEC also rejected plaintiff’s argument that the actions of the other agencies constituted related actions because there was no covered action. Because the actions of the FHFA and the DOJ were not “covered by judicial or administrative action[s]under Section 21F, and because the SEC did not bring a covered action itself, the actions of the other agencies could not constitute “related actions”. The Second Circuit agreed and dismissed the applicant’s request for review.

SEC Passes Whistleblower Rule Changes Offering Whistleblowers Additional Incentives for Non-SEC Actions and Limiting SEC’s Ability to Reduce Reward Size

On August 26, 2022, the SEC adopted two amendments to the whistleblower program rules proposed earlier this year. The First Amendment (to Rule 21F-3) allows the SEC to award whistleblower rewards for related non-SEC actions that might otherwise be covered by another agency’s whistleblower program, even when that other program has the most direct or relevant connection to the related action. In the final rule, the SEC said the amendment will encourage whistleblowers “to report potential violations of federal securities laws when another program has a statutory cap, significantly lower attribution range, or a discretionary allocation structure”. The Second Amendment (to Rule 21F-6) affirms the authority of the SEC to consider the size of a potential award as a reason for changing the amount of the award, but limits any such change to an increase in attribution. Under the amendment, the SEC cannot decrease an award on these grounds. According to SEC Chairman Gary Gensler, these two amendments are intended to “strengthen [the] whistleblower program” and to better “protect investors”. At the same time, in the final rule, the SEC postulated that the impact of the changes “should be small,” but acknowledged that the changes could increase both reward amounts and the number of tips received. With more than $1.3 billion awarded to 278 people since the program’s inception in 2012, nearly half of that in 2021 alone, even a “small” impact could have major implications for would-be whistleblowers and their attorneys in the process. ‘coming.

SEC awards about $40 million to whistleblowers in Q3 2022

On July 15, 2022, the SEC awarded more than $6 million to two whistleblowers who provided critical information and assistance in two separate covered actions. The top prize was over $3 million to a whistleblower who was approached to invest in a product he believed to be misrepresented. The whistleblower quickly alerted the SEC and continued to work with staff after the SEC opened an investigation. The second prize was also more than $3 million to a whistleblower who first reported concerns internally and then subsequently submitted a report to the SEC. The whistleblower also met with the SEC on several occasions to provide additional information throughout the investigation.

On July 19, 2022, the SEC awarded over $17 million to a single whistleblower that sparked the investigation that led to a successful covered action. The whistleblower also provided staff with detailed information and documents, which also led to the success of related action. Accordingly, the SEC said the whistleblower is also entitled to a reward based on the amounts collected in the relevant action.

On August 9, 2022, the SEC awarded more than $16 million to two whistleblowers who provided information and assistance in a successful SEC enforcement action. The first whistleblower received approximately $13 million. They prompted the initiation of the investigation and provided information on hard-to-detect violations as well as identified key witnesses and provided essential information to staff. A second whistleblower was awarded more than $3 million for submitting material new information during the investigation.

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