Whistleblowers, employers, and lawyers for both should celebrate and take advantage of a badly-needed, free resource – The SEC Whistleblower Practice Guide, by David Marshall. Marshall, a partner at the highly-respected employment rights law firm Katz, Marshall and Banks, regularly donates his time teaching continuing legal education courses on whistleblower rights.
This time he has donated the definitive guide to the Securities and Exchange Commission (SEC) whistleblower bounty program created by the 2010 Dodd Frank law, which has a $450 million fund to reward those who expose violations of SEC rules. If a disclosure leads to an enforcement action of $1 million or greater, the whistleblower is entitled to 10-30 percent of the recovery. By the end of FY 2013, it already had sparked 6,573 disclosures from all 50 states and territories, as well as 68 foreign nations.
The 33-page manual traces the Dodd Frank statutory provisions, as well as parallel provisions for the Commodities Futures Trading Commission, and new teeth added in Dodd Frank under the Sarbanes Oxley Act. More significantly, the manual demystifies a mind-numbing, convoluted statute implemented by 305 pages of SEC regulations and forms. He traces the facts of life for each element that must be satisfied to receive an award – that the information was voluntarily provided and represented original information, for example. It explains the incentives to first try internal disclosures; eligibility restrictions for those like corporate auditors or outside accountants whose job is to find violations as part of corporate checks and balances, and factors that nonetheless allow them to make government disclosures, such as corporate inaction or cover-ups. It traces SEC procedures for filing a claim, and the criteria the Commission relies on to choose between 10 and 30 percent rewards.
The text is crammed with useful details to highlight both the devils and angels tucked into the fine print of rules and interpretations to date. To illustrate, a disclosure generally isn’t voluntary when information is provided in response to a government subpoena or investigative query. But if the employee already has raised the same issues internally, there is still eligibility for an award. Some firms have sought to disqualify their entire labor force from the program by making them sign mandatory SEC disclosure agreements as a job prerequisite, a kind of reverse gag order. The manual reports that the SEC has rejected this tactic.
Similarly, “original information” cannot come from the public record, but knowledge learned from a co-worker is eligible for a bounty disclosure. And expert analysis of the public record constitutes original information.
Marshall lists the limitations on who can make disclosures, such as lawyers and auditors in connection with their official duties. For example, a legal opinion does not count as independent analysis, and lawyers can be sanctioned for state bar ethics violations. But he again details the program’s flexibility. For example, those restrictions do not apply if: the employee learns of fraud independent from official duties; SEC disclosure is necessary to shield investors from substantial injury; the employee reasonably believes the company would impede a proper internal inquiry; more than 120 days have passed after an internal disclosure; or the employee learns that the firm already knew the evidence of misconduct that he or she had disclosed internally.
The manual is more than a legal trail guide, however. It includes full disclosure of the program’s results to date – 17 denials, compared with 10 awards to 14 whistleblowers ranging from $50,000 to $30 million. The awards have averaged at 25 percent in the 10-30 percent range, and are paid in installments as money is received for fines. It lists the factors behind awards, which are increased if the employee does not sit on the evidence and first gives the corporation a chance to clean its own house. Marshall points out that the million dollar threshold for an award can be reached through multiple administrative and judicial proceedings based on the same facts. Ironically, although the SEC is a disclosure agency, the commission does not inform investors of the offending corporation’s identity or the nature of the fraud, on grounds that it could threaten the whistleblower’s confidentiality.
The manual covers the anti-retaliation provisions relevant for the SEC program, which have been hampered by sloppy statutory language that has led to split precedents on whether the internal disclosures favored for bounty awards are also protected against retaliation. It also introduces the SEC’s own agency whistleblower program, which found its first violation in June 2014. The SEC can only issue fines for illegal retaliation, but a finding puts the whistleblower on higher ground for a bounty award and parallel reprisal proceedings.
The most dynamic, and ominous, development for whistleblowers since passage of Dodd Frank has been a proliferation of creative gag orders. Examples include severance package prerequisites such as waiver of eligibility for a bounty award, and commitment to notify the company of any future communications to or from the government. Perhaps the most chilling are slap suits issued in defiance of SEC Rule 21F-17A, an anti-gag shield. While the suits may not prevail, they can be devastating for unemployed whistleblowers who cannot afford to win. The manual summarizes proposals by Katz, Marshall and Banks, and a rulemaking petition by the Government Accountability Project (GAP) with the Labaton Sucharow law firm to strengthen the SEC’s anti-gag rule.
The manual ends with a series of “do and don’t” tips that apply the lessons in this de facto continuing legal education course. To the author, the bottom line is simple about this free resource: If you’re a whistleblower or a lawyer for whistleblowers, read this manual! If you’re an employer or a lawyer for employers, read this manual!
Tom Devine is Legal Director for the Government Accountability Project, the nation’s leading whistleblower protection and advocacy organization.