Circuit Split Over Protection Afforded By Dodd-Frank Whistleblower Provision Widens

by Joseph C. Toris and Benjamin L. Rouder

In Somers v. Digital Realty Trust, 15-17352 (9th Cir. March 8, 2017), a split Ninth Circuit Court of Appeals widened an existing circuit court split by ruling that Section 21F of the Dodd-Frank Act (“DFA”) protects individuals who make internal disclosures as well as those who make disclosures to the Securities and Exchange Commission (“SEC”).

Paul Somers, a former Digital Realty Trust, Inc. executive, alleged his employment was terminated after he reported possible securities law violations to senior management. Although Somers never provided any information to the SEC, he claimed protection under Section 21 of the DFA’s anti-retaliation provision.

Digital Realty sought dismissal of Somers’ DFA claim based on the fact that the DFA defines a “whistleblower” as an employee who makes a report “to the Commission.” Under this definition of “whistleblower,” Digital Realty argued, Somers did not qualify for protection under Section 21F. Somers countered that his actions were protected under subsection 21F(h)(1)(A)(iii), which extends anti-retaliation protection to individuals who make internal disclosures of alleged unlawful activity. The district court agreed with Somers and the split three-judge panel affirmed this decision.

The tension between the anti-retaliation provision in 21F(h)(1)(A)(iii) and the whistleblower definition articulated in  21F(a)(6) has resulted in uncertainty and division across the federal judiciary.

A majority of courts have adopted an inclusive definition of “whistleblower.” In Berman v. Neo@Ogilvy LLC, 14-4626 (2d Cir. Sept. 10, 2015), the Second Circuit held that an individual’s internal complaint was sufficient to support a claim of retaliation under the DFA.  In Berman, and subsequently in Somers, the court relied on the SEC’s implementing regulations that resolved the ambiguity in favor of individuals who only made internal disclosures of alleged unlawful activity.

Somers and Berman conflict with the Fifth Circuit Court’s decision in Asadi v. G.E. Energy, No. 12-20522 (5th Cir. July 17, 2013). This court the first federal appeals court to decide this issue, held the DFA’s definitional provision limited protection to individuals who in fact make a disclosure of information to the SEC.  The dissent in Somers followed the same reasoning as Asadi: language that is expressly defined must have a fixed definition. The Sixth Circuit considered similar issues but determined the employee’s claims were too vague to afford him whistleblower protections.  The Third Circuit is currently weighing this issue.

The Somers decision reflects a concern that a narrower reading of the DFA will undercut Congressional intent to protect consumers from abusive financial services practices.  President Trump has proposed narrowing the scope of the DFA, but it is unclear what effect, if any, new legislation will have on the statute’s whistleblower provisions.  In the interim, the DFA will remain an appealing option for internal whistleblowers and the widening split may prompt attention from the Supreme Court.

Ex-GC Awarded $8 Million For Retaliatory Firing

Written by David A. Nenni and Jessica L. Sussman

A California federal jury awarded Sanford Wadler, former General Counsel of Bio-Rad Laboratories, $8 million for his claims against his former employer under the whistleblower provisions of Sarbanes-Oxley (SOX) and the Dodd-Frank Acts (DFA). This case implicates a number of key issues confronting companies and their in-house legal teams, including:  (1) protections and scope of the attorney-client privilege; (2) what constitutes protected activity from an in-house attorney or compliance officer; (3) the importance of consistent and timely performance critiques; and (4) preparing adverse employment decisions to be scrutinized by a judge, jury, or arbitrator.  The case also highlights the existing split among federal courts regarding what constitutes a “whistleblower” under the DFA.

Background on the Wadler v. Bio-Rad Laboratories Case – Wadler was the General Counsel of Bio-Rad for over 20 years. In 2011, while Wadler was its General Counsel, Bio-Rad uncovered evidence of Foreign Corrupt Practices Act (“FCPA”) violations by Bio-Rad employees in Vietnam, Thailand, and Russia.  Bio-Rad had outside counsel investigate these issues, as well as concerns about such violations in China.  Outside counsel concluded that violations had occurred in Vietnam, Thailand, and Russia, but not China.  Bio-Rad addressed the violations with the Department of Justice, ultimately paying $55 million to resolve the matters.  According to Bio-Rad’s evidence at trial, its outside counsel during or after these investigations advised Bio-Rad that Wadler should be terminated due to his lack of oversight of these issues.

In February 2013, Wadler issued a report to Bio-Rad’s audit committee detailing his alleged concerns that the Company had indeed violated the FCPA in China. Bio-Rad hired yet another outside firm to investigate Wadler’s allegations, which overlapped with a pre-existing investigation.  The outside firm concluded that Bio-Rad had not violated the FCPA in China.  The Department of Justice reached a similar conclusion related to Bio-Rad’s China activities.

In June 2013, Bio-Rad terminated Wadler. Bio-Rad’s stated justification for Wadler’s termination was his general poor performance, which led to the FCPA violations in Vietnam, Thailand, and Russia, as well as his mistreatment of employees, yelling at them and slamming his fists on tables.

