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CORPORATE

WHISTLEBLOWING

IN THE

SARBANES-OXLEY/DODD-FRANK ERA

Second Edition

Michael Delikatand

Renée Phillips

Incorporating Release #6September 2017

#208903

Practising Law InstituteNew York City

#32923

This work is designed to provide practical and usefulinformation on the subject matter covered. However, it issold with the understanding that neither the publisher northe author is engaged in rendering legal, accounting, orother professional services. If legal advice or other expertassistance is required, the services of a competent profes-sional should be sought.

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my mentor, partner, and friend.

About the Authors

MICHAEL DELIKAT is a partner and the Chair of Orrick, Herrington &Sutcliffe LLP ’s global employment law practice group residentin its New York office. His practice involves both active litigationand counseling for major corporations and is concentrated in thefinancial services, technology, and media industries. He devotes asubstantial portion of his practice to defending class, pattern orpractice, and other high-exposure employment litigation, advisingand representing companies in Sarbanes-Oxley and Dodd-Frankwhistleblower matters, and litigating trade secret/restrictive covenantissues. Michael graduated from Harvard Law School and obtainedhis undergraduate degree in Industrial and Labor Relations fromCornell University. He is active in numerous bar and philanthropicorganizations and resides in Greenwich, Connecticut.

RENÉE PHILLIPS is a partner in Orrick’s employment law groupin New York and co-head of Orrick’s whistleblower task force. Herpractice includes a full range of employment litigation, counseling,and internal investigations, with particular emphasis on Sarbanes-Oxley and Dodd-Frank whistleblower issues. Renée graduated fromHarvard Law School and obtained her undergraduate degree inIndustrial and Labor Relations from Cornell University.

ix(Delikat, Rel. #6, 9/17)

Acknowledgments

We wish to acknowledge the contributions of Orrick attorneysMichael Disotell and Josh Naylor, who have assisted us in editingthis volume. We sincerely appreciate their efforts.

xi(Delikat, Rel. #6, 9/17)

Table of Chapters

Chapter 1 The Sarbanes-Oxley Act

Chapter 2 Who Is Covered?

Chapter 3 The Administrative Process

Chapter 4 Federal District Court andAlternative Forums

Chapter 5 Elements of a Prima Facie Case andEmployer Defenses

Chapter 6 Remedies

Chapter 7 Complaint Procedures andCodes of Ethics

Chapter 8 Special Provisions for Attorneys

Chapter 9 Other Statutory and Public PolicyImplications of SOX WhistleblowerProvisions

Chapter 10 Practical Suggestions for Compliance

Chapter 11 Internal Investigations

Chapter 12 Special Crisis Communication Issues

Chapter 13 Whistleblower Protections of the American Recovery andReinvestment Act of 2009

Chapter 14 Health Care Reform Law Contains New WhistleblowerProtections for Employees

Chapter 15 [Reserved.]

Chapter 16 The Dodd-Frank Wall Street Reform and ConsumerProtection Act

(Delikat, Rel. #6, 9/17) xiii

Chapter 17 Section 922’s Whistleblower Bounty Provisions

Chapter 18 Section 922’s Whistleblower Retaliation Protections


Chapter 20 Section 748’s Whistleblower Anti-Retaliation Provisions

Chapter 21 Consumer Financial Whistleblower Protections ofSection 1057

xiv

CORPORATE WHISTLEBLOWING

(Delikat, Rel. #6, 9/17)

Table of Contents

About the Authors .............................................................................ix

Acknowledgments .............................................................................xi

Table of Chapters ........................................................................... xiii

Preface ............................................................................................ xxv

Chapter 1 The Sarbanes-Oxley Act

§ 1:1 Introduction.................................................................... 1-1§ 1:2 SOX Section 806 Regarding Whistleblowers................... 1-2§ 1:3 Legislative History .......................................................... 1-3§ 1:4 Retroactivity.................................................................... 1-3

Chapter 2 Who Is Covered?

