The Stakes are Up: Dodd-Frank Legislation’s
Impact on SOX Whistleblower Litigation
The Dodd-Frank Act of 2010
• The Dodd-Frank Wall Street Reform and Consumer
Protection Act
►Pub. L. 111-203, H.R. 4173
• Signed into law by President Obama on July 21, 2010
• The SEC will implement regulations by April 17, 2011
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Dodd-Frank’s Whistleblower Provisions
• We’ll focus on the following:
► Expanded protections for whistleblowers under Section 806 of the
Sarbanes-Oxley Act of 2002 (SOX);
► Bounties now offered to whistleblowers;
► New private rights of action;
► Practical concerns and tips for employers.
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Legislative Purpose – SOX
• Enacted July 30, 2002, in reaction to accounting and other
corporate scandals
• “Insight vs. Oversight”: Congress recognized that employees
have access to information beyond the government’s and
public’s view and thus are uniquely positioned to protect
shareholders
• Thus, Congress sought to encourage reporting of fraud
through “self-appointed corporate police” that could impact
shareholder confidence without fear of retaliation
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Procedure
• Employee must file complaint with OSHA within 180 days of
violation (Dodd Frank recently doubled the original 90-day
statute of limitations)
• Employee can “kick out” claim to federal district court (de
novo) if DOL does not issue a final order within 180 days
►Stone v. Instrumentation Lab. Co.: employee can pursue a claim de
novo in district court where a final decision was not reached within 180
days of the filing of the OSHA complaint even where an ALJ already
adjudicated the claim. 2009 WL 5173765 (4th Cir. Dec. 31, 2009)
(www.seyfarth.com/OMM012810/)
• Or employee can pursue claim through DOL’s regime and
then proceed in federal court of appeals: OSHA → ALJ →
ARB → Federal Appellate Court
,
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OSHA Has Stepped Up Enforcement
• OSHA’s recent willingness to issue substantial monetary
rewards and order reinstatement (www.seyfarth.com/MA032510)
►March: Tennessee Commerce Bank ordered to pay $1M to and
reinstate a CFO
 DOL is seeking enforcement of that order in federal court
►March: e-Smart Technologies ordered to pay ~ $600K and reinstate
employee
►May: Assistant Secretary of Labor announced OSHA’s plan to
substantially strengthen whistleblower program
►June: U.S. Bank in Seattle ordered to pay back wages and reinstate
manager
• Secretary Solis appointed two new judges to the ARB
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Coverage
• Extraterritorial application?
►A number of courts and the ARB have ruled that SOX does not provide
for jurisdiction over claims filed by foreign nationals employed outside
of the U.S., as § 806 was not intended to apply to persons employed
outside of the U.S.
 These decisions are consistent with the presumption against
extraterritorial application of employment law statutes
►At least one federal court has taken the opposite view. O’Mahony v.
Accenture Ltd., 537 F. Supp. 2d 506 (S.D.N.Y. Feb. 5, 2008)
 Nature of employee critical to analysis
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Damages, Penalties & Other “Teeth”
Civil
Reinstatement
Back-pay with interest
Emotional distress and
loss of reputation
Attorneys’ fees and
costs
Other “affirmative relief”
(e.g., letter of apology,
formal posting of
decision)
Criminal
“Whoever knowingly, with the intent to
retaliate, takes any action harmful to
any person, including interference with
the lawful employment or livelihood of
any person, for providing to a law
enforcement officer any truthful
information relating to the commission
or possible commission of any federal
offense, shall be fined … imprisoned
not more than 10 years, or both. (§
1107)
Enforced by DOJ
SOX also provides for INDIVIDUAL LIABILITY
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Reputation
Cases garner
significant
publicity,
adversely
impacting
reputation
and goodwill
Key Defenses
►Statute of Limitations
►Failure to Exhaust Remedies
►Not a Covered Employer
►Not a Covered Employee
►Lack of Reasonable Belief
►Complaint Does Not “Definitively and Specifically” Relate to Prohibited
Conduct Identified in Section 806
 Present vs. Possible Future Violation
 Materiality
 Internal Guidelines/Procedures
►Alternative Basis for Employment Action
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Dodd-Frank - Impact on SOX
•
Prior to the passage of Dodd-Frank, Section 806 of SOX was the primary source
of whistleblower litigation based on financial misconduct.
•
SOX protects whistleblowers who report various types of fraud- and securitiesrelated violations from retaliation by their employers.
