Dodd-Frank Overhaul Could Spark Rebound in SOX Whistle-Blower Cases

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By Jasmine Ye Han

Legislation to rewrite the Dodd-Frank Act is likely to be voted on in the House this week. But the overhaul envisioned in the Financial Choice Act could have one unintended consequence: a possible rebound in the number of SOX whistle-blower claims filed against companies.

The Financial Choice Act would prevent the Securities and Exchange Commission from awarding “culpable” whistle-blowers that took part in the misconduct they report. The bill would obliterate the SEC’s reasonable approach to culpable whistle-blowers and undermine enforcement efforts at the expense of ordinary Americans and shareholders, Dallas Hammer with Zuckerman Law told Bloomberg BNA.

However, even if the Financial Choice Act becomes law, the employee-friendly standards and broad scope of protected activity under SOX will ensure that whistle-blowers continue to have an effective shield against retaliation, said Hammer, who is of counsel at Zuckerman and is chair of the firm’s whistle-blower rewards practice group. The fundamentals of securities fraud and corporate wrongdoing aren’t going to change.

“And if deregulation breeds more misconduct as it has in the past, whistle-blowers’ role in exposing fraud will be crucial and more pronounced,” Hammer said.

Although Hammer’s speculation is true in theory, it’s equally possible that there’s no tangible impact from the change proposed so far, Sean McKessy with Phillips and Cohen said. McKessy was the first chief of the SEC Office of Whistle-blowers created in 2010 under Dodd-Frank.

What is certain is how whistle-blower claims changed after Dodd-Frank was enacted in 2010 in response to the 2008 financial crisis. The Occupational Safety and Health Administration oversees the whistle-blower program of most laws, including SOX.

The number of whistle-blower claims filed under Sarbanes-Oxley Act fell by more than 10 percent in 2010. The number dropped by about a quarter in 2011 and has never recovered to its pre-2010 level. At the same time, the total number of whistle-blower claims under all statutes has increased by more than 40 percent since 2010, statistics from the DOL whistle-blower program show.

The big drop in SOX case numbers in 2011 is likely related to the passage of Dodd-Frank, Edward Ellis told Bloomberg BNA. Ellis is an attorney with Littler Mendelson, a law firm representing management in employment and labor law matters. Ellis is co-chair of the firm’s whistle-blowing and retaliation practice.

“People aren’t going to OSHA because they don’t have to. They can just go to the court after 2010 because of Dodd-Frank,” Ellis said.

Two other factors might also be at play in the drop in SOX filings, Hammer said. Many specialized laws now have their own whistle-blower provisions, thus taking away from the need for the more generalized SOX claim. Second, the aggressive enforcement under the Obama Administration could have actually reduced misconduct and whistle-blower retaliation, he said.

Many Uncertainties

If Dodd-Frank went away entirely, there would definitely be more attention on SOX, but the Financial Choice Act doesn’t change the retaliation protection provisions under Dodd-Frank, McKessy said. Those include the opportunity to go directly to court to sue the company, reinstatement and double back pay remedies, as well as an extended statute of limitations.

Dodd-Frank also authorized the SEC to punish the company for retaliation. If this were changed, it wouldn’t necessarily affect whistle-blowers’ decision making, McKessy said. “Most people are less interested in the company paying the fine,” he said. Instead, “they are looking for back pay and being reinstated to their job. Those remedies are only available through the SOX method or through the court, which I think will continue to be available.”

In addition, the track record of SOX whistle-blower cases doesn’t provide a lot of promise, McKessy said.

Less than 1 percent of SOX whistle-blowers who filed claims to OSHA won cases on merits between 2006 and 2016, according to Bloomberg BNA’s analysis of investigation statistics released by the OSHA whistle-blower protection program. The program enforces whistle-blower provisions of 22 laws, including SOX.

“So even if folks feel the SEC process for retaliation under Dodd-Frank is no longer as strong, there’s still opportunity to go straight to court,” under Dodd-Frank and not necessarily go through the SOX system, McKessy said. “There is a lot unknown here.”

Even if it turns out there are no detrimental changes to the Dodd-Frank program, any down flow in SOX claims is going to take a long time to shake itself out, McKessy said. “The Senate has a lot on its plate right now, taking on all the reforms the Choice Act proposes to Dodd-Frank is taking some time to work out. If whatever version, if any, of the Choice Act ends up working its way into the system, there will be some time for that to be all calibrated.”

Dodd-Frank: An Alternative to SOX

Dodd-Frank since 2010 has provided an alternate channel for whistle-blowers in the financial sector, practitioners say.

The U.S. Court of Appeals for the Second Circuit, for example, sits in lower Manhattan, less than two miles from Wall Street. Federal courts within the jurisdiction of the Second Circuit may hear cases that can have overlapping issues under Dodd-Frank and SOX, Hammer said. “If you look at Dodd-Frank claims that have been filed in the Second Circuit, I put decent money on it that had Dodd-Frank not been around, all of those claims would be SOX claims.” Hammer said.

Dodd-Frank can provide better remedies than SOX, depending on the case, Hammer said. The most notable difference is that Dodd-Frank provides for double back pay. By contrast, SOX allows a whistle-blower to recover for emotional distress and reputational harm, whereas Dodd-Frank does not. There is no limit to these special damages under SOX.

Ideally, whistle-blowers would bring claims under both statutes, as well as other claims such as wrongful termination under state law, to ensure that their harms are fully redressed. “SOX isn’t the only game in town,” Hammer said.

However, Dodd-Frank covers a much narrower scope then SOX, Tom Devine, legal director of the Government Acountability Project, said. The Government Accountability Project is a whistle-blower protection and advocacy group.

SOX Whistle-Blowers in the Trump Era

President Trump campaigned on less corporate regulation and has promised to repeal Dodd-Frank. The House Financial Services Committee approved the bill (H.R. 10) in early May and the full House is expected to vote on the bill in June. But the bill’s fate in the full House and Senate is uncertain.

“We’ve been hearing from corporate America on how regulatory compliance costs have been keeping business down,” Hammer said. “But there are all these other costs in deregulating. If we dismantle Dodd-Frank we are going to see more misconduct and more retaliation,” he said. And that could lead to more whistle-blower claims reporting that conduct.

However, Ellis said he doesn’t expect drastic changes to SOX’s whistle-blower protection. “Even though Republicans are viewed as in favor of employers, nobody is in favor of fraud,” he said.

Hammer and Devine also agreed that whistle-blower protection is an area of law that enjoys broad support. The bipartisan House Whistle-blower Protection Caucus—which includes Reps. Mike Coffman (R-Colo.), Kathleen Rice (D-N.Y.), Jackie Speier (D-Calif.), and Rod Blum (R-Iowa)—and the Senate Whistle-blower Caucus that includes Sens. Charles E. Grassley (R-Iowa) and Ron Wyden (D-Ore.) serve as proof of that, Devine said.

While SOX itself isn’t expected to change, Hammer anticipates a less employee-friendly review board than there was under the administration of President Barack Obama.

“It might take a few years to get there, but we can definitely see some tightening and some pulling back of those decisions where it makes it harder to bring SOX claims,” Hammer said.

To contact the reporter on this story: Jasmine Ye Han in Washington at yhan@bna.com

To contact the editor responsible for this story: Terence Hyland at thyland@bna.com; Jo-el J. Meyer at jmeyer@bna.com

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