To support its decision to terminate, Bio-Rad presented the jury with a 2012 performance review documenting Wadler’s poor performance, which Bio-Rad purportedly addressed with Wadler in April 2013. However, metadata on the performance review (the underlying electronic information in the document) revealed that it was not created until July 2013, after Wadler’s termination.

During trial, Wadler also presented evidence that (1) the Company had previously given him generally positive performance reviews and (2) others were not terminated after yelling at subordinates and co-workers.

When presented with the issues, a jury concluded that Wadler (1) engaged in protected activity under SOX and DFA when he issued the report to the audit committee and (2) Bio-Rad terminated Wadler for engaging in that protected activity. The jury awarded Wadler $2.96 million in lost wages and stock options and $5 million in punitive damages.  Under the DFA, Wadler’s lost wages could be doubled.

As noted above, this case presents a number of significant issues for companies supervising in-house attorneys, mitigating compliance risks, and avoiding whistleblower claims.

The Attorney-Client Privilege – In a decision from December 20, 2016, the Court addressed the attorney-client privilege issue in great detail as much of the information Wadler needed to pursue his claims was covered by the attorney-client privilege. After a detailed analysis of state and federal law, the Court found the following:  (1) Bio-Rad waived the attorney-client privilege as to certain information it presented to the Department of Justice and OSHA during agency investigations; (2) Wadler would be permitted to present evidence otherwise protected by the attorney-client privilege so long as it was “reasonably necessary to any claim or defense in the case”; and (3) to the extent California’s attorney ethics rules prevented Wadler from disclosing certain attorney-client privileged information in his case, those rules were preempted by SOX regulations, which expressly preempted conflicting or inconsistent state laws.  While it may ultimately prove difficult to defend a whistleblower claim based on the defense of attorney-client privilege, employers should be mindful of certain disclosures at government agencies that might waive the privilege and affect the company’s ability to preserve the privilege.

The Expansiveness of Protected Activity in General – As a general counsel, one of Wadler’s jobs was to identify and mitigate legal risks for Bio-Rad by advising Bio-Rad of potential areas of concern. Most circuits have found that before being deemed to have engaged in protected activity, employees in compliance positions must first overcome a general “presumption that they are merely acting in accordance with their employment obligations” and not engaging in legally protected activities.[1]  While this issue does not appear to have been an issue at trial, it certainly is an issue that companies should be aware of when disciplining or terminating in-house attorneys or compliance officers.  Companies should be mindful of reports or actions that the employee might later claim were protected activities.

The Importance of Consistently Addressing Performance-Related Issues When They Arise – When an employment relationship reaches the point of separation due to performance-related issues, it is best for a company to be able to show that (1) the employee was previously disciplined for conduct that led to termination and (2) others have not been permitted to engage in such conduct and remain employed. Wadler’s presentation of evidence that his performance review was created after his termination suggested that he had not been previously criticized in the manner the company claimed and possibly that the business justifications the company presented were not legitimate.  His presentation of evidence that others had yelled or otherwise mistreated other employees similarly demonstrated that the company likely did not consider such conduct to be a terminable offense.  Prior discussions of performance deficiencies with Wadler and consistent discipline of others engaged in similar conduct might have persuaded the jury that those were legitimate reasons for Wadler’s termination and dissuaded them from adopting Wadler’s version of events.

Preparing Adverse Employment Decisions to Be Scrutinized by a Third Party – When an employer takes an adverse action against an employee, it is almost always conceivable that a judge, jury, or arbitrator might have the opportunity to second-guess that decision. Accordingly, it is important that the company present itself as the most reasonable person in the room such that the third party will side in the company’s favor.  Based on reports from the Wadler trial, it appears that metadata cast doubt on the history of Wadler’s documented poor performance and Bio-Rad’s credibility for the jury.  By relying on the April 2013 performance evidence, which metadata showed was created after Wadler’s termination in July 2013, a jury was able to make a credibility determination relative to Bio-Rad, which cast doubt on the explanations it provided for Wadler’s termination.  This, in turn, allowed Wadler to fill that void with his theory of the termination.  At any trial, arbitration, or on summary judgment, it is important that the evidence show the employer to be the most reasonable person in the room.  Misdated or after-the-fact justifications allow a jury to draw a negative conclusion about the veracity of a company’s decision.

Courts Are Still Split on What Constitutes a Whistleblower Under the DFA – The Wadler case again highlights the still existent split among federal courts regarding what constitutes “protected activity” under the DFA. By its language, the DFA prohibits retaliation against an “individual who provides . . . information relating to a violation of . . . securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC].”  The Fifth Circuit has held that an employee must disclose relevant information about violations of securities laws to the SEC to gain whistleblower protections under the DFA. See Asadi v. GE Energy, 720 F.3d 620 (5th Cir. 2013). The Second Circuit has held that an employee need only disclose such information internally to the employer to gain such whistleblower protections. See Berman v. Neo@Ogilvy, 801 F.3d 145 (2d Cir. 2015).  The Northern District of California in the Wadler case sided with the Second Circuit, finding that a whistleblower need not report a violation of law to the SEC to be deemed a whistleblower under the DFA. See Wadler v. Bio-Rad Labs., Inc., 141 F.Supp.3d 1005, 1024-1027 (N.D. Cal. 2015).  An employee can gain such protections by making an internal report.  This split is increasingly important in whistleblower cases due to the DFA’s provision doubling back pay awards for successful plaintiffs.