§ 2:1 Publicly Traded Companies, Subsidiaries, Affiliates,Officers, Employees, Contractors, Subcontractors,or Agents .......................................................................... 2-1

§ 2:1.1 Individual Liability.................................................... 2-2§ 2:1.2 Covered Employees ................................................... 2-3§ 2:1.3 Employees Outside of the United States .................. 2-6§ 2:1.4 Independent Contractors ........................................ 2-10

§ 2:2 Non-Publicly Traded Subsidiaries ................................. 2-12§ 2:3 Parent Company Liability for Subsidiaries’ Actions...... 2-14§ 2:4 Special Provisions for Securities Analysts..................... 2-16

Chapter 3 The Administrative Process

§ 3:1 Filing a Complaint with the Department of Labor,OSHA ............................................................................. 3-2

§ 3:1.1 Statute of Limitations ............................................... 3-3[A] Tolling ....................................................................... 3-3[B] Continuing Violations Doctrine ............................... 3-7

§ 3:2 OSHA Claims Handling: Investigation ofSarbanes-Oxley Claims................................................... 3-8

§ 3:2.1 Confidentiality, FOIA Requests ................................ 3-8§ 3:2.2 Preliminary Prima Facie Showing and

Burden of Proof ....................................................... 3-10

xv

§ 3:2.3 Respondent’s Position Statement............................ 3-11§ 3:2.4 Investigation and Determination............................ 3-12

[A] Preliminary Reinstatement ..................................... 3-12[B] Economic Reinstatement ........................................ 3-12[C] Motion for Stay of Preliminary Reinstatement .........3-13[C][1] Irreparable Injury.................................................. 3-14[C][2] Likelihood of Success on the Merits..................... 3-15[C][3] Balancing of Harms.............................................. 3-15[D] Enforcement of Preliminary Reinstatement

Orders ..................................................................... 3-15[D][1] Federal Court Enforcement .................................. 3-16[D][2] ALJ Sanctions....................................................... 3-17

§ 3:3 Appeals of OSHA Investigator Determinations............ 3-18§ 3:4 Administrative Law Judge Hearing ............................... 3-19

§ 3:4.1 Discovery ................................................................ 3-19§ 3:4.2 Expert Testimony .................................................... 3-20§ 3:4.3 Amendments to the Complaint.............................. 3-22§ 3:4.4 Dispositive Motions................................................ 3-23

[A] Motion for Dispositive Action ................................ 3-23[B] Motion for Summary Decision............................... 3-24

§ 3:5 Appeals Process............................................................. 3-25§ 3:5.1 Appeal to Administrative Review Board ................. 3-25§ 3:5.2 Interlocutory Appeals to the ARB........................... 3-26§ 3:5.3 Appeal to Court of Appeals..................................... 3-27

§ 3:6 Settlement..................................................................... 3-28§ 3:6.1 Release of SOX Claims ........................................... 3-29

Chapter 4 Federal District Court and Alternative Forums

§ 4:1 Introduction.................................................................... 4-1§ 4:1.1 Statute of Limitations ............................................... 4-5§ 4:1.2 Implications of Exhaustion Requirement.................. 4-7§ 4:1.3 Jury Trial ................................................................. 4-10

§ 4:2 Arbitration of Sarbanes-Oxley Claims .......................... 4-11§ 4:2.1 Arbitrability of SOX Claims Under FINRA Rules .....4-13

§ 4:3 Res Judicata and Collateral Estoppel ............................ 4-14§ 4:4 Is De Novo Review Available After Secretary ’s

Order Becomes Final? ................................................... 4-18

Chapter 5 Elements of a Prima Facie Case and EmployerDefenses

§ 5:1 Introduction.................................................................... 5-2§ 5:2 Protected Activity............................................................ 5-3

§ 5:2.1 “Reasonable Belief” Standard .................................... 5-5

xvi



[A] Belief of an Existing, As Opposed to Future,Violation ....................................................................5-5

[B] Objective and Subjective Components ofReasonable Belief Standard ........................................5-8

[B][1] Objectively Reasonable Belief ..................................5-8[B][1][a] Reasonable Person with Similar Training

and Experience.....................................................5-8[B][1][b] Laws, Rules, and Regulations Covered by

