This past week, the SEC brought its first enforcement action ever to be based solely on retaliation against a whistleblower. On September 29, 2016, the SEC ordered International Game Technology (IGT) to pay a $500,000 penalty for terminating the employment of a whistleblower because he reported to senior management and the SEC that the company’s financial statements might be distorted. Though this is the second time the SEC has exercised its authority under the Dodd-Frank Act to redress whistleblower retaliation, it is the SEC’s first stand-alone retaliation case. The enforcement action underscores the high value the agency places on whistleblowers and indicates that the SEC Office of the Whistleblower will remain an aggressive advocate for whistleblowers under its new director, Jane Norberg.
The whistleblower joined IGT in 2008. When IGT terminated his employment on October 30, 2014, the whistleblower was a division director with a budget of more than $700 million and supervisory responsibility forup to eleven direct reports. Throughout his tenure at IGT, he received exceptional ratings and was described as the VP’s Supervisor’s top employee, as a “high potential” employee, and as an employee with a potential “future assignment” at the vice-president level. In addition, IGT even sought authorization from senior resources managers to pay him a special retention bonus.
Starting in June 2014, the whistleblower led several projects to determine whether it was cheaper for IGT to refurbish used parts using outside vendors or through internal refurbishment. During the project, the whistleblower became concerned that IGT was improperly accounting for costs associated with refurbished used parts. Although the whistleblower was not an accountant in the company, he reasonably believed that the company’s current method resulted in a $10 million discrepancy in the financial statements.
On July 30, 2014, the whistleblower reported his findings to his supervisors during a presentation. After raising concerns about the accounting method and its impact on the financial statements, the whistleblower had a heated disagreement with the executive supervisor on the issue. Immediately following the meeting, the executive supervisor emailed the whistleblower’s supervisor regarding the presentations, stating that, “I can’t allow [the whistleblower] to place those inflammatory statements into presentations, if there is not basis in fact.”
Thereafter, IGT conducted an internal investigation into the allegations made by the whistleblower. During the investigation, IGT retaliated against the whistleblower by removing him from job opportunities that were significant to performing his job successfully. On October 31, 2016, the internal investigation concluded that IGT’s cost accounting model was appropriate and did not cause its financial statements to be distorted. That same day, IGT terminated the whistleblower.
SOX’s Reasonable Belief Standard Provides Broad Protection
Although the whistleblower’s concern was ultimately incorrect, he was still protected under the SEC Whistleblower Program because he reasonably believed that IGT’s cost accounting model constituted a violation of federal securities laws. Recently, the trend in federal courts has been to broadly construe protected activity under this reasonable belief standard. This is a departure from the previous requirement that whistleblowers “definitively and specifically” identify the alleged violation at issue, which undermined potential whistleblowing.
The courts’ broad interpretation of the reasonable belief standard is important because whistleblowers’ must be free to make good faith disclosures, even if they end up being wrong. As Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said, “[s]trong enforcement of the anti-retaliation protections is critical to the success of the SEC’s whistleblower program. This [IGT] whistleblower noticed something that he felt might lead to inaccurate financial reporting and law violations, and he was wrongfully targeted for doing the right thing and reporting it.”
Similarly, Jane A. Norberg, Chief of the SEC’s Office of the Whistleblower, stated that “[b]ringing retaliation cases, including this first stand-alone retaliation case, illustrates the high priority we place on ensuring a safe environment for whistleblowers. We will continue to exercise our anti-retaliation authority when companies take reprisals for whistleblowing efforts.”
Prior SEC Enforcement Action for Whistleblower Retaliation
The IGT enforcement action is consistent with an SEC enforcement action against hedge fund advisory firm Paradigm Capital Management (“Paradigm”), which also redressed whistleblower retaliation. On June 16, 2014, the SEC announced that it was taking enforcement action against Paradigm for engaging in prohibited principal transactions and for retaliating against the whistleblower who disclosed the unlawful trading activity to the SEC.
According to the order, Paradigm retaliated against its head trader for disclosing, internally and to the SEC, prohibited principal transactions with an affiliated broker-dealer while trading on behalf of a hedge fund client. The transactions were a tax-avoidance strategy under which realized losses were used to offset the hedge fund’s realized gains.
When Paradigm learned that the head trader had disclosed the unlawful principal transactions to the SEC, it retaliated against him by removing him from his position as head trader, changing his job duties, placing him on administrative leave, and permitting him to return from administrative leave only in a compliance capacity, not as head trader. The whistleblower ultimately resigned his position.
Paradigm settled the SEC charges by consenting to the entry of an order finding that it violated the anti-retaliation provision of Dodd-Frank and committed other securities law violations, agreeing to pay more than $1 million to shareholders and to hire a compliance consultant to overhaul their internal procedures, and entering into a cease-and-desist order.
The SEC’s press release accompanying the order includes the following statement by Enforcement Director Ceresney: “Those who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.” The Paradigm enforcement action suggests that whistleblower retaliation can result in liability far beyond the damages that a whistleblower can obtain in a retaliation action and that retaliation can invite or heighten SEC scrutiny.
These enforcement actions signal to companies that retaliating against a whistleblower can result not only in a private suit brought by the whistleblower, but also in a unilateral SEC enforcement action. The IGT action in particular indicates that employers cannot take adverse actions against whistleblowers, even when the underlying disclosure is in error.