[1] See U.S. ex rel. Williams v. Martin-Baker Aircraft Co., 389 F.3d 1251, 1261 (D.C. Cir. 2004) (citing Yuhasz v. Brush Wellman, Inc., 341 F.3d 559, 568 (6th Cir. 2003); United States ex rel. Ramseyer v. Century Healthcare Corp., 90 F.3d 1514, 1522-23 (10th Cir. 1996)). See also Stein v. Tri-City Healthcare Dist., 2014 U.S. Dist. LEXIS 121112 (S.D. Cal., Aug. 27, 2014) (“A compliance officer like Stein must prove that he went beyond his normal job duties to show that his employer knew he was engaging in protected activities.”). 

CFTC Has Banner Year For Enforcement Actions in FY2016

The U.S. Commodity Futures Trading Commission (CFTC) recently released its enforcement results for fiscal year 2016.  In FY 2016, the CFTC filed 68 enforcement actions and obtained restitution, disgorgement and penalty orders totaling approximately $1.29 billion.  The CFTC collected and deposited at the U.S. Treasury over $484 million in civil monetary penalties, nearly double the agency’s operating budget for FY 2016.  CFTC also secured over $748 million in civil monetary penalties and $543 million in restitution and disgorgement orders.  It pursued litigation in over 100 cases and issued its largest award to a whistleblower to date, for more than $10 million.

Despite its “banner year” the future of the program is in question.  As reported in the Jackson Lewis P.C. November 10, 2016 update following the election of Donald Trump http://www.jacksonlewis.com/publication/workplace-law-under-president-elect-donald-trump-what-expect then President-elect Trump singled out the Dodd-Frank Act during the campaign as making it impossible for banks to lend money to businesses for the purpose of creating jobs.  Therefore, a repeal of the entire law or parts of it is possible under President Trump and this might encourage Congress and the Securities and Exchange Commission (SEC) to rely more heavily on the Sarbanes-Oxley Act (SOX) whistleblower provisions and thus mandate that corporate compliance programs, as developed by publicly traded companies, be increasingly robust, providing for greater “self-regulation.”  Where this would leave the CFTC whistleblower program remains to be seen.

Below is a chart of the 68 enforcement actions filed by the CFTC in FY 2016, by category.

FY 2016 Enforcement Actions by Category
Manipulation, Attempted Manipulation, False Reporting, Disruptive Trading 4
Protection of Customer Funds and Financial Integrity 8
Retail Fraud 30
Illegal Off-Exchange Contracts, Failure to Register 8
Other Trade Practice: Wash Trades, Fictitious Trades, Position Limits, Trading Ahead 4
Misappropriation of Material, Non Public , Confidential Information, Misconduct by Employees against their Employers 4
Reporting, Recordkeeping 9
Statutory Disqualification 1
Total Number of Enforcement Actions Filed 68
Notes: Some cases involve multiple types of charges, but are listed above by the primary charges.  For example, 3 retail fraud actions also involved illegal, off-exchange transactions; 5 actions against registrants included a failure to supervise violation; 3 actions also involved violation of a prior CFTC order; and 9 actions also involved false statements to the CFTC or NFA.

The mission of the CFTC is to “foster open, transparent, competitive, and financially sound markets, to avoid systemic risk, and to protect the market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act.”  The CFTC’s whistleblower program was created by the Dodd-Frank Act and allows for the payment of monetary awards to eligible whistleblowers, and provides anti-retaliation protections for whistleblowers who share information with or assist the CFTC.

Under the CFTC’s whistleblower program, the agency will pay awards to eligible whistleblowers who voluntarily provide the CFTC with original information about violations of the Commodity Exchange Act (CEA) that lead to the CFTC bringing an enforcement action that results in more than $1 million in monetary sanction.  The CFTC can also pay whistleblower awards based on monetary sanctions collected by other authorities in actions that are related to a CFTC enforcement action, and are based on information provided by a CFTC whistleblower.  The total amount of a whistleblower award will be between 10 and 30 percent of the monetary sanctions collected in either the CFTC action or the related action.  Under the DFA, employers may not retaliate against whistleblowers for reporting violations of the CEA to the CFTC. In general, employers may not discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against a whistleblower because of any lawful act done by the whistleblower.

The $10 million whistleblower award in FY 2016 is the largest award since Congress created the CFTC whistleblower program in 2010.  To date, the CFTC has made just four whistleblower awards.  The CFTC and the SEC whistleblower programs were set up at the same time to encourage whistleblowers in response to the financial crisis.  Since their creation, the SEC program has paid out significantly more in whistleblower awards than the CFTC.

