January 2021 Review of Recent Whistleblower Developments
Whistleblower Developments is a periodic report covering significant cases, decisions, proposals, and legislation related to whistleblower statutes and how they may impact your business. Recent developments include:
SEC Whistleblower Awards Accelerate, with Nearly 25% of Total Program Awards Issued in Q4 of 2020
The fourth quarter of 2020 saw approximately $176 million in whistleblower awards1 – almost the same amount awarded in the entire previous fiscal year, which was itself a record-setting year.2
This acceleration was driven in part by a record-setting $114 million whistleblower award issued on October 22, 2020 to a single whistleblower whose information and assistance led to successful SEC enforcement and related actions. The SEC characterized the whistleblower’s actions as “extraordinary” and noted that the claimant “suffered serious personal and professional hardships” as a result of making a report. Even without this precedential award, the fourth quarter of 2020 award total was well above average. Notable awards issued this quarter include:
On November 3, 2020, the SEC announced payment in excess of $28 million to a whistleblower who provided significant information that aided the SEC in bringing a successful enforcement action, following the whistleblower’s internal report of information that prompted the company to initiate an internal investigation. The SEC noted the whistleblower saved the SEC time and resources by providing testimony and identifying a key witness, and the whistleblower’s information supported certain charges against a publicly traded company and its executives.
On November 5, 2020, the SEC announced an award in excess of $3.6 million to a whistleblower who provided information about misconduct occurring abroad, which augmented the whistleblower’s self-funded international travel to assist SEC staff. The order notes the claimant’s award was revised upward after the claimant contested the original award amount. It also notes that the law enforcement interests in the matter were high because the information provided concerned wrongful conduct abroad that otherwise would have been difficult for the government to detect.
On December 18, 2020, the SEC announced awards in excess of $3.6 million to whistleblowers in connection with three separate actions, including one $1.8 million-plus payment for providing information about a fraudulent scheme that resulted in the return of millions of dollars to harmed investors. In a second action, a whistleblower was awarded over $1.2 million. Although the SEC noted that the size of the reward had been impacted by the whistleblower’s own culpability and unreasonable delay, the order indicates the whistleblower’s award application first had been denied entirely. The SEC determined on review that the whistleblower should not be held responsible for having planned or initiated the misconduct, making him eligible for an award despite delayed reporting and personal benefit from the fraud.
New Anti-Money Laundering Act Law Incentivizes Whistleblowers
Overriding President Trump’s veto with substantial bipartisan support on New Year’s Day, Congress passed the National Defense Authorization Act of Fiscal Year 2021, which included the Anti-Money Laundering Act of 2020 (“ALMA” or the “Act”) (Public Law No. 116-283, §§ 6001-6511). The ALMA contains comprehensive reforms to the United States’ anti-money laundering laws, including an expansion of whistleblower awards and protections previously set forth at 31 U.S.C. §§ 5323 and 5328.
First, the Act makes whistleblower awards mandatory for those who “voluntarily provided original information … that led to a successful enforcement action” by the Department of Justice or the Treasury Department, concerning Bank Secrecy Act violations. See Pub. L. No. 116-283, § 6314(a) (adding 31 U.S.C. § 5323(b)(1)). Previously, whistleblower awards were discretionary under 31 U.S.C. § 5323. Second, awards now will be permitted in an amount up to 30% of ordered penalties, disgorgement, and interest from a successful enforcement action that results in monetary sanctions exceeding $1,000,000. Previously, awards were limited to $150,000, irrespective of the value of the ordered sanctions, in most cases. Eligible whistleblowers must provide information to their employer, Treasury, or DOJ.
The Act also provides whistleblowers with protections against retaliation by allowing them to file a complaint with the Department of Labor and, if not adjudicated within 180 days, to bring an action in federal district court. See Pub. L. No. 116-283, § 6314(a) (adding 31 U.S.C. § 5323(g)). Upon prevailing, an AMLA whistleblower is entitled to reinstatement, double back pay with interest, uncapped compensatory damages, litigation costs and reasonable attorney fees, and any other appropriate remedies with respect to the retaliatory conduct at issue. See id. (adding 31 U.S.C. § 5323(g)(3)(C)).
The text of the whistleblower provisions are much like those in the Dodd-Frank Act. If the trajectory of the SEC’s whistleblower program is any guide (see supra), these reforms are anticipated to generate significant interest among potential whistleblowers. Nevertheless, the full impact of these changes may depend in part on implementing regulations that have not yet been published as of this writing. For instance, as with the Dodd-Frank Act, details remain few as to how determinations of exact award amounts and percentages will be made in any case.
CFTC Releases Its Whistleblower Program 2020 Annual Report
In October, the Commodity Futures Trading Commission released its whistleblower program annual report for FY 2020. The CFTC’s Whistleblower Office (WBO) received 1,030 tips – a 36% increase over the previous, record year of 2018. During FY 2020, the CFTC granted 16 applications for whistleblower awards to individuals who voluntarily provided original information or analyses that led to successful enforcement actions. This represents 44% of the total award orders (25) issued since the program’s inception in 2012. Collectively these awards are associated with successful enforcement actions resulting in sanctions totaling nearly $1 billion. Award totals for FY 2020 summed to approximately $20 million.