Section 806........................................................5-10[B][1][b][i] Mail Fraud: 18 U.S.C. § 1341 .......................5-11[B][1][b][ii] Wire Fraud: 18 U.S.C. § 1343 .......................5-14[B][1][b][iii] Bank Fraud: 18 U.S.C. § 1344.......................5-15[B][1][b][iv] Securities Fraud: 18 U.S.C. § 1348................5-17[B][1][b][v] Any Rule or Regulation of the SEC................5-20[B][1][b][vi] Any Provision of Federal Law Relating

to Fraud Against Shareholders .......................5-20[B][2] Fraud Against Shareholders...................................5-25[B][3] Materiality.............................................................5-27[B][4] Reporting Within Normal Job Duties ...................5-30[B][5] Violations of Internal Company Policy .................5-32[B][6] Violations of State Law .........................................5-34[B][7] Violations by Third Party ......................................5-35[C] Subjectively Reasonable Belief..................................5-36[D] “Provide Information”..............................................5-38[D][1] Whether Report Must Definitively and

Specifically Relate to Enumerated Categoryof Violations ..........................................................5-40

[D][2] Relevant Inquiry Is What Employee ActuallyCommunicated at Time of Protected Activity........ 5-42

[D][3] Refusals to Engage in Behavior..............................5-44[D][4] Providing Information Already Known to the

Company...............................................................5-46[D][5] Providing Information Already Known to the

Public ....................................................................5-47[D][6] Providing Information About One’s Own

Misconduct............................................................5-47[E] “Cause Information to Be Provided or

Otherwise Assist” ....................................................5-48[F] Authority to Investigate, Discover, or

Terminate Misconduct .............................................5-49§ 5:3 Knowledge of Protected Activity ....................................5-50

§ 5:3.1 Knowledge by Decisionmakers.................................5-51§ 5:4 Adverse Action...............................................................5-53

§ 5:4.1 Burlington Northern Standard .................................5-54§ 5:4.2 Menendez v. Halliburton Standard ..........................5-55§ 5:4.3 Post-Termination Conduct.......................................5-56

Table of Contents

xvii

§ 5:5 Causation ..................................................................... 5-57§ 5:5.1 Temporal Proximity ................................................ 5-58§ 5:5.2 Casual Nexus Between Protected Conduct

and Adverse Action................................................. 5-62§ 5:6 Clear and Convincing Evidence: Employer ’s

Legitimate, Nondiscriminatory Reasons....................... 5-63§ 5:6.1 Poor Performance.................................................... 5-64§ 5:6.2 Violation of Company Policy .................................. 5-66§ 5:6.3 Reduction in Force .................................................. 5-67§ 5:6.4 Mixed Motive Cases ............................................... 5-68

§ 5:7 Pretext........................................................................... 5-70

Chapter 6 Remedies

§ 6:1 Civil Remedies................................................................ 6-1§ 6:1.1 Compensatory Damages ........................................... 6-2

[A] Reinstatement........................................................... 6-2[B] Back Pay with Interest .............................................. 6-6[C] Special Damages (Litigation Costs, Expert

Witness Fees, and Reasonable Attorneys’ Fees)......... 6-9[D] Additional “Relief Necessary to Make the

Employee Whole”.................................................... 6-11[D][1] Front Pay .............................................................. 6-11[D][2] Relocation Costs and Job Search Expenses .......... 6-12[D][3] Injury to Reputation and Emotional Distress

Damages (Non-Pecuniary CompensatoryDamages).............................................................. 6-13

[D][4] Other Compensatory Damages ............................ 6-15§ 6:1.2 Punitive Damages ................................................... 6-16§ 6:1.3 Limitations on Damages......................................... 6-16

[A] “After-Acquired Evidence” of ComplainantMisconduct ............................................................. 6-17

[B] Complainant’s Duty to Mitigate Damages............. 6-18[C] Waiver ..................................................................... 6-20[D] Respondent’s Right to Attorneys’ Fees.................... 6-20

§ 6:2 Criminal Penalties ........................................................ 6-22

Chapter 7 Complaint Procedures and Codes of Ethics

§ 7:1 Complaint Procedures Mandated by theSarbanes-Oxley Act .......................................................... 7-1

§ 7:2 Conflicts Between Sarbanes-Oxley 301 and EU Law...... 7-2§ 7:3 Code of Ethics Requirement ........................................... 7-8


xviii

Chapter 8 Special Provisions for Attorneys

§ 8:1 Introduction.................................................................... 8-1§ 8:1.1 Section 307 of SOX .................................................. 8-2§ 8:1.2 The Client’s Right to Discharge Counsel or

