Whistleblowing Galore Under the Dodd-Frank Act

Posted on August 23, 2010 by Kevin Griffith

Congress’ recent passage and President Obama’s signing of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” provides significant incentives for financial industry whistleblowers to assist the government root out fraudulent practices and other unlawful conduct in the industry. Supporters of the Dodd-Frank Act are praising its expansive whistleblower protections as a necessary good corporate-citizen tool to help the government ensure a financial crisis like 2008 never happens again.

Under the Dodd-Frank Act, whistleblowers in publicly traded companies are provided significant personal financial incentives to disclose to the SEC “original” information concerning securities laws violations occurring within their companies. “Original” information means the information must be derived from the whistleblower’s independent knowledge or analysis and cannot be known to the SEC from any other source. The available financial reward — or “bounty” — available to a qualifying whistleblower will range from 10% to 30% of any financial recovery in excess of $1,000,000 that the SEC obtains from the targeted corporation, including the amount of any penalties, disgorgement and interest.

The Dodd-Frank Act also protects the whistleblower from being retaliated against by the employer because the whistleblower provided information to the SEC. The Act gives the whistleblower a private right of action in federal court to try to establish the unlawful retaliation. Remedies for the successful whistleblower may include reinstatement, double back pay with interest, expert witness fees, and attorneys fees. Thus, Congress clearly intended for these remedies, coupled with a possible incentive bounty of at least $100,000, to encourage whistleblowers to come forward and assist the government attack corporate financial fraud.

Comparing Dodd-Frank with SOX

Unlike under Dodd-Frank, a whistleblower who is a victim of retaliation under the Sarbanes-Oxley Act of 2002 (“SOX”) must first file a complaint with OSHA of the U.S. Department of Labor and exhaust such administrative remedies before bringing an action in court. As under Dodd-Frank, however, SOX also provides whistleblowers protection from retaliation for providing, in good faith, information to the SEC about possible violations of any SEC rule or regulation. But SOX also provides whistleblowers even broader protection from retaliation, including for reporting information of a possible SEC rule violation within the company to “a person with supervisory authority over the employee” or, for example, to an audit committee.

The remedies available under SOX and Dodd-Frank to whistleblowers who have been retaliated against are similar, except Dodd-Frank expressly allows for the recovery of “double” back pay, while SOX does not. Of course, unlike under SOX, a Dodd-Frank whistleblower also has an opportunity to recover a “bounty” of 10% to 30% of any SEC recoupment over $1,000,000.

Also, the statute of limitations under Dodd-Frank is much longer than under SOX. Under Dodd-Frank, the whistleblower can bring a retaliation action up to six years after the date on which the retaliation occurred, or three years after “the facts material to the claim are known.” By contrast, and as now amended by Dodd-Frank, a SOX whistleblower only has 180 days from the date the employee becomes aware of the retaliatory decision to file a SOX retaliation claim with OSHA.

In addition, as amended by Dodd-Frank, SOX complaints, after administrative exhaustion, can now be tried before a jury and cannot be the subject of mandatory pre-dispute arbitration agreements. Finally, Dodd-Frank amends SOX to clarify that SOX covers whistleblowers who work for subsidiaries of publicly traded companies. 

The Dodd-Frank Act – The Gift to Whistleblowers that Keeps on Giving

Dodd-Frank also enacted additional federal whistleblowing protections, including into the Commodity Exchange Act for whistleblowers who report information to the Commodity Futures Trading Commission. In addition, Dodd-Frank also created the new Bureau of Consumer Financial Protection and added protections to financial services industry whistleblowers who disclose information to the company or the Bureau about fraudulent or unlawful conduct by companies that extend consumer credit, provide real estate settlement or appraisal services, or provide financial advisory services to consumers. Similarly, Dodd-Frank broadened the existing anti-retaliation provisions under the Federal False Claims Act. 

So, Be Careful If an Employee is Complaining About Financial Fraud in Your Organization

With the passage of Dodd-Frank, President Obama obviously is trying to make good on his administration’s promise to “clean up” the financial services industry. Dodd-Frank’s extensive encouragement of and protections for individual whistleblowers is one step toward trying to keep that promise. The federal government clearly is trying to enlist assistance from employees inside the industry who should be in the best position to know whether any fraudulent or unlawful financial conduct is occurring. Whether these incentives and protections under Dodd-Frank will prove to be an effective step will be determined through litigation in the years to come.
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OSHA Sends Strong Message Under SOX

Posted on March 26, 2010 by Kevin Griffith

Publicly traded companies need to remain vigilant to avoid employment-related retaliation against employees who may complain about company violations of accounting controls and possible violations of SEC related rules or regulations. In a whistleblower case under SOX, OSHA recently ordered Tennessee Commerce Bank to reinstate its former chief financial officer and pay him more than $1 million in back wages, interest, attorneys fees and compensatory damages.

Apparently fostering the Obama administration’s push for stricter enforcement of Department of Labor and financial industry regulations, an Assistant Secretary of Labor for OSHA issued this statement about OSHA’s order: “This case clearly shows the Department’s commitment to ensuring individuals are provided the protections and relief forwarded by the laws and sends a strong message that retaliatory actions will not be tolerated.”

In the case, the former CFO alleges he raised concerns to the Bank’s audit committee and later to the Federal Deposit Insurance Corporation about internal controls, certain employee accounts and possible insider trading. For reasons not yet publicized, apparently the CFO was placed on administrative leave in March 2008, filed a whistleblower complaint with OSHA in April 2008, and he was terminated from employment in May 2008. In its defense, Tennessee Commerce claims that it terminated the CFO “for cause” and that any alleged whistleblowing occurred only after his termination. Tennessee Commerce is appealing OSHA’s determination.

Meanwhile, Tennessee Commerce has a very challenging situation. Under the whistleblower provisions of SOX, Tennessee Commerce has to reinstate the CFO to a position that will make him “whole” in terms of pay, benefits and seniority status. That puts Tennessee Commerce in a very awkward situation since the former CFO has not worked for the Bank since March 2008. Worse yet, under the SOX rules, Tennessee Commerce legally cannot obtain a stay of the reinstatement order while it appeals OSHA’s decision.

Obviously, OSHA’s order gives the former CFO tremendous settlement leverage if Tennessee Commerce wants to avoid the awkwardness and employee relations impact of re-employing its former CFO. If the parties do not settle the case and continue with the formal legal proceedings, we will keep you apprised. The Tennessee Commerce case certainly is a clear and loud reminder to all publicly traded companies to respond carefully to any SOX-related whistleblower allegations in an appropriate manner.
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