Posted on 12 Aug 2013 by Neilson
A key unsettled question about protections for whistleblowers is whether tipsters have to take their claims to the Securities and Exchange Commission to qualify. Big U.S. companies have a surprising answer: Yes.
The answer is surprising because companies, alarmed that new rewards for whistleblowers could undermine internal fraud-detection efforts and lead to a flood of regulatory actions, had argued before regulators that employees should raise allegations of corporate wrongdoing with their company first.
But in an effort to escape liability in cases brought by whistleblowers claiming retaliation under the Dodd-Frank financial-overhaul legislation of 2010, they are increasingly claiming that tipsters aren't protected if they didn't go to the authorities.
That viewpoint was the central issue in a recent federal court case brought in Houston. An energy executive named Khaled Asadi sued General Electric Co. (GE) alleging he was fired after he raised concerns internally that GE had allegedly engaged in bribery in violation of the Foreign Corrupt Practices Act.
GE denied the former executive's claims and said his termination had nothing to do with his allegations of bribery. But even if it had, GE argued, Mr. Asadi didn't qualify as a whistleblower, because he never raised the claims with the SEC.
"Without any allegation that he reported a securities-law violation to the SEC, Asadi is not a 'whistleblower' under Dodd-Frank," lawyers for GE argued in court papers.
Last month, the Fifth U.S. Circuit Court of Appeals ruled in favor of GE.
A lawyer for Mr. Asadi, Ronald E. Dupree, said they were considering an appeal to the U.S. Supreme Court.
GE said in a written statement that the company has long encouraged internal reporting and prohibited retaliation against employees who raise concerns. Dodd-Frank contains provisions that shield whistleblowers from retaliation and offers qualified whistleblowers a bounty for reporting wrongdoing.
"GE's consistent position has been that employees should report internally first, with lawsuits and bounties reserved for instances where a company fails to respond appropriately, obliging employees to report to the SEC," the company said in the statement. "The Asadi decision is consistent with this position: Mr. Asadi did not acquire a right to sue or obtain a bounty because he never needed to go to the SEC and never did so before he sued."
UBS AG and Siemens AG have taken similar stances in recent litigation with former employees claiming protection under the whistleblower provisions. Siemens cited the recent Fifth Circuit decision in a brief filed Thursday in the case of a former employee claiming protection. "Congress made clear that an employee qualifies as a 'whistleblower' only upon providing information to the SEC," the brief said.
The issue stems from Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created a rewards program for people who report to the SEC violations of securities laws that lead to an enforcement action. Under the program, whistleblowers can receive as much as 30% of any monetary penalty the agency recovers.
The section also prohibits retaliation against whistleblowers. While employees can seek protection and compensation under other federal whistleblower provisions, the SEC's program is considered especially whistleblower-friendly, in part because it gives employees a long period of time to file suit.
At the heart of the dispute is a quirk in the language that set up the new whistleblower provisions. In one place, it specifically defines a whistleblower as someone who reports information to the SEC, but in another place it says that whistleblowers are protected from retaliation if they report information in a variety of ways.
So far, at least five U.S. district-court judges have held that employees who report suspected violations of securities laws internally can, in most cases, be protected under the Dodd-Frank provisions. But in the suit brought by Mr. Asadi, the Fifth Circuit held otherwise.
GE's argument in that case is in some sense the opposite of the one it and other companies made when the SEC was discussing how to implement the new Dodd-Frank rules three years ago.
After the SEC released its proposed rules on the whistleblower bounty provisions in 2010, the agency received dozens of letters from companies and their lawyers who said the program would undermine internal fraud-detection efforts. Chief among their pleas was that the SEC include a provision that would require whistleblowers to report wrongdoing internally before approaching regulators. GE made that exact argument to the SEC in a Dec. 17, 2010, letter that was also signed by Google Inc., Honeywell Inc., J.P. Morgan Chase & Co., Microsoft Corp., and Northrop Grumman Corp. (NOC).
"[We] believe that the best way to balance the desires for strong compliance functions and an effective whistleblower program is to require internal reporting to be eligible for an award except in cases where the whistleblower's company does not maintain an effective compliance program with an acceptable reporting process," the companies wrote.
The final rules, approved by the SEC in 2011, ultimately didn't include an internal-reporting requirement, but added incentives for people to report problems through internal company channels in addition to tipping to the SEC.
Those incentives might be undone if the Fifth Circuit's decision is followed by other circuit courts of appeal.
Corporations could see less litigation from individuals who internally reported suspected wrongdoing and then claimed protection under Dodd-Frank's retaliation provisions, said Mike Delikat, who advises companies on whistleblower issues as partner and chair of the whistleblower task force at Orrick, Herrington & Sutcliffe LLP.
On the other hand, tips that could have remained internal might now also be lodged with the SEC. Internal whistleblower programs are often meant to be the first place employees air concerns--and they can be used to catch wrongdoing early and deal with it discreetly, though companies might choose to eventually self-disclose some of that information to the government.
The ruling makes it less likely that a savvy whistleblower, especially one with a knowledgeable lawyer, would report a potential securities-law violation internally without also reporting to the SEC, said Jordan Thomas, partner and chair of the whistleblower representation practice at Labaton Sucharow LLP.
"Internal compliance systems play an important role as the first line of defense," Mr. Thomas said. "This ruling will make people less likely to use these avenues."