Wrongful Discharge? ................................................. 8-3§ 8:1.3 Attorneys As Whistleblowers and Client

Confidences: The Ethical Dilemma.......................... 8-7§ 8:1.4 The Dodd-Frank Act............................................... 8-12

Chapter 9 Other Statutory and Public Policy Implications ofSOX Whistleblower Provisions

§ 9:1 Preemption ..................................................................... 9-1§ 9:2 California Whistleblower Statute.................................... 9-3§ 9:3 Public Policy Implications .............................................. 9-4§ 9:4 Sarbanes-Oxley ’s Potential to Resurrect Civil

RICO Claims in the Employment Context .................... 9-7

Chapter 10 Practical Suggestions for Compliance

§ 10:1 Preventative Steps......................................................... 10-1§ 10:2 Handling the Whistleblower ......................................... 10-2

Chapter 11 Internal Investigations

§ 11:1 The Importance of Internal Investigations ................... 11-2§ 11:1.1 Compliance with Obligations Under

Sarbanes-Oxley ....................................................... 11-2§ 11:1.2 Compliance with Fiduciary Duties ......................... 11-2§ 11:1.3 Cooperating with Government Investigations ........ 11-2

[A] SEC—The Seaboard Report and theSEC’s January 2010 Cooperation PolicyStatement................................................................ 11-3

[B] DOJ—Principles of Federal Prosecution ofBusiness Organizations........................................... 11-6

§ 11:2 Triggering Events .......................................................... 11-8§ 11:2.1 Internal Investigations After Dodd-Frank ............... 11-9

§ 11:3 First Steps ................................................................... 11-11§ 11:3.1 Assessment of Seriousness.................................... 11-12§ 11:3.2 Early Identification of the End Game ................... 11-12§ 11:3.3 Identifying the Decision Maker ............................ 11-12§ 11:3.4 Identifying the Investigator and His or

Her Role ................................................................. 11-13


Table of Contents

xix

§ 11:3.5 Defining the Scope of the Investigation................ 11-14§ 11:3.6 Getting Control of the Documents....................... 11-15§ 11:3.7 Stop Wrongful Conduct Immediately ................... 11-15

§ 11:4 Documents ................................................................. 11-15§ 11:4.1 Secure the Documents.......................................... 11-15§ 11:4.2 Document Collection ........................................... 11-16§ 11:4.3 Document Review................................................. 11-17

§ 11:5 Interviews ................................................................... 11-18§ 11:5.1 Interview Plan....................................................... 11-18§ 11:5.2 Conducting the Interview ..................................... 11-18

[A] Commencement of the Interview ......................... 11-18[B] Interviewing Techniques ....................................... 11-19[C] Answering Interviewee Questions......................... 11-19

§ 11:5.3 Interview Memoranda........................................... 11-20§ 11:6 The Investigation Report ............................................ 11-21

Chapter 12 Special Crisis Communication Issues

§ 12:1 Introduction.................................................................. 12-1§ 12:2 Before the Whistleblower Goes Public .......................... 12-2

§ 12:2.1 Organizing the Team .............................................. 12-2§ 12:2.2 Fact-Gathering ........................................................ 12-3§ 12:2.3 Creating “Good” Facts ............................................ 12-3§ 12:2.4 Message Development ............................................ 12-4§ 12:2.5 Materials for Public Explanation ............................ 12-4§ 12:2.6 Designation of Spokespeople .................................. 12-4§ 12:2.7 Identifying Constituencies ...................................... 12-4§ 12:2.8 Breaking the News Internally and to Other

Constituencies ........................................................ 12-5§ 12:2.9 Third-Party Validators ............................................. 12-5

§ 12:3 Proactive Communication Strategy:The Predicate Story ...................................................... 12-5

§ 12:4 Gone Public: Managing the Crisis by RapidResponse ....................................................................... 12-6

Chapter 13 Whistleblower Protections of the AmericanRecovery and Reinvestment Act of 2009

§ 13:1 Introduction.................................................................. 13-1§ 13:2 Statute of Limitations................................................... 13-2§ 13:3 Who Is Covered? .......................................................... 13-2