The CFTC’s Division of Enforcement subsequently released its FY 2020 annual report on December 1, 2020. The report notes both that 30–40% of the Division’s ongoing investigations involve a whistleblower component and that “the Division expects the whistleblower program to continue to grow—and to continue to serve as an important part of the Commission’s broader enforcement efforts.”
Texas District Court Allows SOX Whistleblower Claim To Proceed Against Publicly-Traded Parent Company Of Whistleblower’s Employer
On October 19, 2020, a magistrate judge in the Eastern District of Texas issued a lengthy decision allowing a whistleblower to proceed to trial with his Sarbanes-Oxley Act (“SOX”) retaliation claim against both his employer and the publicly-traded parent company of his employer. Lozada-Leoni v. MoneyGram Int’l, Inc., No. 4:20-CV-68-RWS-CMC, 2020 WL 7000874 (E.D. Tex. Oct. 19, 2020). The court’s opinion recommended denial of a summary judgment motion brought by the publicly-traded parent company, MoneyGram International, Inc. (“MGI”), in which MGI argued Plaintiff was not its employee, but rather the employee of its subsidiary, MoneyGram Payments Systems, Inc. (“MPSI”).
Prior to Plaintiff’s employment, MGI had entered into a stipulated order with the Federal Trade Commission (“FTC”), requiring it to establish a comprehensive anti-fraud program, and MGI also entered into a deferred prosecution agreement (“DPA”) with the U.S. Department of Justice (“DOJ”). After Plaintiff was terminated, in 2018, DOJ levied a substantial fine against MGI and entered into an amended DPA, and the FTC secured compensatory and injunctive relief against MGI in a settlement agreement for its alleged violations of the earlier stipulated order.
The plaintiff worked for MPSI in the interim (beginning October 2016 as an MPSI compliance department employee). He was terminated in April 2017, after allegedly complaining to management about the same conduct that formed the bases for the amended DOJ DPA with MGI and for MGI’s settlement with the FTC for violations of the earlier FTC order. Pursuant to Section 806 of SOX, the whistleblower provision, 18 U.S.C. § 1514A, Plaintiff filed an administrative complaint with OSHA in September 2017, and, after a sufficient period of time, filed a whistleblower retaliation claim in the U.S. District Court for the Eastern District of Texas, alleging MGI and MPSI violated § 1514A by taking adverse employment actions against him, including termination because of his protected conduct.
MGI moved for summary judgment on the ground that Plaintiff only had been employed by MPSI, MGI’s subsidiary, and not by MGI itself. The court denied summary judgment in broad terms after “providing an exceedingly lengthy recitation of the law regarding § 1514A from both before and after Dodd-Frank.” 2020 WL 7000874, at *49. After analyzing decades of administrative decisions and court rulings, the magistrate judge held there were material factual questions as to whether MGI was liable under two different theories, one direct and one derivative.
First, there was a genuine issue of material fact as to whether Plaintiff was an “employee” of MGI for purposes of § 1514A. Although that provision does not define “employee,” the court reasoned the term is illuminated by the Department of Labor regulations’ more recent definitions of “employee” and “covered person,” and would include the employees of every constituent of a publicly traded company, including its wholly-owned subsidiaries. Second, there was a genuine issue of material fact as to whether MGI was liable to Plaintiff derivatively because Plaintiff’s employer, MPSI, was MGI’s agent. On this second theory, the court emphasized that the burden of proof of agency in the SOX whistleblower context is less demanding than in the labor law context; insofar as SOX is fundamentally an antifraud law, the agency question primarily can be resolved by considering whether MPSI was MGI’s agent for purposes of producing financial information consolidated into MGI’s financial reports.
The court then also denied a combined summary judgment motion of both MGI and MPSI, which had argued that Plaintiff failed to exhaust his administrative remedies by failing to include specific allegations in his pre-suit OSHA complaint relating to the alleged violations. The court emphasized the absence of formal pleading requirements and said a primary objective of Section 806’s exhaustion requirement is to put parties on notice of the allegations against them. It held that, although the allegations in Plaintiff’s OSHA complaint were “sparse,” he did identify the categories of conduct by the defendants that he believed to be illegal. Consequently, the defendants had been put on notice, and the pre-suit exhaustion requirement had been satisfied.
This decision serves as a valuable primer on SOX whistleblower protection jurisprudence. It also underscores the broad scope of persons potentially covered by the SOX’s whistleblower protection statute as well as the generous pleading standards available to potential whistleblowers who seek to invoke those protections.
2 Sept. 30, 2020 Press Release (“This year the SEC has made a record 39 individual awards of approximately $175 million, more than in any prior fiscal year.”).