Dodd-Frank Act: Robust Protections and Substantial Rewards for Whistleblowers

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Published on March 8, 2014

Author: lojz11ppt



The Dodd-Frank Act whistleblower provisions reward whistle blowing and protect whistleblowers against retaliation. The Dodd-Frank Act creates a robust retaliation action for employees in the financial services industry. The scope of coverage is quite broad in that Section 1057 applies to organizations that extend credit or service or broker loans; provide real estate settlement services or perform property appraisals; provide financial advisory services to consumers relating to proprietary financial products, including credit counseling; or collect, analyze, maintain, or provide consumer report information or other account information in connection with any decision regarding the offering or provision of a consumer financial product or service.
Under the Dodd-Frank Act, an individual who provides original information to the SEC or Commodity Futures Trading Commission (“CFTC”) which results in monetary sanctions exceeding $1 million shall be paid an award of 10 to 30 percent of the amount recouped. See Dodd-Frank Act § 748 (applying to CFTC whistleblowers) and § 922(a) (applying to SEC whistleblowers). The amount of the reward is at the discretion of the respective commission and factors to be considered in calculating the amount of the award include the significance of the information provided by the whistleblower, the degree of assistance provided by the whistleblower, the interest of the respective commission in deterring violations by making awards to whistleblowers, and other factors that the each commission may establish by rule or regulation. Id. An award shall not be paid to a whistleblower who has been convicted of a criminal violation related to the judicial or administrative action for which the whistleblower provided information; who gains the information by auditing financial statements as required under the securities laws; who fails to submit information to the SEC as required by an SEC rule; or who is an employee of the DOJ or an appropriate regulatory agency, a self-regulatory organization, the Public Company Accounting Oversight Board or a law enforcement organization. Id. Sections 748 and 922 of Dodd-Frank are not qui tam provisions, i.e., the whistleblower cannot pursue an action if the SEC or CFTC decline to act on the whistleblower’s disclosure.

Whistleblower Provisions of the Dodd-Frank Act Jason M. Zuckerman The Employment Law Group® Law Firm Tel: 202.261.2810 Fax: 202.261.2835

Agenda • New SEC whistleblower reward and protection • New CFTC whistleblower reward and protection • New protection for financial services employees • Amendments to Sarbanes-Oxley Act (SOX) • Amendments to False Claims Act (FCA)

Dodd-Frank Act • Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) – Historic change in the regulation of U.S. financial institutions and markets – Requires private equity firms and hedge funds that manage over $100 million to register with SEC – Establishes new Bureau of Consumer Financial Protection (CFPB) within the Federal Reserve – Creates new whistleblower reward programs – Expands whistleblower protections

§ 922 –SEC Whistleblower Reward and Protection

§ 922 • Rewards whistleblowers (including nonemployees) who report corporate fraud or wrongdoing • Protects whistleblowers from employer retaliation • Modeled after IRS Whistleblower Program

§ 922 • SEC must reward individuals who provide “original information” that leads to “monetary sanctions” exceeding $1 million • Reward ranges from 10% to 30% of the amount recouped

“Monetary Sanctions” • “Any monies, including penalties, disgorgement, and interest, ordered to be paid;” and • “Any monies deposited into a disgorgement fund or other fund pursuant to Section 308(b) of [SOX], as a result of such action or any settlement of such action.”

Amount of § 922 Reward • Factors SEC will consider: –Significance of the information provided –Degree of assistance –Interest of SEC in deterring violations –Other factors SEC may establish by rule or regulation

“Original Information” Requirement • Information: – Derived from the independent knowledge or “analysis” of the whistleblower; • Harry Markopolos’s analysis of Madoff’s scheme – Not known to the SEC from another source unless whistleblower is the original source; and – Not exclusively derived from a government hearing, report, audit, or investigation or the news media unless whistleblower is a source

“Original Source” • “Original source” is not defined in the statute • IRS Whistleblower Program, 26 U.S.C. § 7623 – “original source” means the individual originally provided “the information resulting in the initiation of the action” • False Claims Act, 31 U.S.C. § 3730 – “original source” means “an individual who either • Prior to a public disclosure, has voluntarily disclosed to the Government the information on which these allegations or transactions are based; or • Has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.”

