In hopes of providing more protection from retaliation for whistleblowers, Rep. Elijah E. Cummings (D-Md.) and Sen. Tammy Baldwin (D-Wis.) introduced the Whistleblower Augmented Reward and Non-Retaliation Act of 2016 (WARN Act) on Feb. 25.
Sections 748 and 922 of the Dodd-Frank Act provide protection for financial whistleblowers who report directly to the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC); however, Cummings stated that these protections were being undermined by financial firms’ use of certain legal loopholes.
“Our bill would address these abuses and create stronger protections for whistleblowers who shine a light on corporate malfeasance,” Cummings said. Cummings is the ranking member of the Oversight and Government Reform Committee.
The outline released for the WARN Act stated that Wall Street banks can prevent employees from exercising their rights by requiring them to waive their whistleblower rights as a condition for employment. The outline added that there were not adequate protections in place for whistleblowers at prudential regulators.
“For example, a Federal Reserve whistleblower was not protected by current law when she was fired for refusing to change a supervisory report at her superiors’ request,” the outline stated, referencing the case brought by former bank examiner Carmen Segarra, who alleged that the Federal Reserve Bank of New York fired her after she refused to change certain findings about Goldman Sachs Group Inc.
In that case – Segarra v. Federal Reserve Bank of New York et al, U.S. District Court, Southern District of New York, (No. 13-07173) – U.S. District Judge Ronnie Abrams ruled that Segarra failed to connect her disclosure of Goldman Sachs’ alleged conflict-of-interest violations with her firing.
The WARN Act would prohibit employers from forcing whistleblowers to waive their rights or disclose their communications with the government; safeguard whistleblowers from retaliation if they refuse to participate in activities they believe violate the law; and provide whistleblower protections to regulators who disclose information relating to a bank’s safety and soundness.
The WARN Act also would do the following, as outlined:
- Apply procedures, evidentiary standards and burdens of proof that allow whistleblowers to show that their exercise of protected behavior was a contributing factor leading to unfavorable personnel actions;
- Harmonize whistleblower awards with those under the Dodd-Frank Act so whistleblowers are eligible to receive between 10 percent and 30 percent of penalties and recoveries imposed as a result of the information they provide; and
- Provide civil remedies and punitive damages, including reinstatement, twice the amount of accrued back pay (with interest) and further compensation for any special damages such as litigation costs.
“If we strengthen and empower whistleblowers in the financial industry, we can do a better job of holding Wall Street accountable. These reforms will help us do that,” Baldwin stated, referring to the “reckless actions” that led to the financial crisis in 2008.
The bill has been endorsed by the Government Accountability Project, Americans for Financial Reform, the AFL-CIO, Public Citizen and Communication Workers of America.
An update on agency whistleblower programs
According to the SEC’s latest annual report to Congress, the SEC has paid more than $54 million to 22 whistleblowers since its program went into effect in August 2011. In fiscal year 2015, more than $37 million was paid to reward whistleblowers for providing original information that led to successful enforcement actions, with monetary sanctions totaling more than $1 million.
The SEC has experienced substantial growth in the number of whistleblower tips. In fiscal year 2015, the SEC received nearly 4,000 tips, a 30 percent increase over the number of tips received in fiscal year 2012 (the first year in which the SEC had full-year data). The report attributed this to increased public awareness.
For the first time in April 2015, the SEC brought successful charges against a company for including language in its confidentiality agreements that impeded whistleblowers from reporting to the SEC. The confidentiality agreements used by the company prohibited employees from discussing the substance of interviews they gave in internal investigations without the approval of the company’s legal department.
A current legal question that has some district courts divided is whether would-be whistleblowers must make separate reports of alleged securities violations to the SEC (in addition to their employers) for anti-retaliation protections to kick in.
On Feb. 4, the SEC submitted an amicus brief in John S. Verble v. Morgan Stanley Smith Barney LLC; Morgan Stanley & Co., Inc., U.S. District Court, Eastern District of Tennessee (No. 15-6397).
“[A]fter noticeand-comment rulemaking, [the SEC] issued a rule to clarify an ambiguity in the whistleblower employment anti-retaliation provisions in Section 21F(h)(1) of the Securities Exchange Act of 1934, 15 U.S.C. §78u-6(h)(1),” the SEC stated within the brief’s statement of the issue. “The [SEC’s] rule interpreted the anti-retaliation protections to extend to any individual who engages in the whistleblowing activities described in Section 21F(h)(1)(A), irrespective of whether the individual makes a separate report to the [SEC]. Is the [SEC’s] rule entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)?”
The SEC asserted within its brief that when it implemented the whistleblower rules, as required by the Dodd-Frank Act, the objective was to provide employees with “strong incentives” to report internally to their employers before reporting to the SEC.
“[T]he rule helps protect individuals who choose to report potential violations internally in the first instance (i.e., before reporting to the SEC), and thus is an important component of the overall design of the whistleblower program. [I]f the rule were invalidated, the commission’s authority to pursue enforcement actions against employers that retaliate against individuals who report internally would be substantially weakened,” the SEC argued.
The SEC’s stance is that the court should defer to the SEC’s interpretation of the rule (under what commonly is referred to as Chevron deference in administrative law), and hold that “individuals are entitled to employment anti-retaliation protection if they make any disclosures … irrespective of whether they separately report the information to the commission.”
The Internal Revenue Service (IRS) also has called for greater anti-retaliation protection, asking Congress to enact a federal law to protect whistleblowers who report tax fraud or tax underpayment.
According to an article in The National Law Review, Section 922 of the Dodd-Frank Act can protect disclosures about tax fraud “in that it encompasses disclosures protected under 18 U.S.C. Sec. 1513(e),which prohibits retaliation for a disclosure about the ‘commission or possible commission of any federal offense.’ As certain forms of tax evasion are criminal offenses, disclosures about tax avoidance schemes can be protected under the Dodd-Frank Act.”
The CFTC recently launched its new website for its whistleblower program. In its latest report on its whistleblower program, which was released Oct. 30, 2015, the CFTC stated that from Oct. 1, 2014, to Sept. 30, 2015, it did not pay any whistleblower awards. The CFTC had received 232 whistleblower tips and an additional 75 separate non-whistleblower tips and complaints.
Its latest award (totaling $290,000) was announced Sept. 29, 2015. This was the second whistleblower award by the CFTC. Its first award ($240,000) was issued May 20, 2014.