What to Expect in Terms of Criminal Justice Priorities Under Attorney General Sessions

Senator Jeff Sessions as U.S. Attorney General would be tough on urban crime, corporate wrongdoers, and immigration violations. An analysis of his recent Senate confirmation testimony, record as U.S. Attorney for the Southern District of Alabama, and public comments as a U.S. Senator, provides a picture of some of the prosecution priorities that Sessions is likely to implement as Attorney General.

A former Assistant U.S. Attorney (1975-77), U.S. Attorney (1981-93), and Attorney General of Alabama (1995-97), Sessions is no newcomer to this field and has impressive qualifications for the role that he will occupy.  He undoubtedly will bring strong support for law enforcement, respect for the rule of law, and a commitment to many of the law enforcement objectives outlined by President Donald Trump during the campaign.

During his confirmation testimony, Sessions expressed concern for the number of police officers killed in the line of duty, noting that many in law enforcement have felt abandoned by the “political leadership of this country” in recent years.  He emphasized building trust between police and the communities they serve, and the need for law enforcement to step up efforts to protect citizens in America’s cities. Coupled with President Trump’s comments on the campaign trail about that unacceptable level of inner city violence, and his recent suggestion that he may “send in the Feds” to help the City of Chicago get the rising murder rate under control, we can expect Sessions to devote substantial resources to increasing investigations and prosecutions of urban gang activity, drug-related violence, and criminal activity directed at law enforcement.

Relatedly, Senator Sessions has been a vocal opponent of state laws legalizing marijuana, which he has described as “dangerous,” and likely a gateway drug to more addictive substances.  We expect to see an eventual change in the Obama Administration’s hands-off policy on recreational marijuana and a renewed enforcement of the federal Controlled Substances Act.

In the area of corporate crime, a Sessions’ Justice Department likely will maintain focus on while collar crime and continue efforts (currently reflected in DOJ’s Yates Memorandum) to prosecute individuals responsible for committing corporate crimes.  In response to pointed questions during his confirmation hearing on whether he would continue investigations into white collar crime and corporate wrongdoing, Sessions said it seemed to him that “corporate officers who caused a problem should be subjected to more severe punishment than stockholders of the company who didn’t know anything about it.”  This indicates a likely priority for enhancing the focus on culpable corporate officers and employees, rather than simply imposing significant civil fines and monetary penalties that might affect the share value of a company.  Sessions’ past public comments as both a federal and state prosecutor, and as a Senator, also reflect a long-held belief that the prosecution of individuals serves as the most effective deterrent against future corporate wrongdoing.  Expect this approach to continue under a Sessions’ Justice Department.

Finally, as recent headlines reflect, Trump is taking decisive, albeit controversial, actions on immigration and border control issues, consistent with positions and themes he articulated during the campaign.  The President certainly will be looking to the DOJ to support these efforts, and to significantly enhance efforts to investigate and prosecute immigration and visa-related offenses and to deport undocumented offenders.  Sessions has pledged during recent hearings to respect the civil and constitutional rights of all persons, but to aggressively enforce existing federal laws.

Jackson Lewis’ White Collar and Government Enforcement practice group includes former federal prosecutors, immigration specialists, and experienced defense practitioners who closely monitor changes and developments in federal criminal law and policy, and regularly advise and defend companies, municipalities, institutions, and individuals facing law enforcement and regulatory issues.

California Court Rules Sarbanes-Oxley Preempts California Law Regarding Privileged Communications in Suit by Former In-House Counsel

Written by Joseph C. Toris and Benjamin L. Rouder

By determining that the Sarbanes-Oxley Act (“SOX” or the “Act”) preempts California’s ethical rules, the Northern District of California ruled that an in-house attorney can rely on privileged communications and confidential information to the extent they are reasonably necessary to assert a claim or defense. Wadler v. Bio-Rad Laboratories, Inc., et al., No. 3:15-cv-02356 (N.D. Cal. Dec. 20, 2016).

Plaintiff Sanford Wadler is former General Counsel for Defendant Bio-Rad Laboratories, Inc. Plaintiff served in that role for nearly twenty-five years until his discharge in 2013.  Thereafter, Plaintiff filed suit against the Company alleging that his employment was terminated because he was investigating potential Foreign Corrupt Practices Act violations, and had reported his concerns to the Company’s Audit Committee.  The Company contends that Plaintiff’s employment was terminated due to his sub-standard work performance and poor behavior.

In proceedings before both the Securities and Exchange Commission and the Department of Labor, as well as in the federal district court, the Company did not object to the public filing of allegedly privileged information, and did not raise any objections or defense on the basis of confidentiality or privilege. However, upon substituting counsel, the Company sought to exclude all evidence and testimony based on information Plaintiff learned in the course of his services as General Counsel on the basis of privilege.  In making this argument, the Company argued, inter alia, that California’s laws governing attorney conduct precluded the disclosure of any confidential client information that Plaintiff learned in his role as in-house counsel.  The Company argued that California’s statutory and ethical rules – which protect a client’s confidences except in cases of threatened criminal action that can lead to death or serious injury – barred Plaintiff from offering the evidence necessary to prove his claim.

