Fearing the power and effectiveness of the Dodd-Frank whistleblower programs, big business has stepped up offensive tactics to prevent employees from exposing misconduct to federal regulators.
Attacks on whistleblowers have moved beyond just firing and blackballing them. Many companies now are undertaking aggressive new steps on two fronts: One tactic aims to prevent whistleblowers from reporting misconduct to the Securities and Exchange Commission or the Commodity Futures Trading Commission. The other seeks to demolish the protections against employment retaliation that Dodd-Frank offers to whistleblowers (along with substantial awards).
Intimidation is at the heart of these anti-whistleblower efforts.
The first tactic involves requiring employees to sign confidentiality agreements, separation agreements and other employment agreements that stymie the individual’s ability to disclose a company’s wrongdoing to regulators.
For example, aggressive employers have conditioned the payment of severance on requirements that the employee will not voluntarily provide and has not provided information about company business practices to regulators or enforcement authorities. Agreements also might require that the employee forfeit any whistleblower award he or she may receive. Although the inclusion of such terms in employment agreements may be unenforceable, they are intended for their more immediate effect: To gag whistleblowers.
The strategy to preemptively stop whistleblowing has become so common that Sean McKessy, chief of the Securities and Exchange Commission Whistleblower Office, has coined a new word for it: “pre-taliation.”
To its credit, the SEC has been aggressive in responding to corporate efforts to deter whistleblowing, both through agency enforcement and public comments. McKessy has made clear that the SEC is not shy about using its enforcement authority to protect the program from efforts to intimidate or retaliate against whistleblowers. Indeed, the SEC successfully brought its first anti-retaliation action in June, charging hedge-fund advisory firm, Paradigm Capital Management, with retaliating against a whistleblower. Paradigm and its owner, Candace King Weir, paid a total of $2.2 million to settle the retaliation and other securities law violations.
Regulated companies engaging in chilling tactics do so at their peril. Agreements that aim to interfere with whistleblowing arguably violate SEC rules prohibiting “. . . any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . .”
Wall Street’s second offensive on whistleblowers involves efforts to deny them Dodd-Frank’s protections against employment retaliation. In courtrooms across the country, companies are arguing that only employees who report to the SEC before being retaliated against are protected under Dodd-Frank, while employees who are fired or suffer retaliation after raising concerns through internal channels, but before reporting wrongdoing to the SEC, are not.
Remarkably, these arguments are being pushed by the very companies that aggressively lobbied the SEC for rules mandating that would-be whistleblowers must report wrongdoing internally first, before going to the SEC. Now, in an ironic “gotcha,” company lawyers argue that those who report internally, without going to the SEC, should not be protected against retaliation under Dodd-Frank.
The SEC has argued in amicus briefs that whistleblowers are protected by Dodd-Frank even when they report concerns internally. As SEC Whistleblower Office Chief McKessy stated earlier this year, “Under SEC rules, whistleblowers are entitled to protection regardless of whether they report wrongdoing to their employer or the Commission.”
The majority of federal district courts in the 20 or so cases that have been litigated thus far have deferred to the SEC’s interpretation. However, the Court of Appeals in the Fifth Circuit in a case involving General Electric disagreed and ruled that a person cannot be a Dodd-Frank whistleblower unless he or she first reports the information to the SEC. The GE whistleblower did not report to the SEC until after he was terminated, shortly after he raised concerns through internal company channels. Based on the timing of his termination and report to the SEC, the court ruled that he wasn’t entitled to Dodd-Frank protections.
Individuals faced with “pre-taliatory” agreements or a decision as to whether to report internally should consult with experienced legal counsel before acting. Regardless of whether a whistleblower submission is ultimately made to the SEC or CFTC, both whistleblower offices should be advised of specific instances where an employer seeks to interfere with the individual’s ability to report misconduct to federal regulators or to receive a reward for doing so.
