SEC Examines The Way Companies Deal with Whistleblowers

The U.S. Securities and Exchange Commission is looking at whether companies are stifling corporate whistleblowers. The regulator has submitted letters to companies to request a number of documents, including employment contracts, nondisclosure agreements, confidentiality deals, and settlement agreements entered into since the Dodd-Frank Act became law. SEC officials are worried that there has been a backlash against whistleblowers.

Some of the documents come with clauses that get in the way of an employee notifying the government about wrongdoing at the company, as well as about other securities law violations. Firms may even demand that employees give up their rights to benefits from government investigations, which takes away the incentive that is provided by the SEC whistleblower program.

Under the SEC whistleblower program, tipsters may be entitled to receive 10-30% of penalties collected if the information provided results in an enforcement action that brings in sanctions of over $1 million. In 2014, the regulator looked at over 3,600 tips about possible securities law violations. The number of tips has gone up in recent years. The Dodd-Frank Act bars companies from getting in the way of employees submitting such tips.

The SEC also is interested in documents regarding corporate training about confidentiality, as well as those dealing with whistleblowing. They want to see lists of employees that have been fired.

Last year a number of Democrats in the U.S. House of Representatives issued a letter to the SEC pressing the regulator to stop non-disclosure agreements from keeping whistleblowers silent. Often these agreements will contain language that covers more than the proprietary information that is traditionally protected.

On February 6, the SEC submitted an amicus brief notifying the United States Court of Appeals for the Second Circuit that the Dodd-Frank Act’s whistleblower protections cover persons who reported any wrongdoing to their company before they notify the SEC. The brief was in support of appellant Daniel Berman, an ex-employee at Neo@Ogilvy LLC. He was let go after notifying his supervisors.

Since Berman didn’t tell the SEC about the alleged wrongdoing until several months after he was fired, the lower court said that he was not protected under the anti-retaliation provisions of the Dodd-Frank Act. The Commission, however, asserted that Section 21F was added to the Securities Exchange Act of 1934 to make sure individuals who notified an employer about violations first were not undermined. It argued that any other interpretation would weaken its authority to go after employees that retaliate against whistleblowers. The Commission is asking for deference to its interpretation since it is the agency tasked with administering the Dodd-Frank Act.

Companies are not allowed to retaliate against a whistleblower. Unfortunately, that is not always what happens and someone who comes forward may encounter harassment on the job, lost opportunities at work, termination, or career ruin.

This week, New York Attorney General Eric Schneiderman said he would propose legislation that would protect and reward employees that report information about illegal activity in the financial services, insurance, and banking industries. Currently, there is no such law protecting whistleblowers or providing them with incentives in New York.

The bill, known as the Financial Frauds Whistleblower Act, would compensate whistleblowers that voluntarily report fraud. Tips that lead to over $1million in settlement proceeds or penalties would result in compensation for the tipster. The whistleblower’s information would be kept confidential and any employer that retaliates would be breaking the law.

Our SEC whistleblower lawyers are here to help your clients by protecting their rights and ensuring that they get the recovery they are owed.

SEC Probes Companies’ Treatment of Whistleblowers, The Wall Street Journal, February 25, 2015

The SEC’s Amicus Brief (PDF)

A.G. Schneiderman Proposes Bill To Reward And Protect Whistleblowers Who Report Financial Crimes, AG.NY.Gov, February 26, 2015

More Blog Posts:
Whistleblower Earns $57M Payout in Second Lawsuit Against Bank of America, Institutional Investor Securities Blog, December 17, 2014
SEC News: Regulator Grants $30M Whistleblower Award and Charges Washington Investment Advisory Firm $600K for Undisclosed Principal Transaction, False Advertising, Stockbroker Fraud Blog, September 23, 2014

Securities Whistleblower Roundup: Retaliation Lawsuit Against Thompson Reuters Gets Go Ahead & SEC Issues Its Sixth Bounty Award, Stockbroker Fraud Blog, November 14, 2013