The Court held that SOX preempts California’s ethical and statutory rules, and permit in-house attorneys to introduce privileged information and communications in whistleblower actions. Moreover, the Court held that, to the extent that California’s ethical rules allow for more limited disclosures of privileged and confidential communications, SOX permits an attorney pursuing a retaliatory discharge claim under the Act to make broader disclosures of privileged information and communications.  However, the Court held that an attorney would only be permitted to introduce privileged and confidential communications upon a showing of a reasonable belief by the attorney that the information is necessary to prove his or her claims or defenses.

 The Wadler decision presents a potential concern for employers facing retaliation lawsuits from in-house counsel.  Employers are typically concerned as to whether and to what extent communications between management and in-house counsel will be protected by the attorney-client privilege. Based on the Wadler decision, even communications that might otherwise be protected by the privilege could be subject to disclosure if the party claiming retaliation is in-house counsel. As a result, in taking adverse actions against in-house counsel, employers should review the potential impact of foreseeable disclosures or prior communications with that counsel in the event of a SOX retaliation lawsuit.

U.S. Securities and Exchange Commission Surpasses $100 Million in Awards Through Whistleblower Program

On August 30, 2016, the U.S. Securities and Exchange Commission (“SEC”) announced that it surpassed the $100 million mark in monetary awards for whistleblowers. Through the enactment of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), Congress established the whistleblower program to incentivize whistleblowers who possess “specific, credible and timely” information about federal securities laws violations to report information to the SEC. At the Sixteenth Annual Taxpayers Against Fraud Conference, held on September 14, 2016, SEC Enforcement Director Andrew Ceresney addressed this recent milestone and how the SEC intends to expand its mandate to prevent and prosecute securities violations through its whistleblower program.

The SEC’s Recent Awards To Whistleblowers

How does the SEC carry out its mandate by incentivizing individuals to come forward with information? Section 922 of the Dodd-Frank Act, codified 15 U.S.C. § 78u-6, encourages individuals to report information regarding securities laws violations by requiring the SEC to pay substantial monetary awards to individuals who provide information that ultimately leads to a successful enforcement action yielding monetary sanctions of over $1 million.

Since the inception of the SEC’s whistleblower program, the SEC has received more than 14,000 tips from whistleblowers in the United States and in 95 foreign countries, and has awarded an estimated $111 million to 34 whistleblowers. In 2016 alone, the SEC awarded over $50,500,000 to whistleblowers.  Just recently, on September 20, 2016, the SEC announced that it awarded $4 million to a whistleblower who provided original information that alerted the SEC to an alleged fraud. In August 2016, the SEC awarded $22.4 million to a company insider, who disclosed alleged accounting fraud at the insider’s company.  In June 2016, the SEC awarded more than $17 million to a former employee, whose detailed tip of key original information advanced the SEC’s investigation into the whistleblower’s former employer.  In May 2016, the SEC awarded a former employee over $5 million for detailed tips that helped the SEC uncover securities violations. In May 2016, the SEC again awarded $3.5 million to a company employee, who provided additional evidence of wrongdoing that strengthened an ongoing investigation of the SEC.  In March 2016, the SEC awarded each of three whistleblowers for coming forward with information, for a total award of $2 million. One whistleblower received $1.8 million of the $2 million award for providing key original information that prompted the SEC to open its investigation, and for continuing to provide information throughout the investigation.  In 2015, the SEC awarded an estimated $5 million to whistleblowers.  In 2014, the SEC awarded more than $30 million, the largest award in the history of the whistleblower program, to a foreign whistleblower who provided key original information regarding an ongoing fraud that led to a successful SEC enforcement action.

In addition to the use of monetary awards, the SEC encourages whistleblowers to come forward by affording a private cause of action against an employer who takes an unlawful retaliatory action against the whistleblower. The SEC has also taken measures to impede the use of confidentiality agreements that discourage individuals from reporting securities laws violations.  (Additional information on these efforts can be found here and here.) The SEC recently announced that it has brought four actions against companies for including such language in confidentiality and severance agreements.

Who Qualifies As A Whistleblower

In his September 14, 2016 speech, SEC Enforcement Director Ceresney suggested that anyone, either an insider or outsider of a company, can potentially be a whistleblower. Section 922 of the Dodd-Frank Act defines a “whistleblower” as any individual, alone or jointly with others, who provides information relating to a violation of the securities laws to the SEC, in the manner established by rule or regulation, or by the SEC. See 15 U.S.C. § 78u-6(a)(6).  Enforcement Director Ceresney acknowledged that company insiders, such as current and former employees, and company outsiders, such as independent industry experts, have proven to be equally valuable whistleblowers.  For example, in January 2016, the SEC awarded more than $700,000 to a company outsider who provided independent data analysis that led to a successful SEC enforcement action. Enforcement Director Ceresney encouraged future whistleblowers to come forward without delay. Mr. Ceresney also encouraged whistleblower counsel to take an active role in the reporting process. Quicker reporting and a more active “whistleblower” bar likely mean more activity to come in this area.