Bars to Reward • § 922 prohibits SEC from rewarding whistleblowers who: – Are convicted of a crime related to the matter; – Gain the information from auditing statements as required by law; – Fail to submit the information to the SEC as required by law; or – Are employed by the DOJ, regulator, Public Company Accounting Oversight Board, or law enforcement

Persons Eligible for § 922 Reward • Internal audit and compliance personnel are eligible for a reward • In-house legal personnel, but SEC might be reluctant to accept privileged information • Employees who learn of violations in the course of performing their job duties

Appealing SEC Reward Determination • SEC has sole discretion • No qui tam provision • Can appeal reward determination only where reward amounts is not between 10% and 30%

§ 922 Whistleblower Protection • Private right of action – No administrative exhaustion requirement – Exempt from mandatory arbitration agreements – Cannot waive rights granted under § 922 – SOL is 6 years after retaliation occurred or 3 years after employee should have known of the retaliation but no later than 10 years

§ 922 Protected Conduct • Providing information to the SEC in accordance with § 922; • Initiating, testifying in, or assisting in any investigation or judicial or administrative action of the SEC based upon or related to such information; or • Disclosing information required or protected by SOX, the 1934 Act, and any other law, rule, or regulation subject to the jurisdiction of the SEC.

Overlap of SOX and § 922 Protected Conduct • § 922 protects disclosures that are also protected under § 806 of SOX • Employees may choose to proceed under § 922 rather than SOX because lack of administrative exhaustion requirement • But § 922 does not expressly authorize compensatory damages

§ 922 Actionable Adverse Actions • • • • • • • Termination Demotion Suspension Discrimination Harassment Threatened adverse employment action Courts will likely apply Burlington Northern standard – Any conduct that would dissuade a reasonable employee from engaging in protected conduct

§ 922 Remedies • • • • Reinstatement or front pay Double back pay with interest Attorney’s fees Litigation costs including expert witness fees

§ 748 – New CFTC Whistleblower Reward and Protection

§ 748 • Commodity Futures Trading Commission – Regulates trading of futures, options, and derivatives • § 748 of the Dodd-Frank Act: – Rewards whistleblowers for reporting fraudulent or manipulative trading practices to the CFTC – Protects whistleblowers from retaliation

§ 748 Whistleblower Reward • Nearly identical to § 922 • CFTC has sole discretion to determine amount of the reward • Whistleblower can appeal CFTC reward determination to U.S. Court of Appeals within 30 days

§ 748 Whistleblower Protection • Nearly identical to § 922 • SOL is 2 years after retaliation occurred

§ 748 Protected Conduct • “Providing information to the [CFTC] in accordance with [§ 748]” • Assisting any investigation or hearing related to such information

§ 748 Remedies • • • • • Reinstatement or front pay Back pay with interest Attorney’s fees Litigation costs including expert witness fees “Special damages” – Under SOX, “special damages” construed to include compensatory damages. Kalkunte v. DVI Fin. Servs., ARB Nos. 05-139, 05-140, ALJ No. 2004-SOX-56 (ARB Feb. 27, 2009).

