the stakes are up: dodd-frank legislation’s impact on sox whistleblower litigation

The Stakes are Up: Dodd-Frank Legislation’s The Stakes are Up: Dodd-Frank Legislation’s Impact on SOX Whistleblower LitigationImpact on SOX Whistleblower Litigation

2 | © 2010 Seyfarth Shaw LLP

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


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.


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


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


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


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


Damages, Penalties & Other “Teeth”

Civil Criminal ReputationReinstatement “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

Cases garner significant publicity, adversely impacting reputation and goodwill

Back-pay with interestEmotional distress and loss of reputationAttorneys’ fees and costsOther “affirmative relief” (e.g., letter of apology, formal posting of decision)

SOX also provides for INDIVIDUAL LIABILITY


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


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 securities-related 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.


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.


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.


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.


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 self-regulatory 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.


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.


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.


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.


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.


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.


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


“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


“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


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


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


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


Executive Compensation ClawbacksWhen 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


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


Katherine Perrelli Craig ZajacNational Litigation Chair Vice President and General CounselSeyfarth Shaw LLP VCE

Christopher Robertson Deborah Hart-KleinPartner Vice President, ComplianceSeyfarth Shaw LLP Reed Elsevier

Barbara RobbCo-managing PartnerShilepsky Hartley Robb Casey Michon LLP

the stakes are up: dodd-frank legislation’s impact on sox whistleblower litigation

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