The Jackson Lewis Corporate Governance and Internal Investigations practice represents employers against Sarbanes-Oxley and Dodd-Frank whistleblower claims and conducts internal investigations.

Sometimes a Complaint is Just a Complaint: Eighth Circuit Applies Reasonableness Standard to Reject Employee’s SOX Retaliation Claim

Earlier this summer, in Beacom v. Oracle, the U.S. Court of Appeals for the Eighth Circuit affirmed summary judgment dismissing the SOX and Dodd Frank Act claims of an employee who was fired from his Vice President position after he says that he complained about changes in his employer’s financial forecasting. The Court upheld dismissal of that claim based on the standard that a SOX plaintiff must prove that he “subjectively believe[d] the employer’s conduct violated a law relating to fraud against shareholders, and the employee’s belief must be objectively reasonable” (Emphasis added.) According to the Minnesota District Court that initially heard and dismissed Beacom’s claim and the Court of Appeals that affirmed, the plaintiff in this case could do neither.

The record established that in 2011 Oracle hired a new General Manger, over Beacom, who had served as the interim GM. The new GM revised the method for financial forecasts and sales quotas set for Beacom and the sales force he oversaw. The forecasts required higher results than Beacom (and the Company) had previously achieved. The group did not achieve those results in the initial quarters following these changes. In early 2012, Beacom complained to Human Resources that the new forecasts set unreasonable expectations about what his group could achieve. After another quarter passed without meeting the new forecasts and senior management was concerned about Beacom’s lack of a strategic plan to close a deal, Beacom was fired for poor performance.

Both the lower court and the appeals court cited the two-part reasonableness standard quoted above. On the subjective belief element, the District Court found that Beacom did not produce evidence that he believed at the time that he complained to HR that the higher targets risked fraud on the investors, although he claimed as much in his lawsuit. Ultimately, however, the Court of Appeals relied on its examination of the objective belief prong of the reasonableness test to dismiss Beacom’s claim. That is – whether Beacom proved “that a reasonable person in the same factual circumstances with the same training and experience would believe that the employer violated securities laws.” The courts approached this issue from a few vantage points. First, the analysis considered that Beacom’s group represented just a fraction of Oracle’s overall business and the alleged inflation of forecasts for that small group would not impact the Company’s share price. The courts also examined how closely the targets had been missed, Beacom’s own statements during his employment about how he had planned to achieve them, and the lack of evidence that the targets were unobtainable. Ultimately, although the targets were repeatedly higher than achieved results, they were not disproportionate to conceivable outcomes, industry experience, or the Company’s overall financial results.

This conclusion is an important victory not just for the employer involved, but for all employers, as it offers reassurance that not every complaint is given talismanic affect under SOX. This decision put the burden squarely on the ex-employee to show more than merely a complaint that the sales targets were higher than he believed they should be. Although an employee doesn’t have to use the word “fraud” for a complaint to be considered “protected activity” under SOX, he had to prove that he reasonably believed that the decisions to which he objected were fraudulent. Indeed, the lower court went so far as to say that Beacom could not succeed on his claim “absent evidence that [the new] targets bore no relationship to reality–that they were a material misrepresentation … intended to induce shareholders to rely on it.” (Emphasis added.)

The appeals court ultimately deferred to Oracle’s business decisions to set its own goals and hold its employees to those standards. As a practical matter, employers can take away the message that they can still challenge employees to meet high standards and implement innovative measures and goals. Importantly, however, it remains important to have the processes in place, like Oracle, to ensure Human Resources personnel and others empowered as part of a compliance process, are able to recognize and follow up on complaints that implicate financial responsibility and investor information. Additionally, this case tracks a clear timeline of expectations being set for an employee, his opportunity to achieve them, and employment action taken as a result of the employee’s failure to satisfy such obligations, unrelated to the employee’s complaint to HR. In the complex and evolving world of corporate compliance, those fundamentals of performance management remain as important as ever.

The case is Vincent A. Beacom v. Oracle America, Inc., case number 15-1729, in the U.S. Court of Appeals for the Eighth Circuit.  Jackson Lewis attorneys are available to answer inquiries regarding this case and other questions you may have about the Sarbanes-Oxley Act’s employee protection provisions and other laws relating to whistleblower activity.

Supreme Court Decision Restricts Government Prosecution of Political Corruption

In a unanimous 8-0 decision, the U.S. Supreme Court has vacated the political corruption convictions of former Virginia Governor Robert F. McDonnell for conspiracy to commit honest services fraud and Hobbs Act extortion and making false statements to federal officials. McDonnell v. United States, No. 15-474, 579 U.S. ___ (2016).

