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An apparent win for corporate America in the U.S. Supreme Court’s recent decision that an employer can fire whistleblowers who don’t report their suspicions to the SEC might turn out to be a “big loss,” according to the lawyer who first ran the agency’s whistleblower office.
“People are going to look at their internal compliance programs with a completely different eye, a very skeptical eye” in the wake of the court’s Feb. 21 decision, Sean X. McKessy told Bloomberg Law. In the decision, the court held that the Dodd-Frank Act didn’t bar Digital Realty Trust Inc. from firing an employee who reported possible compliance problems internally but not to the Securities and Exchange Commission. McKessy left the commission in 2016 and is now a partner representing whistleblowers at Phillips & Cohen LLP in Washington.
The decision could prompt whistleblowers to bypass internal compliance procedures and go straight to the SEC to secure retaliation protections, whistleblower attorneys told Bloomberg Law. The decision could turn out to be a case of “be careful what you wish for,” they said.
It could mean an increase in “potentially unnecessary SEC investigations,” David Marshall, a founding partner at Katz, Marshall & Banks LLP’s Washington office, told Bloomberg Law.
Under the court’s decision, whistleblowers must tell the SEC—not just their internal compliance offices—about securities violations to get retaliation protection. In its decision, the court said anti-retaliation provisions in the Dodd-Frank Act didn’t protect Paul Somers, a former real estate investment trust official at Digital Realty Trust, who complained about possible securities law violations, because Somers didn’t report the potential violations to the SEC.
The SEC Office of the Whistleblower connects employees who suspect securities law violations with the agency that enforces those laws. Whistleblowers who provide the SEC with high-quality information that leads to an enforcement action with sanctions of more than $1 million are eligible to apply for a monetary award.
The SEC whistleblower office is busy. It received over 4,400 tips in fiscal 2017—its highest yearly total to date, according to its 2017 annual report to Congress. It has received more than 22,000 whistleblower tips since August 2011. The data doesn’t include whistleblowers who aren’t eligible for an award for a number of reasons, such as being an employee of a self-regulatory organization, law enforcement organization, or the SEC itself.
The office has paid out more than $179 million in whistleblower awards since its first award order in August 2012. Whistleblower complaints—including those that didn’t result in an award—have led to more than $975 million in sanctions, according to the 2017 report.
Corporate employees have always had the option to “report alleged misconduct in the securities arena directly to the SEC,” Scarlett Singleton Nokes, counsel in the government enforcement and investigations practice group at Bradley Arant Boult Cummings LLP’s Nashville, Tenn. office, told Bloomberg Law.
However, “historically, only about 20 percent of the complaints have gone to the SEC,” Nokes, a former federal prosecutor who handled fraud and money laundering cases, said.
Although the decision requires whistleblowers to report directly to the SEC to retain Dodd-Frank protections, internal-only whistleblowers will still have some protections under the Sarbanes-Oxley Act, which “already provides virtually the same scope of protection,” Renee Phillips, a partner in Orrick, Herrington & Sutcliffe LLP’s Washington office who focuses on employment litigation, told Bloomberg Law.
Sarbanes-Oxley, enacted in 2002 in response to major accounting scandals such as at Enron Corp., includes retaliation protections similar to those provided under Dodd-Frank, but often involves following a more complicated process. The older law fell out of favor with whistleblowers after Dodd-Frank’s passage in 2010 provided an easier alternative.
“You get a cause of action in court under Dodd-Frank,” Amar Sarwal, chief legal officer of the Association of Corporate Counsel in Washington, told Bloomberg Law. Sarbanes-Oxley requires employees to take retaliation complaints to the Occupational Safety and Health Administration first. Additionally, “a lot of organizations have protections internally” to encourage whistleblowers to report within their companies, said Sarwal, who is also ACC’s senior vice president of advocacy and legal services.
Companies initially criticized the SEC’s whistleblower program for incentivizing employees to bypass internal programs and go straight to the commission, McKessy said. That didn’t happen, but it might now, given that going to the SEC is the only way to get Dodd-Frank retaliation protections, he said.
“Nobody wanted that to be the law of the land,” McKessy said, calling the decision something out of a “bizarro world.”
McKessy took a lot of “flak” over potential damage to internal programs when he helped the SEC create its whistleblower program, he said. But “if internal compliance programs are destroyed, the first crack in the wall is going to be this decision,” he added.
Marshall, who often represents whistleblowers in retaliation suits, said investors might also suffer if employees fear retaliation and don’t first bring concerns to management with “the ability to address and remedy the misconduct.”
Employee tips are the “lifeblood of any robust and effective internal compliance program,” so companies and their in-house counsel need to make sure they “still get the benefit of those tips,” Sarwal said.
Employers might “have a harder time incentivizing internal complaining” before employees go to the SEC, Nokes said. “But employers that are concerned about this already have rigorous compliance programs in place,” she added. The SEC will still look at the strength of internal compliance programs when investigating firms, so employers have a good reason to keep rigorous programs in place, Nokes said.
Retaliation protections under Dodd-Frank are really “immaterial” to internal compliance programs, Sarwal said. “That the SEC’s position has been rejected isn’t a get-out-of-jail-free card” for companies, he added.
“I think the bottom line for employers is largely the same,” Nokes said. Internal reports “need to be taken seriously, internal investigations have to be thorough, retaliation just cannot be tolerated,” she said.
Still, some attorneys are wary of telling potential whistleblowers to rely on internal procedures.
“I have to think long and hard about advising a client to use an internal compliance function knowing that they’re going to forfeit their protections,” McKessy said. The SEC will have to think carefully about its messaging to potential whistleblowers, too, he added.
Some employer-side whistleblower attorneys told Bloomberg Law the decision might increase the quality of whistleblowing actions, even if it decreases the quantity.
“If an employee who thinks they have a legitimate complaint knows that they have to involve the government as an initial matter, I think that will cause a little more reflection” on whether the complaint is worth bringing, Nokes said.
The decision should also encourage whistleblowers to file suit promptly, said Phillips, co-head of Orrick’s Whistleblower Task Force.
With prompt filing, “meritorious allegations will more quickly come to light, and non-meritorious allegations will be easier for companies to defend,” Phillips added.
The case is Digital Realty Trust, Inc. v. Somers , U.S., 16-1276, 2/21/18 .
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