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Protect the SEC Whistleblower Program

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Protecting Internal Whistleblowers

The Dodd-Frank Wall Street Reform and Consumer Protection Act (often simply known as Dodd-Frank) enhanced the Securities Exchange Act, codified in law as 15 U.S.C. § 78(u)(6), in the wake of the 2008 financial crisis and created the SEC Whistleblower Program.

Yet whistleblower protections under the Dodd-Frank Act, as well as the successful SEC whistleblower program, have been consistently under attack. One case, Digital Realty Trust v. Somers (No. 16-1276), has proven to be devastating to whistleblowers. Allies of big business attempted to convince the courts that employees who report violations of securities law to their supervisors or corporate compliance programs (as in, internally), but not to the SEC, are not protected from retaliation under the Dodd-Frank Act’s protection as SEC whistleblowers.

The National Whistleblower Center submitted an amicus curiae , also known as friend-of-the-court, brief to the U.S. Supreme Court, urging the Justices to reject the convoluted logic of big business allies and protect internal whistleblowers. The amicus brief was widely read and influential. In fact, an analysis of the Supreme Court arguments by the well-respected SCOTUS Blog, which highlights Justice Stephen Breyer’s point about the National Whistleblower Center’s amicus brief, can be found here. Senator Charles Grassley, the then-Chairman of the Senate Judiciary Committee and the top-ranking official on the Senate Whistleblower Caucus, also filed a brief in support of the whistleblower. As reported by leading whistleblower attorneys, Sen. Grassley argued that “it would make no sense to read” the Dodd-Frank Act as only protecting employees’ internal disclosures if they “also reported to the SEC” stating the “obvious effect of petitioner’s interpretation will be to discourage internal reporting.”

Moreover, the National Whistleblower Center also provided a report to the public, published during the formation of the SEC Whistleblower Program, which proves that “the overwhelming majority of employees voluntarily utilized internal reporting processes”, and therefore are effected by the result of the Digital Realty case. The report, titled “Impact of Qui Tam Laws on Internal Whistleblowers”, can be read here.

Additionally, whistleblower blogs and experts wrote several crucial explanatory pieces on the importance of this case. The Whistleblowers Blog reported that thousands of whistleblowers were at risk as a result of this litigation. NWC Board Chairman Stephen M. Kohn explained that whistleblower protections are at risk prior to the U.S. Supreme Court’s arguments, writing that “stripping protections of employees who report violations of law to in-house managers will constitute the greatest setback for voluntary compliance programs since these programs were established in the mid-1980s. The Government Accountability Project Blog published a guest blog explaining to whistleblowers and whistleblower advocates the effects of this case. Titled “Dodd-Frank Whistleblower Protection Post-Digital Realty“, the blog emphasizes that whistleblowers must report to the SEC as soon as possible in order to have any recourse against the retaliation that employers often take against whistleblowers. Finally, links to the Supreme Court arguments and other key documents can be found here.

Unfortunately, on February 21, 2018, the U.S. Supreme Court ruled in support of Digital Realty, and against whistleblowers. Seemingly unaware of the practical consequences of its decision, the Supreme Court unanimously ruled to leave whistleblowers who report internally without critical protections under the Dodd-Frank Act.

Stephen M. Kohn, then-Executive Director and now Chairman of the Board of the National Whistleblower Center (NWC) and an attorney who has represented “internal” whistleblowers since 1984, described the Supreme Court decision in Digital Realty Trust v. Somers (No. 16-1276) as “devastating.”

“The overwhelming majority of whistleblower report violations directly to their managers and internal corporate compliance programs. Stripping internal whistleblowers of protection under the Dodd-Frank Act could negatively impact over 90% of corporate fraud retaliation cases,” Kohn said.

Kohn, in a piece for Law30, also explained that employees now take grave risks in using internal compliance programs. Titled “Digital Realty’s Victory is a Loss for Corporate Compliance,” the piece describes the stunning blow of the U.S. Supreme Court decision for whistleblowers. This long-form writing describes the background of the SEC whistleblower program, and how and why the rules were created. It notes the long process, as well as the lobbying work of big business toward the SEC in arguing for internal compliance programs. It also tells the story of Paul Somers, who was retaliated against after using the internal reporting procedures of his employer, Digital Realty. As Kohn describes,

Digital ignored every argument as to why internal compliance programs should be supported, and claimed that to be a “whistleblower” under the Dodd-Frank Act, employees were required to bypass compliance programs and first contact the SEC.

The Supreme Court agreed to hear Digital’s arguments. Incredibly, every corporation that had urged the SEC to protect or encourage internal whistleblowing remained silent. Every compliance-related trade association remained silent. The corporate lawyers who so eloquently advocated for internal whistleblowing during the SEC’s rule-making proceeding remained silent.

And Kohn uses his expertise to offer a word of warning to future whistleblowers: In light of the Supreme Court’s decision, whistleblowers should hire an attorney and take their complaints directly to the Securities and Exchange Commission (SEC). The full article can be accessed here.