McDonnell and his wife, Maureen McDonnell, were convicted for accepting $175,000 in loans, gifts, and other benefits from Virginia businessman Jonnie Williams while McDonnell was Governor. Williams was CEO of a Virginia-based company that had developed a nutritional supplement made from a compound found in tobacco (anatabine). He wanted McDonnell to authorize Virginia’s public universities to conduct scientific research of anatabine and its potential medical benefits.

The government needed to prove that McDonnell committed (or agreed to commit) an “official act” in exchange for the loans and gifts received from Williams. The government alleged McDonnell committed “official acts” by arranging meetings for Williams with Virginia officials to discuss anatabine, hosting events for Star Scientific at the Governor’s Mansion, and contacting other state officials about studying anatabine. McDonnell maintained that setting up meetings, hosting events, or contacting officials about anatabine — without more — does not make an official act because they “are not decisions on matters pending before the government.”

The District Court instructed the jury using the government’s broad interpretation of “official act” and the jury convicted McDonnell on all counts. McDonnell was sentenced to two (2) years in prison, but appealed to the Fourth Circuit Court of Appeals challenging the jury instructions, which, he said, defined “official action” to allow “virtually all of a public servant’s activities” to be construed as official “no matter how minor or innocuous.”  The Fourth Circuit affirmed McDonnell’s convictions. (Maureen McDonnell was convicted of similar charges and sentenced to one year in prison, although her appeal remains pending before the Fourth Circuit.)

Writing for a unanimous Court, Chief Justice John Roberts noted that the federal bribery statute definition of “official act,” 18 U. S. C. §201(a)(3), is “any decision or action on any question, matter, cause, suit, proceeding, or controversy, which may at any time be pending, or which may by law be brought before any public official, in such official’s official capacity, or in such official’s place of trust or profit.”

Significantly, the Court read the statute as “more bounded” than the District Court. Any decision or action on a “question” or “matter” before a public official, the Court found, was a formal exercise of governmental power akin to a “cause, suit, proceeding or controversy” and either was “pending” or by law be “brought before any public official” in his official capacity.

Equating McDonnell’s conduct with, for example, the President hosting championship teams at the White House or a cabinet secretary delivering a policy speech on a pending “question” or “matter,” United States v. Sun Diamond Growers of California, 526 U.S. 398 (1999), the Court found hosting events at the Governor’s mansion, meeting with public officials, or speaking with interested parties, without more, was simply not an “official act.”  McDonnell’s conduct was not a “decision or action” within the meaning of the bribery statute despite the fact that the event, meeting, or speech related to a pending “question” or “matter” involving public financing of anatabine.

Something more is required, said the Court. The bribery statute requires the public official make a decision or take some action on the question or matter before such conduct becomes an “official act.”  Even to agree to act on a “question” or “matter,” said the Court, would constitute an “official act.” Any other interpretation of the statute, said the Court, would make this critical requirement of the statute meaningless.

Finding the trial court’s jury instruction defining “official act” was “significantly over-inclusive,” lacked important qualifications, and failed to comport with the Court’s statutory interpretation, the jury may have convicted McDonnell for conduct that was not unlawful.

Fourth Circuit Upholds Sarbanes-Oxley Whistleblower Retaliation Finding and Substantial Monetary Award

On May 20, 2015, a split Fourth Circuit panel ruled Deltek, Inc., a Virginia-based software and information services provider, must pay a terminated whistleblower four years of front wages and thirty thousand dollars ($30,000) in college tuition. In doing so, two thirds of the panel affirmed the U.S. Department of Labor’s Administrative Review Board’s determination upholding an Administrative Law Judge’s finding the company retaliated against Dinah R. Gunther, a former financial analyst, in violation of the Sarbanes-Oxley Act, holding these decisions were supported by substantial evidence and reached through application of the correct legal standards. The decision is not precedential but is likely to be relied upon by plaintiff’s counsel for its approval of the ARB’s rulings on causation and damages.

Gunther complained to her supervisors, the company’s general counsel, and the United States Security and Exchange Commission that Deltek was committing fraud by systematically disputing invoices for IT services in order to cover up a budget shortfall and the IT department’s poor financial condition. Deltek investigated with Gunther’s assistance but concluded there was no improper activity. Gunther further complained of harassment, eventually went on medical leave for stress and the parties engaged in drawn out settlement negotiations for her to depart the company. Months later, after talks broke down, Gunther was terminated the day after she returned to work for engaging in what the company called “egregious[ly] disruptive and confrontational” behavior during a meeting with HR. However, after what the majority described as a “painstaking” review of the evidence, the ALJ found – and the ARB affirmed – Gunther had established a prima facie case of whistleblower retaliation, the company’s explanation was pretextual, and awarded “make-whole” prospective damages of four-year’s pay and college tuition on the premise that Gunther – who claimed she could not secure a job comparable to the one she held at Deltek because she had no college degree – could obtain a job comparable, and thus be “made whole,” in four years during which she obtained a degree.