§ 13:3.1 “Non-Federal Employer” ......................................... 13-2§ 13:3.2 Employees Covered by the Stimulus Act ................ 13-2


xx


§ 13:4 What Complaints Are Covered? ................................... 13-3§ 13:5 Invoking the Protections of the Stimulus Act and

Available Relief ............................................................. 13-4§ 13:6 Burdens of Proof ........................................................... 13-5§ 13:7 Private Right of Action ................................................. 13-6§ 13:8 Other Provisions........................................................... 13-6§ 13:9 Ramifications for Employers......................................... 13-6

Chapter 14 Health Care Reform Law Contains NewWhistleblower Protections for Employees

§ 14:1 Introduction.................................................................. 14-1§ 14:2 Statute of Limitations................................................... 14-2§ 14:3 What Complaints Are Covered? ................................... 14-2§ 14:4 Complaint Procedure and Burdens of Proof

Under the Act ............................................................... 14-3§ 14:5 Private Right of Action ................................................. 14-4§ 14:6 Relief Available Under the Act...................................... 14-4

Chapter 15 [Reserved.]

Chapter 16 The Dodd-Frank Wall Street Reform andConsumer Protection Act

§ 16:1 Introduction.................................................................. 16-1§ 16:2 Sections 748 and 922: New SEC and CFTC

Whistleblower Incentives and Protections .................... 16-2§ 16:3 Sweeping Amendments to Section 1514A of the

Sarbanes-Oxley Act....................................................... 16-3§ 16:4 Section 1057: New Consumer Financial

Whistleblower Protections ............................................ 16-3


§ 17:1 Introduction.................................................................. 17-1§ 17:2 Definition of Whistleblower ......................................... 17-2§ 17:3 Eligibility for an Award................................................. 17-3

§ 17:3.1 Voluntary Submission of Information .................... 17-4§ 17:3.2 Original Information .............................................. 17-5

[A] Independent Knowledge or Analysis ....................... 17-5[B] Exclusions from Independent Knowledge and

Analysis .................................................................. 17-5§ 17:3.3 Additional Eligibility Requirements ........................ 17-8

Table of Contents

xxi

§ 17:4 Incentives to Report Internally ..................................... 17-9§ 17:5 Anonymous Reports to the SEC................................. 17-10§ 17:6 SEC’s Communications with Employees ................... 17-10§ 17:7 Amount of Award ....................................................... 17-11§ 17:8 Criteria for Determining Amount of Award............... 17-11

§ 17:8.1 Factors That May Increase Award Amount.......... 17-12§ 17:8.2 Factors That May Decrease Award Amount......... 17-14

§ 17:9 No Amnesty ............................................................... 17-15§ 17:10 Awards to Whistleblowers Who Engage in

Culpable Conduct....................................................... 17-15

Chapter 18 Section 922’s Whistleblower RetaliationProtections

§ 18:1 Introduction.................................................................. 18-1§ 18:2 Retroactivity.................................................................. 18-2§ 18:3 Procedures and Statute of Limitations.......................... 18-3

§ 18:3.1 Federal Court Action .............................................. 18-3§ 18:3.2 Statute of Limitations ............................................. 18-4

§ 18:4 Scope of Protections...................................................... 18-4§ 18:4.1 Categories of Protected Reporting ........................... 18-4

[A] SEC Final Rule........................................................ 18-4[B] Judicial Interpretations—Circuit Split .................... 18-5

§ 18:4.2 Employees Outside of the United States ................ 18-8§ 18:4.3 Individual Liability.................................................. 18-9§ 18:4.4 “Reasonable Belief” Standard .................................. 18-9§ 18:4.5 “Providing Information” to the SEC ..................... 18-10§ 18:4.6 Interaction with Bounty Provision........................ 18-11

§ 18:5 Remedies/Jury Trial..................................................... 18-11§ 18:6 Pre-Dispute Arbitration Agreements/Waivers of

Claims ........................................................................ 18-12


§ 19:1 Introduction.................................................................. 19-1§ 19:2 Definition of Whistleblower ......................................... 19-2§ 19:3 Eligibility for an Award................................................. 19-3

§ 19:3.1 Voluntary Submission of Information .................... 19-5§ 19:3.2 Original Information .............................................. 19-5