Other whistleblower laws undermined by this decision include the whistleblower provisions in the Commodity Exchange Act, numerous banking whistleblower laws, the Clean Air Act,  Safe Drinking Act, Occupational Safety and Health Act, Credit Union Employee Protection Act, FDIC Act, International Monetary Transactions Act, Superfund, Water Pollution Control Act, Toxic Substances Control Act, and Surface Mining laws.

 

How We Can Fix the Supreme Court’s Mistaken Decision in Digital Reality and Protect Internal Whistleblowers

The U.S. Supreme Court’s decision in Digital Realty put countless internal whistleblowers in grave danger. Yet there is a clear solution.

In May 2019, an act to amend the definition of whistleblower in the Securities and Exchange Act, H.R. 2515, was introduced in the House of Representatives. Titled “The Whistleblower Protection Reform Act,” the law would ensure that internal whistleblowers are protected just as Congress originally intended, undoing the devastating effects of Digital Realty. The NWC strongly supports this legislation; attorneys with the NWC reviewed the legislation before its introduction and believe it is the best way to proactively protect whistleblowers through Congressional action moving forward. The law passed the House on July 9th, 2019.

In September 2019, Senator Charles Grassley introduced S.2529 in the Senate. Titled the “Whistleblower Program Improvements Act”, it follows the House bill in ensuring that internal whistleblowers are protected under the Dodd Frank Act. It also expedite the processing time for Dodd-Frank rewards following successful prosecutions. Currently, the process has been plagued with long delays. We urge Congress to enact this law immediately.

Additional Resources:

Understanding the Value of the U.S. Securities and Exchange Commission (SEC) Whistleblower Program

The Dodd-Frank Wall Street Reform and Consumer Protection Act (often simply known as Dodd-Frank) enhanced the Securities Exchange Act, codified in law as 15 U.S.C. § 78(u)(6), in the wake of the 2008 financial crisis and created the SEC Whistleblower Program. It offers rewards to qualified persons who provide information to the SEC which leads to the recovery of monetary sanctions. The law is structured to ensure that whistleblowers’ information benefits the SEC to the greatest extent possible. As a result, it has grown into one of the best whistleblower programs in the country and one of the most effective checks on corporate fraud.

Section 922 of the law provides that whistleblowers can file anonymous and confidential claims. Crucially, eligibility does not depend on U.S. citizenship. Whistleblowers who provide original information that leads to a successful enforcement action entitled to a mandatory reward of between 10% to 30% of the collected proceeds. This incentivizes whistleblowers to provide high-quality information on significant crimes. Specific whistleblower provisions under this law are explained by leading whistleblower attorneys here.

Attorneys who form the National Whistleblower Center leadership took the lead on advocating toward the SEC during the crucial time of creating the SEC Whistleblower Program. In 2010 and 2011, these leading whistleblower legal experts were the principal authors of eight key comments to the SEC, and chaired formal meetings as well as individual meetings in order to ensure that the rules agreed upon would make the program as successful as possible. More information can be found here.

The SEC Whistleblower Program Works:

The data continues to prove the efficacy of the SEC whistleblower program:

  • Since 2011, the SEC has paid over $326 million in rewards.
  • Between 2011 to 2018, 3,305 whistleblower tips have been received from outside of the U.S., from a total of 119 countries.

The SEC’s Office of the Whistleblower’s 2017 annual report confirmed that “whistleblowers have provided tremendous value to its enforcement efforts and significantly helped investors.” It also confirmed that SEC whistleblower disclosures have “directly” contributed to “hundreds of millions of dollars returned to investors.” For example, that year alone the SEC paid $50 million in whistleblower rewards to 12 individuals.

 

The SEC Whistleblower Reward Program As An Effective Avenue For Law Enforcement:

Leadership of the SEC agree that whistleblower information is crucial for the success and ability of the SEC enforcement capacities. Time and time again, the SEC has made it clear: whistleblowers should not hesitate to come forward with information that they believe may lead the SEC to discover and prosecute criminals who aim to evade and undermine U.S. laws.

The “whistleblower program . . . has rapidly become a tremendously effective force-multiplier, generating high quality tips, and in some cases virtual blueprints laying out an entire enterprise, directing us to the heart of the alleged fraud.”

– Chairman Mary Jo White, Securities and Exchange Commission. Remarks at the Securities Enforcement Forum, Washington DC (October, 2013)

“Whistleblowers, whether they are located in the U.S. or abroad, provide a valuable service to investors and help us stop wrongdoing… This award recognizes the continued, important assistance provided by the whistleblower throughout the course of the investigation.”

— Jane Norberg, Chief of the Office of the Whistleblower, Securities and Exchange Commission, Press Release on award to overseas whistleblower

“[I]t makes no difference whether . . . the claimant was a foreign national, the claimant resides overseas, the information was submitted from overseas, or the misconduct comprising the U.S. securities law violation occurred entirely overseas.”

— Kevin M. O’Neill, Deputy Secretary, Securities and Exchange Commission, Order Determining Whistleblower Award Claim

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