Deltek appealed on principal two grounds – that the ALJ and ARB erred first in holding that Gunther engaged in protected activity and then in finding her protected activity was a contributing factor in her termination. As to protected activity, the court easily rejected Deltek’s argument that because Gunther had only a few months of experience and no college degree, she could not form an “objectively reasonable” belief Deltek engaged in fraud. As to causation, the court noted the “rather light burden” given the “broad and forgiving” contributing factor standard, agreed with the ALJ’s ruling that proximity in time is sufficient to raise an inference of causation and approved the ALJ’s finding that Gunther was entitled to this inference because she was terminated “almost immediately after the breakdown of the settlement negotiations precipitated by her OSHA complaint” even though that action was taken six months after her initial protected activity.

Ultimately, the Court was most persuaded by the finding that Deltek’s stated reason for terminating Gunther was pretextual. According to the Court, this wholly precluded Deltek from showing “the kind of exceptional circumstances that would allow [the Court] to set aside the… finding…as affirmed by the Board” under the deferential standard of review for agency decisions and, thus, “Deltek’s arguments on appeal [were] unavailing.”

In his dissent, U.S. Circuit Judge G. Steven Agee disagreed that the determinations of the ALJ and affirmation by the Board were defensible even under the forgiving “substantial evidence” standard because the ALJ’s decision was “premised on nothing more than post hoc ergo propter hoc reasoning.” According to the dissent, the ALJ found Gunther met her burden to prove causation solely based on the sequence of events leading to her termination of employment. Judge Agee would have rejected this finding, and the ARB’s affirmance, as based on a false inference that the timeline of events was in itself sufficient to prove a causal connection and, because Gunther could not establish the elements of her prima facie case, never reached the question of “pretext.”  The dissent also disagreed with the damages award, calling it a speculative windfall and opining that “no law requires Deltek to bear the onerous burden of subsidizing Gunther’s full time, four-year college education, a qualification Gunther didn’t need to obtain her post with Deltek just one year earlier.”
The case is Dinah R. Gunther v. Deltek, Inc., case number 14-2415, in the U.S. Court of Appeals for the Fourth Circuit.  Jackson Lewis attorneys are available to answer inquiries regarding this case and other questions you may have about internal investigations, the Sarbanes-Oxley Act’s employee protection provisions and other laws relating to whistleblower activity.

Post-Luis, Law Enforcement Can Freeze Assets Not Tied to Crimes or Needed to Hire Counsel, Federal Court Rules

On March 30, 2016, the U.S. Supreme Court in Luis v. United States, No. 14-419, held that pretrial restraint of untainted assets needed by a criminal defendant to retain counsel of choice violates a Sixth Amendment right to counsel.  This decision, however, left unresolved the broader question of whether the United States may restrain untainted assets not needed to hire counsel.

In United States v. Chamberlain, No. 5:14-CR-128-2H, the federal District Court for the Eastern District of North Carolina held that Luis does not bar the United States in restraining such assets.  In Chamberlain, the government moved for a post-indictment pretrial restraining order against Chamberlain’s untainted substitute assets pursuant to 21 U.S.C. Section 853(e).  “Substitute assets” are those which are untainted by alleged criminal conduct, but which the government seeks to forfeit to replace exhausted or unreachable tainted assets.  Both the defendant and government agreed that the untainted substitute asset in question, a parcel of land, was not needed by Chamberlain in order to secure criminal defense counsel.

Section 853(e) allows a court to enter a restraining order or injunction to preserve assets that are subject to criminal forfeiture.  Relying on the Supreme Court’s decision in United States v. Monsanto, 491 U.S. 600 (1989), many courts have allowed entry of a pretrial restraining order under Section 853(e) against assets that are not connected to the underlying crime and are not needed to hire counsel.

The defendant in Chamberlain maintained that these court’s decisions based on Monsanto are now incorrect in light of Luis.  The defendant argued that Justice Breyer’s language/analysis in the plurality decision of Luis foreclosed pretrial restraint of any substitute asset under Section 853, thus narrowing the scope of the Monsanto decision.  This new argument, in effect, also would overrule Fourth Circuit precedent that permits pretrial restraint of untainted substitute assets, subject to Sixth Amendment concerns.

Disputing the defendant’s opposition, the government narrowly interpreted the Luis decision and maintained that Luis was inapplicable since Chamberlain raised no Sixth Amendment issue. The District Court ultimately agreed with the government, but expressed some uncertainty in light of the Luis decision.  In fact, the court said while it “agrees that the Supreme Court may in fact interpret Section 853 in this way in the future, it has not yet ruled on this issue and has not upset applicable Fourth Circuit precedents governing the instant question presented before this court.”

The District Court’s Order has been appealed to the Fourth Circuit.  Whether the United States may restrain untainted assets that are not needed to hire counsel remains an open question after Luis.  Jackson Lewis attorneys are experienced in defending white collar and government enforcement matters and are available to advise companies on the scope of law enforcement seizure rights, asset forfeiture, and the Mandatory Victims Restitution Act.

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