by Jackson Lewis

The highly anticipated legislation expected to bring reform to Wall Street also includes provisions that greatly expand whistleblower liability risk for employers.  The Dodd-Frank Act Wall Street Reform and Consumer Protection Act (“DFA”) was signed into law by President Barack Obama on July 21, 2010.   The 2,319 pages of federal legislation contain the hotly contested establishment of a “Bureau of Consumer Financial Protection.”  The establishment of this Bureau, however, is far from being the DFA’s only change.  Among its provisions, the DFA brings much change by way of expanding whistleblower liability in the following ways:

• Adding new whistleblower rights for direct reports to the Securities and Exchange Commission;
• Adding new whistleblower rights for financial services employees;
• Enhancing provisions for Sarbanes-Oxley whistleblowers; and
• Enhancing provisions for the anti-retaliation provisions of the False Claims Act.

The four areas of new or expanded whistleblower liability are explained briefly in this article and will be further analyzed in an upcoming Jackson Lewis “Special Report:  The Dodd-Frank Act Whistleblower Provisions.”  The Special Report will be accompanied by a Jackson Lewis Webinar, provided at no cost to Firm clients.  Look for a Jackson Lewis invitation on the upcoming Special Report and Webinar. 

The DFA creates two new whistleblower frameworks, providing the federal government a new scope of claims.  It also enhances existing whistleblower and anti-retaliation provisions  in the Sarbanes-Oxley Act (“SOX”) and the False Claims Act (“FCA”).   

1. New Whistleblower Provisions for Direct Reports to SEC and CFTC

Section 922 of DFA Title IX, referencing investor protections and improvements to the regulation of securities, contains a monetary incentive for individuals to make whistleblower reports to the SEC and the Commodity Futures Trading Commission (“CFTC”). 

Individuals who provide original information to these Commissions that results in monetary sanctions in excess of $1 million in civil or criminal proceedings will receive a reward.  “Original information” is derived from the independent knowledge or analysis of the whistleblower, is not known to the SEC/CFTC from any other source, and is not exclusively derived from an allegation in an administrative hearing, governmental report, hearing, audit or investigation or from the news media. 

The reward can range from 10 percent to 30 percent of the amount recouped by the SEC/CFTC and is determined in the respective Commission’s discretion, subject to judicial review if the amount is not within the 10 percent to 30 percent statutory range. 

Factors considered in determining the amount of the reward include the significance of the information provided, the degree of assistance provided, the programmatic interest of the Commission in deterring violations and other factors the Commission may establish. 

In contrast to qui tam actions under the FCA, the DFA does not provide a private cause of action to whistleblowers to prosecute securities fraud or other SEC violations.     Section 922 provides, however, a private right of action for employees or other individuals who have suffered retaliation due to lawful whistleblower acts, including providing information to the SEC, initiating or otherwise participating in investigations or judicial or administrative actions of the SEC, or making disclosures required or protected under SOX, the Securities Exchange Act of 1934 or any other law, rule or regulation in the SEC’s jurisdiction. 

The private right of action is not limited to employees, extending to claims by any individual claiming to have been threatened, harassed or subjected to discrimination because of protected activity.  Unlike SOX actions, these private actions may be asserted directly in federal court and remedies may include reinstatement, double back pay with interest, litigation costs, expert witness fees and reasonable attorneys’ fees.  The statute of limitations for such actions is six years after the date on which the retaliation occurred or three years after the date on which the facts material to the right of action are known or reasonably should be known to the employee.  There is no administrative exhaustion requirement to bringing such an action in federal court.

2. New Whistleblower Provisions for Financial Services Employees

The DFA also contains dedicated whistleblower protection for financial services employees who disclose information about fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service.  Section 1057 of the DFA prohibits retaliation against a covered employee who:

• provides, causes to be provided, or is a about to provide or cause to be provided, to an employer, the newly-created Bureau of Consumer Financial Protection (“Bureau”) or any other state, local or federal government authority or law enforcement agency, information the employee reasonably believes to be a violation of the Consumer Fraud Protection Act of 2010 (Title X of the DFA) or any other provision of law subject to the jurisdiction of the Bureau or any rule, order, standard or prohibition prescribed by the Bureau;
• testifies in any proceeding regarding the same; or
• files, institutes or causes to be filed, any proceeding under any federal consumer financial law.

Employees who believe they have been retaliated against for engaging in protected activity under Section 1057 must file a complaint with the Secretary of Labor within 180 days of the alleged retaliation.  In order to establish a prima facie case under Section 1057, an employee need demonstrate only that the protected activity was a contributing factor in the adverse action.  The employer must then demonstrate by clear and convincing evidence that it would have taken the same action absent the protected activity.  The parties can appeal the Department’s findings to the Office of Administrative Law Judges.  In the event the Department fails to issue a final order within 210 days of the filing of the complaint, the complainant can bring a claim in federal court for de novo review and either party may request a trial by jury. 

Significantly, claims under Section 1057 are exempt from arbitration agreements.       

3. Enhanced SOX Whistleblower Provisions

The DFA contains very significant amendments to the SOX whistleblower provisions.  These amendments will likely have a dramatic affect on the handling and defense of these cases.  Generally, the amendments either undo prior favorable provisions or contradict prior, employer-friendly, interpretations of key SOX provisions. 

The SOX statute of limitations period is doubled from 90 days to 180 days.  This runs counter to the originally stated policy purpose of having whistleblower litigation proceed on an expedited basis and likely will open the door to additional claimants.

The DFA clarifies that SOX litigants are entitled to a jury trial, an issue left unresolved by prior SOX jurisprudence and one that may have prompted SOX litigants to resolve their claims by way of the OSHA administrative agency process rather than seeking entry to federal court. 

The DFA clarifies that subsidiaries and affiliates of publicly traded companies are subject to SOX if the financial information of the subsidiary or affiliate is included in the consolidated financial statements of the public company.   This is in direct contradiction to the growing line of cases and, indeed, the Department of Labor’s own view, that employees of non-publicly traded subsidiaries were generally not covered by SOX absent a showing of a substantial nexus between the parent and the subsidiary. 

Notably, pre-dispute arbitration agreements are no longer enforceable under SOX, nor will the rights and remedies under SOX be waivable by agreement. 

4. Enhanced Anti-Retaliation Provisions to the False Claims Act

The DFA amends the FCA’s anti-retaliation provisions by expanding the definition of what is deemed “protected conduct” and by clarifying a three-year statute of limitations period.   The 1986 Amendments to the FCA provide remedies for persons wrongfully discharged or otherwise discriminated against in their employment because of lawful acts done in furtherance of an FCA action.  Section 1079B of the DFA amends these anti-retaliation provisions by expanding “protected conduct” to include “lawful acts done by the employee… in furtherance of an action under this section….”  In so doing, the FCA’s protective anti-retaliation provisions extend to individuals who take action pursuant to the DFA’s consumer protection efforts. 

The DFA further clarifies that the statute of limitations for FCA retaliation actions is three years rather than tied to that of the analogous state statute.

Employer Impact

We expect the new and enhanced whistleblower provisions to have a significant impact on the whistleblower-litigation landscape.  The monetary incentives to report matters to the SEC, independently of the SOX administrative process, coupled with enhanced provisions for both SOX and consumer-oriented claims will likely increase the volume of such claims.