Whistleblower Reward and

Retaliation Claims: Current

Developments

Sean McKessy, Securities and Exchange CommissionSteven J. Pearlman, Proskauer Rose LLPAnthony Rosa, Department of Labor, Occupational Safety & Health Jason Zuckerman, Zuckerman Law

March 31, 2015

RECENT SEC

WHISTLEBLOWER

AWARDS

Recent SEC Whistleblower Awards

• Impact of 9/22/14 $30M award• Circumstances under which persons with

internal audit or compliance-related functions may be eligible for an award.

• Impact of awards to a corporate officer and internal auditor

• See OWB Annual Report at http://www.sec.gov/about/offices/owb/annual-report-2014.pdf

Gag clauses in

settlement agreements

and confidentiality

agreements

Gag Clauses

From OWB Annual Report:•OWB has been working to identify employee confidentiality, severance, and other kinds of agreements that may interfere with an employee’s ability to report potential wrongdoing to the SEC. •Rule 21F-17(a) under the Exchange Act provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”•The Office is actively working with Enforcement staff to identify and investigate practices in the use of confidentiality and other kinds of agreements that may violate this Commission rule.

• OSHA must approve all settlement agreements

• OSHA must approve private private (third-party) settlement agreements even if OSHA is not a party

• OSHA will not approve a provision that implies OSHA or DOL is party to a “confidentiality” agreement

• OSHA will not approve a “gag” order stopping the employee from talking to the Government

• OSHA may approve a “waiver of future employment” under certain conditions

SEC ENFORCEMENT ACTION FOR WHISTLEBLOWER RETALIATION

SEC Enforcement Action forWhistleblower Retaliation

• Section 21F(h)(1) of the Exchange Act prohibits employers from retaliating against individuals in the terms and conditions of their employment when they engage in whistleblowing activities. Rule 21F-2(b)(2) under the Exchange Act provides that Section 21F(h)(1) is enforceable in an action or proceeding brought by the Commission.

• In June 2014, the SEC brought its first anti-retaliation case, charging hedge fund advisory firm Paradigm Capital Management, Inc. with retaliating against the head trader for his disclosures to the SEC about prohibited principal transactions. Paradigm and the firm’s owner, Candace King Weir, agreed to pay $2.2 million to settle the Commission’s charges, including for the firm’s violation of Section 21F(h)(1).

Practical implications of the recent U.S. Supreme Court's Lawson v. FMR LLC decision

SOX 806 – Who is Covered?

• Company that registers a class of securities under Section 12 of the 1934 Securities and Exchange Act

• Company that is required to file reports with the Securities Exchange Commission under Section 15(d) of the 1934 Act

• A subsidiary or affiliate whose financial information is included in the consolidated financial statement of one of these

SOX 806 – Who is Covered?

• A nationally recognized statistical rating organization

• Any “officer, employee, contractor, subcontractor or agent of such company or nationally recognized statistical rating organization”

“Officer, Employee, Contractor, Subcontractor or Agent”

• Lawson v. FMR, No. 12-3 (Mar. 4, 2014)– SOX protects employees of a public company's

private contractors and subcontractors– Essentially same decision as ARB decision Spinner v.

David Landau & Assocs. LLC, No. 10-111 (ARB May 31, 2012), but did not defer to ARB

– Majority declined to adopt (but did not rule out) limiting principles

– Gibney v. Evolution Mktg. Research, LLC, No. 14-1913, 2014 WL 2611213 (E.D. Pa. June 11, 2014)

Impact of Lawson

• What is the statute’s reach? – Employees of 5,000 public companies– Employees of 6 million private companies– Untold millions of employees of public company

employees and officers

• Impact on mutual fund industry and law and accounting firms, private businesses generally

Sarbanes-Oxley and

Dodd-Frank Protected

Conduct

Sarbanes-Oxley Protected Conduct

• Sylvester v. Parexel Int’l, LLC, ARB 07-123, 2011 WL 2165854 (May 25, 2011) – Protected conduct not limited to disclosures of

shareholder fraud and C need not prove each element of fraud (scienter, materiality, etc.)

– Disclosure about a potential violation protected

– Abandons prior ARB’s Platone decision requiring that disclosure “definitively and specifically relate” to a violation of one of the categories of fraud or SEC rule violations

Sarbanes-Oxley Protected Conduct

• Will federal courts adopt Sylvester?– Nielsen v. AECOM Tech. Corp., No. 13-235-cv

(2d Cir. Aug. 8, 2014)– Weist v. Lynch, 710 F.3d 121 (3rd Cir. 2013)– Lockheed Martin Corp. v. Administrative

Review Bd., 717 F.3d 1121 (10th Cir. 2013)– But see Riddle v. First Tennessee Bank, Nat.

Ass’n., 497 Fed. App’x. 588 (6th Cir. 2012).

Dodd-Frank Act Protected Conduct

• Protected activity if: – Provided information to the SEC ; – Provided assistance in any SEC;– Made required or protected disclosures under

the Sarbanes-Oxley Act of 2002 . . .

Dodd-Frank Act Protected Conduct

• Does it protect internal disclosures?– No -- Asadi v. G.E. General (USA), L.L.C.,

720 F.3d 620 (5th Cir. 2013) – Yes – a number of district court have adopted

a contrary position, including two opinions post-Asadi

– Yes – SEC amicus briefs

SOX Causation Standard and Same-Decision Affirmative Defense

• Feldman v. Law Enforcement Associates Corp., 779 F. Supp. 2d 472 (E.D.N.C. March 10, 2011)

• Speegle v. Stone & Webster Construction, ARB 13-074, 2005-ERA-006 (ARB Apr. 25, 2014)

• Powers v. Union Pacific RR Co., ARB No. 13-034, ALJ No. 2010-FRS-030 (March 20, 2015)

SOX “Special Damages”

and Recent Jury Verdicts

SOX Special Damages

• $6M verdict in Zulfer v. Playboy Enterprises, Inc. No. 2:12-cv-08263 (C.D. Cal. Mar. 5, 2014)

• “Special damages” include emotional distress damages. Jones v. Southpeak Interactive Corp, — F.3d —-, 2015 WL 309626 (4th Cir. Jan. 26, 2015)

SOX Adverse Actions

• Merely “outing” a whistleblower is an adverse action. Halliburton, Inc. v. Admin. Review Bd., 771 F.3d 254, 259 (5th Cir. 2014)