► Employee engages in “protected activity” by providing information he or she reasonably
believes constitutes a violation of federal mail, wire, bank or securities fraud; federal
law relating to fraud against shareholders; or any rule or regulation of the SEC.
► Employee must show the following by a preponderance of the evidence: protected
activity; employer knew or suspected, actually or constructively, that employee
engaged in protected activity; unfavorable personnel action; and circumstances
sufficient to raise inference that protected activity was a contributing factor.
► Employer must show by clear and convincing evidence that it would have taken the
same unfavorable personnel action in the absence of the protected activity.
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Impact on SOX (cont’d)
•
Further, as originally constituted, SOX:
► Only covered publicly traded companies, not their private subsidiaries or
affiliates. (Limited exceptions existed, such as where the public parent had a
hand in the challenged adverse employment action.)
► Had a 90-day statute of limitations.
► Was arguably unclear as to whether there was a right to a jury trial in actions
filed in federal court.
•
Plaintiffs’ bar and Senators, including the ones who drafted Section 806,
complained that SOX was not being appropriately interpreted and
enforced by the DOL. They claimed the coverage provisions were too
narrowly construed, the statute of limitations was too strict, and
employers’ success rates were too high.
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Impact on SOX (cont’d)
•
Dodd-Frank breathes new life into whistleblower complaints. It sharpens
SOX’s teeth by:
► Expanding it to cover private subsidiaries or affiliates of publicly traded
companies whose financial information is included in the consolidated
financial statements of such companies, and covering nationally recognized
statistical rating organizations (e.g., Moody’s and Standard & Poor’s);
► Increasing the 90-day statute of limitations to 180 days;
► Providing a right to a jury trial in SOX actions removed to federal district
courts; and
► Prohibiting pre-dispute arbitration agreements and any other “agreement,
policy, form, or condition of employment” that requires a waiver of rights
under SOX.
► Retroactive? ARB currently is focusing on this issue in Johnson v. Siemens
Building Technologies, et al., ARB Case No. 08-032.
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Bounties!!!
• Dodd-Frank also amends the Securities Exchange Act of
1934 (SEA) by including a provision requiring the SEC to
provide a monetary award to individuals who provide
“original information” to the SEC that results in sanctions
exceeding $1,000,000.
• The SEC has discretion to award between 10% and 30% of
the total amount of the sanctions.
• The award may be appealed to the federal Circuit Court of
Appeals within 30 days of the SEC’s determination.
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New Whistleblower Bounties
• Such bounties are not available to:
► Individuals who are convicted of criminal violations related to the
action for which the whistleblower provided information, or who obtain
the information through audits of financial statements required by
securities laws and for whom submission would be contrary to the
requirements of section 10A of the SEA.
► Employees of an appropriate regulatory agency, the DOJ, a selfregulatory agency, the Public Company Accounting Oversight Board,
or a law enforcement organization are ineligible.
• These new "bounty" rules allow whistleblowers to remain
anonymous until the bounty is paid.
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Bounties (cont’d)
•
About half of the investigations by the SEC's enforcement division since
the agency's founding in 1934 that have resulted in corporations being
prosecuted and/or sanctioned for violating federal laws started from
whistleblower accusations.
► That was long before the availability of these new bounties.
•
Just one day after Dodd-Frank became law, the SEC awarded a $1 million
bounty to the whistleblower in a Connecticut case.
► Contrast: in the 20 years before this case, the SEC had given out a grand total
of $160,000 to whistleblowers.
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New Private Rights of Action
•
Dodd-Frank also affords a private right of action to employees retaliated
against for complaining to the SEC or CFTC, which they may pursue
directly in federal court.
► Contrast SOX actions, which require an employee to exhaust administrative
remedies by first filing a claim with OSHA.
•
Successful employees may obtain substantial remedies, including:
reinstatement without loss of seniority; double back-pay (note: SOX only
provides regular back-pay); reasonable attorneys’ fees; and costs and
expert witness fees.
•
Extremely long statute of limitations: employees have up to six years
after the violation occurred, or three years after he or she knew or
reasonably should have known of facts material to the violation, so long
as the complaint is filed within 10 years of the violation.
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New Private Rights of Action for Financial
Services Employees
•
Covers employees who perform tasks related to the offering or provision of a
consumer financial product or service. Covered entities include those that extend
credit or service or broker loans, provide real estate and financial advisory
services, or provide consumer report information in connection with any decision
regarding the offering or provision of a consumer financial product or service.
