The Role of “Whistleblowers” in Securities Fraud Cases

Congress passed the Dodd-Frank Act (DFA) in 2010 in response to the post-2007 financial crisis. The DFA included a number of provisions designed to strengthen regulation of the securities and financial industries. One such provision involved the use of “whistleblowers” in securities fraud investigations. Broadly defined, a whistleblower is anyone who provides “information relating to a violation of the securities laws” to the U.S. Securities and Exchange Commission. Under the DFA, an employer may not fire or otherwise retaliate against any employee who is a whistleblower. The SEC must also keep a whistleblower’s identity secret unless and until it becomes necessary to disclose that information to a defendant in a judicial or regulatory proceeding.

If the information provided leads to a successful enforcement action—and the government recovers at least $1 million in monetary sanctions from the guilty parties—the SEC is authorized to reward the whistleblower accordingly. The DFA says such awards must be between 10% and 30% of the money actually collected. The SEC determines the actual award on a case-by-case basis.

A recent example of a whistleblower award came on March 2, when the SEC awarded between $475,000 and $575,000 to an unnamed whistleblower in an unidentified case. The SEC noted this was the 15th such whistleblower award made under the DFA. This particular award was noteworthy because the whistleblower was a corporate officer who initially learned of wrongdoing from another employee. Normally officers cannot claim a whistleblower award under these circumstances, but SEC regulations make an exception for officers who report such information to the SEC within 120 days “after other responsible compliance personnel possessed the information and failed to adequately address the issue.”

Berman v. NEO@OGILVY, LLC

While a whistleblower must report wrongdoing to the SEC in order to claim a financial reward, the anti-retaliation provisions may apply more broadly. The SEC’s regulations implementing the DFA say a whistleblower includes an employee who reports wrongdoing to another government agency, such as the Department of Justice, or to any person inside the company “with supervisory authority over the employee or such other person working for the employer who has authority to investigate, discover, or terminate misconduct.” Any person meeting this definition cannot be fired or otherwise punished by the employer, according to the SEC.

But several federal courts have questioned the legality of the SEC’s definition. In 2013 the U.S. Fifth Circuit Court of Appeals held the DFA, as written, limited the definition of “whistleblower” to only those persons who report misconduct to the SEC directly, not to their employer or another agency. The Fifth Circuit therefore dismissed a lawsuit brought by a former employee who claimed his employer fired him for reporting misconduct internally. In May 2014 a federal judge in Tampa, Florida, adopted the Fifth Circuit’s reasoning in dismissing a similar lawsuit.

The U.S. Second Circuit Court of Appeals in New York is presently considering an appeal of a similar decision issued by a federal judge in Manhattan last December. The SEC has filed a brief in the case, arguing its broader definition of “whistleblower” is entitled to judicial deference. The SEC said “important law enforcement considerations” merited rejecting the lower court’s decision.

Whatever the Second Circuit and other courts decide on this question, the whistleblower program will remain an important part of federal securities regulation for years to come. If you are a potential whistleblower and need legal advice on how to proceed, contact Florida securities fraud attorney Gregory Tendrich right away.