Impact of New Whistleblower Reward Programs • Incentive to get reward may spur employees to bypass internal reporting mechanisms • Underscores importance of encouraging internal reporting, conducting legitimate investigations and keeping concerned employees in the loop. • Update procedures and train employees on options for reporting unlawful or unethical conduct

Recommendations • • • • Self-disclosure Interview departing employees Review releases Training

§ 1057 – Financial Services Whistleblower Protection

§ 1057 Financial Services Whistleblower Protection • Prohibits retaliation against whistleblowers • Covers employers engaged in the “offering or provision of a consumer financial product or service” – Covers “affiliates” who provide a related material service to the employer including • Design, operation, maintenance of those products or services • Processing related transactions • Covers employees performing tasks “related to the offering or provision of a consumer financial product or service”

§ 1057 Financial Services Whistleblower Protection • Examples of Covered Services: – Loan underwriting – Credit rating – Real estate settlement – Property appraisals – Financial advisory services – Credit counseling

Elements 1. Employee engaged in protected conduct 2. Employer knew employee engaged in the protected conduct 3. Employer took adverse action against the employee 4. Protected conduct contributed to adverse action

§ 1057 Protected Conduct • Providing information to an employer, the CFPB, a government regulator, or law enforcement, which the employee reasonably believes relates to the violation of consumer financial protection laws – Reasonable but mistaken belief protected • Assisting any related investigation or hearing • Refusing to participate in an activity that the employee reasonably believes to be a violation of consumer financial protection laws

§ 1057 Protected Conduct • Duty speech defense does not apply • Protects disclosures made “in the ordinary course of the duties of the employee”

§ 1057 Actionable Adverse Actions • “No covered person or service provider shall terminate or in any other way discriminate against, or cause to be terminated or discriminated against . . .” • Courts will likely apply Burlington Northern standard – Any conduct that would dissuade a reasonable employee from engaging in protected conduct

§ 1057 Burden-shifting Framework • Same as Section 806 of SOX • Employee has initial burden of proving by preponderance of evidence that the protected conduct was a contributing factor in the adverse action • Burden then shifts to employer to prove by clear and convincing evidence it would have taken the adverse action even in the absence of employee’s protected conduct

§ 1057 Remedies • “Make whole” relief – Reinstatement or front pay – Single back pay with interest – Compensatory damages – Attorney’s fees – Litigation costs including expert witness fees

Procedures Governing 1057 Claims • • • • Exempt from mandatory arbitration agreements Statute of limitations is 180 days after the date on which alleged violation occurs OSHA investigates and either party can request a hearing before a DOL ALJ If DOL does not issue a final order within 210 days of the filing of the complaint, the employee can remove the claim to federal court and either party can request a jury trial

Amendments to § 806 of Sarbanes-Oxley Act (SOX)

Amendments to § 806 of SOX • Broadens the scope of coverage • Increases the SOL to 180 days after employee becomes aware of the retaliation • Exempts § 806 claims from mandatory arbitration • Clarifies right to jury trial

Broadening SOX Coverage • Dodd-Frank clarifies that § 806 of SOX covers employees of: – subsidiaries of publicly-traded companies when the subsidiary’s financial information is included in the publicly-traded company’s consolidated statements – Nationally Recognized Statistical Rating Organizations and credit rating agencies • Arguably applies to pending cases

Amendments to § 3730(h) of False Claims Act (FCA)

False Claims Act (FCA) • Prohibits direct or indirect submission of fraudulent claims to the government • Includes qui tam provision that allows individuals to bring suit on behalf of the government and obtain up to 30% of the amount recovered – Filed under seal and DOJ decides whether to intervene • § 3730(h) prohibits employers from retaliating against whistleblowers

Dodd-Frank Amendments to § 3730(h) • Extends protection to individuals “associated” with the whistleblower – Supreme Court will consider associational discrimination under Title VII in Thompson v. North American Stainless • Broadens protected conduct to include activity “in furtherance of an action under this section” • SOL is 3 years after retaliation occurred – Prompted by Graham County Soil & Water Conservation Dist. V. U.S. ex rel. Wilson, 545 U.S. 409 (2005) • Court should apply most closely analogous state SOL

FERA Amendments to § 3730(h) • May 2009 Fraud Enforcement and Recovery Act of 2009 (“FERA”) amended § 3730(h): – FCA retaliation provision applies to contractors and agents – Protected conduct includes any efforts to stop one or more violations of the FCA

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