•
The protections shield employees who engage in the following conduct:
► providing information to an employer, the Bureau of Consumer Financial Protection
(“Bureau”) or any state, local or federal government authority or law enforcement
agency relating to the violation of consumer financial protection laws at issue in this
statute or that are subject to the Bureau’s jurisdiction;
► testifying in a proceeding against an employer resulting from the enforcement of
consumer protection laws at issue in this statute or law that are subject to the Bureau’s
jurisdiction;
► helping to initiate any proceeding of consumer financial protection laws at issue in this
statute; and
► objecting or refusing to participate in any activity that the employee reasonably believes
to violate any law subject to the Bureau’s jurisdiction.
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Practical Concerns and Tips
•
Create an overall culture of accountability and ethics.
•
Craft and disseminate appropriate codes of conduct and anti-retaliation policies.
•
Train managers to be appropriately receptive to whistleblowing.
•
Institute telephonic and/or Web-based help-lines.
•
Consider developing methods of competing with bounties.
► Employees now have a unique financial incentive to report suspected fraud to the SEC
rather than through the designated channels companies have created (e.g., HR, other
supervisors, and other supervisors). Employers thus need to consider whether to offer
competing incentives, such as: rewards based on the size of the savings to the
company; performance bonuses rewarding meritorious whistleblowing; and/or adding
criteria to performance evaluations accounting for efforts to protect the company.
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Understanding the Whistleblower
• Know your plaintiff’s motive to: develop effective methods of
either resolving the complaint internally before a claim is filed;
enhance the chances of reaching a favorable settlement; and
develop effective defenses.
►“Private Attorney General” (the “good-faith complainant”):
 Seeks to eliminate unethical or unlawful conduct to protect other
employees and the public
►Skeptic’s view (the “bad-faith complainant”)
 Under-performing employee “sees the writing on the wall;”
 Disgruntled employee is seeking leverage; or
 Employee seeking recognition or influence.
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Executive Compensation Issues
“SAY ON PAY”
• Dodd-Frank give shareholders the right to vote on executive
compensation packages
• The provisions apply to public companies
• Votes are non-binding
• The SEC recently adopted additional regulations
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“SAY ON PAY”
Key Provisions
• Vote must occur at least every three years
• Must vote on the compensation of all of the company’s named
executive officers
• Post-January 21, 2011 proxy statements must include
resolutions regarding votes on executive compensation and
determination of how frequently future votes will occur
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“SAY ON PAY”
What Compensation Is at Issue?
• Compensation that is subject to disclosure under SEC
regulations
► Base salary
► Bonus
► Equity and non-equity compensation
►Severance benefits
►Executive compensation triggered by business combination
transactions
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Proposed SEC Regulations
• Requires votes on the frequency of the shareholder votes at least every six
years
• Non-employee director compensation is not included
• Companies would have to include information on the advisory votes in their
annual meeting proxy statements
• Companies would have to disclose in their Compensation Discussion and
Analyses filings with the SEC whether and how they have considered the
voting results in determining executive pay
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Disclosure of Executive Compensation
• Must disclose in annual reports or proxy statements
► Description of relationship between named executive officer
compensation and performance
► Total compensation of the CEO compared to the median
compensation of all employees of the company
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Executive Compensation Clawbacks
• Companies traded on national exchanges must adopt
executive compensation clawback policies
• These clawback policies must be more expansive than
previously required under Sarbanes-Oxley
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Executive Compensation Clawbacks
When Do They Apply?
• Must apply in the event of any material noncompliance with
accounting statement rules
• Clawback from all executive officers
• Clawback period is three years
• Applies to excess amount paid to executive officers based on
previously reported financial statements that were later
restated
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Executive Compensation Issues
• These rules apply to different companies in different manners
• The issues are often complex and relate to the compensation
of the company’s highest paid employees
• We strongly urge you to seek further counsel regarding
compliance with these rules
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Katherine Perrelli
National Litigation Chair
Seyfarth Shaw LLP
Craig Zajac
Vice President and General Counsel
VCE
Christopher Robertson
Partner
Seyfarth Shaw LLP
Deborah Hart-Klein
Vice President, Compliance
Reed Elsevier
Barbara Robb
Co-managing Partner
Shilepsky Hartley Robb Casey Michon LLP
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