[A] Independent Knowledge or Analysis ....................... 19-6[B] Exclusions from Independent Knowledge ............... 19-6

§ 19:3.3 Additional Categories of Ineligible Individuals ....... 19-7§ 19:4 Incentives to Report Internally ..................................... 19-9


xxii

§ 19:5 Anonymous Reports to the CFTC.............................. 19-10§ 19:6 CFTC’s Communications with Employees ................ 19-10§ 19:7 Amount of Award ....................................................... 19-11§ 19:8 Criteria for Determining Amount of Award............... 19-11

§ 19:8.1 Factors That May Increase Award Amount.......... 19-12§ 19:8.2 Factors That May Decrease Award Amount......... 19-13

§ 19:9 No Immunity ............................................................. 19-14§ 19:10 Awards to Whistleblowers Who Engage in

Culpable Conduct....................................................... 19-15

Chapter 20 Section 748’s Whistleblower Anti-RetaliationProvisions

§ 20:1 Introduction.................................................................. 20-1§ 20:2 Who Is Covered? .......................................................... 20-2§ 20:3 Statute of Limitations and Procedures for

Enforcement.................................................................. 20-3§ 20:4 Remedies....................................................................... 20-3§ 20:5 Pre-Dispute Arbitration Agreements/Waivers of

Claims .......................................................................... 20-4

Chapter 21 Consumer Financial Whistleblower Protectionsof Section 1057

§ 21:1 Introduction.................................................................. 21-1§ 21:2 Covered Employees....................................................... 21-2§ 21:3 Protected Activities ....................................................... 21-3§ 21:4 Claim Procedures.......................................................... 21-4§ 21:5 Burdens of Proof ........................................................... 21-5§ 21:6 Remedies....................................................................... 21-5§ 21:7 Penalty for Frivolous Claims ........................................ 21-6§ 21:8 De Novo Review in Federal District Court................... 21-6§ 21:9 No Waiver Provision ..................................................... 21-6


Table of Contents

xxiii

Appendix A Section 806 of the Sarbanes-Oxley Act:18 U.S.C. § 1514A, as amended, andLegislative History ........................................ App. A-1

Appendix B Other Selections from the Sarbanes-Oxley Act:Sections 301, 307, 406, and 501 ................. App. B-1

Appendix C 29 C.F.R. Part 1980: Procedures for theHandling of Retaliation ComplaintsUnder Section 806 of the Sarbanes-OxleyAct of 2002 ...................................................App. C-1

Appendix D 29 C.F.R. Part 18: Rules of Practice andProcedure for Administrative Hearings Beforethe Office of Administrative Law Judges......App. D-1

Appendix E Federal Whistleblower Statutes .....................App. E-1

Appendix F State Whistleblower Statutes .........................App. F-1

Appendix G Excerpts from OSHA WhistleblowerInvestigations Manual ..................................App. G-1

Appendix H Section 1553 of the American Recoveryand Reinvestment Act of 2009.....................App. H-1

Appendix I Section 922 of the Dodd-Frank Act:15 U.S.C. § 78u-6, and Selections fromLegislative History ......................................... App. I-1

Appendix J Section 748 of the Dodd-Frank Act:7 U.S.C. § 26..................................................App. J-1

Appendix K Section 1057 of the Dodd-Frank Act:12 U.S.C. § 5567.......................................... App. K-1

Appendix L 17 C.F.R. Parts 240 and 249: SecuritiesWhistleblower Incentives and Protections ....App. L-1

Appendix M 17 C.F.R. Part 165: WhistleblowerIncentives and Protection ............................ App. M-1

Table of Authorities ........................................................................T-1

Index ................................................................................................. I-1


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Preface

This work is designed to provide the practitioner, companies, andindividuals who believe they have claims under the Sarbanes-OxleyAct or Dodd-Frank Act with a detailed understanding of the whistle-blower provisions of the Acts, the regulations promulgated thereunder,and the rapidly developing case law coming both from the adminis-trative process and the federal courts. With the planned supplements,we hope this work will be an invaluable source for keeping the variousconstituencies up to date on these important federal causes of action.

MICHAEL DELIKAT

RENÉE PHILLIPS

New York, New YorkSeptember, 2011

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