Record High Awards and Supreme Court Decision Further Incent Potential Whistleblowers to Report Conduct to the SEC

On March 19, 2018, the Securities and Exchange Commission (“SEC”) announced its highest ever Dodd-Frank Act (“DFA”) bounty awards to three whistleblowers. These SEC awards represent a new milestone in the SEC’s ongoing efforts to incentivize would-be whistleblowers to report unlawful conduct directly to the Commission. Two whistleblowers will divide a nearly $50 million award and a third whistleblower received $33 million; both awards shattered the previous high award of $30 million and continue the SEC’s trend of issued rising awards.

In a press release, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said these awards demonstrate that whistleblowers can provide the SEC with information that allows the agency to pursue and remedy violations that may otherwise go unnoticed. While these awards demonstrate the role whistleblowers play in assisting the SEC, multi-million dollar awards are likely to incentivize others with high quality information to file reports with the agency.

Since issuing its first award in 2012, the Commission has awarded more than $262 million to whistleblowers who have aided in their investigations. These awards are paid by an investor protection fund that Congress created in connection with passage of the Dodd-Frank Act. The fund is financed entirely through monetary sanctions paid by securities violators to the SEC. Notably, despite the sizeable awards, this DFA whistleblower fund does not have any impact to or reduce the funds collected for the benefit of harmed investors.

While the sheer size of these awards may be enough to entice potential whistleblowers, the Supreme Court’s recent decision in Digital Reality Trust, Inc. v. Somers also provides further incentive for whistleblowers to report suspected unlawful conduct directly to the SEC, and to bypass a company’s internal reporting mechanisms (i.e. hotline). In Digital Reality, the Supreme Court held the Dodd-Frank’s anti-retaliation provision only protects from retaliation those employees who first provide information of a violation of the securities laws to the SEC. In other words, employees who merely make an internal report through a company’s reporting processes will, without notifying the SEC, cannot avail themselves of the DFA anti-retaliation protections. Hence, the Digital Realty Trust decision, together with the record-setting SEC awards, will likely prompt whistleblowers of all types – those with actual concerns of wrongdoing as well as opportunistic whistleblowers, to make their reports directly to the SEC.

Now, more than ever, employers need to pay attention to their internal corporate governance programs to ensure they are effective in re-enforcing the Company’s commitment to operating ethically and according to applicable laws, make it easy for employees to know where to go if they observe unlawful activity, and promote trust in the Company’s response to issues raised.

* Darran St. Ange, Summer Law Clerk, assisted in the preparation of this post.

Retaliation Plaintiff Not a Covered Whistleblower under Plain Reading of Dodd-Frank Act, Court Rules

A former employee who failed to show he reported alleged securities law violations to the Securities and Exchange Commission (SEC), as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), cannot claim his former employer unlawfully retaliated against him, federal Judge William J. Martini has ruled. Price v. UBS Financial Services, Inc., No. 2:17-01882 (D. N.J. Apr. 19, 2018).

To read full article please click here.

Walk the Compliance Walk in 2018

The New Year is prime time to take a look at your Code of Conduct and compliance policies both to consider whether you are up to date on all applicable requirements, but also so that you are fluent in your own processes and prepared to take prompt and compliant action when issues arise. Those policies likely already include a prohibition against unlawful harassment and a process for employees to report concerns about harassment or other possible misconduct. But policies and procedures aren’t enough without a comprehensive outlook and culture supporting equal employment opportunity. So how will you walk that walk?

The ongoing media attention on sexual harassment presents a challenge to employers across industries and sizes to ensure that they have more than just paper commitments to a harassment-free workplace.  The current climate also provides employers with the opportunity to think more broadly about what kind of company culture brand you want to convey to employees, as well as the public. As you refresh your recollection (as lawyers like to say) of your Code of Conduct and compliance policies, consider:

  • Do you clearly articulate a top-to-bottom commitment to achieving business goals and promoting a productive, positive culture?
  • Do your policies and Code properly reflect your company brand and culture?
  • Is the language of your Code and other compliance policies crafted so that employees understand them as clear and sincere?
  • Do you include and commit to effective and innovative avenues for employees to raise concerns without fear of retaliation?

With confidence in the content of those written commitments, what more will your organization do to demonstrate these commitments? Legal compliance is rooted in preventive practices. It is more important now than ever to conduct harassment prevention training. Consider innovative training platforms with content that is specifically-tailored to your organization and its different employee populations, including training for you Board of Directors and C-Suite executives.  Consider how you can weave your company brand and culture into this training so employees walk away feeling energized, not just about your commitment to anti-harassment initiatives, but about their role in the company.  Also consider whether there are opportunities to take the pulse of your employees on workplace culture concerns and incorporate those concerns into training and other preventive efforts.

If you do receive complaints, your internal investigation processes should be primed and ready to go. The best time to develop these processes are when you are not faced with an actual complaint. This “peace time” provides the opportunity to consider objectively how investigators will be assigned (e.g., HR, inside counsel, outside counsel); forms and other guidance for developing an investigation plan; factors for identifying witnesses; guidelines for investigatory interviews; goals for timelines; requirements for information gathering, review and preservation; and public relations considerations. Ultimately, the investigation will consider whether remedial action is appropriate. Again, here is where you walk the walk. While disciplining the direct actor may remedy the immediate situation, it may not satisfy the Company’s commitment to prevent future harassment. Think of your Code, policies, training and internal investigations practices holistically as they relate to and promote the organization’s EEO culture through the tone and content of employee-facing communications, responsiveness, and leading by example.

U.S. Department of Justice Reverses Hands-Off Enforcement Policy on Marijuana

Just days after retail sales of recreational marijuana became legal in California, U.S. Attorney General Jeff Sessions announced a new marijuana enforcement policy that calls for rescinding the long-standing, lenient policy set by the Obama Administration.  Now it is up to the individual U.S. Attorney’s Offices to determine whether and how to pursue criminal prosecutions in their districts.

For more information, see the article by Matthew F. Nieman and Kathryn J. Russo of Jackson Lewis, P.C. in the following link:

U.S. Department of Justice Reverses Hands-Off Enforcement Policy on Marijuana

New Chairman and Board Members Appointed to the SEC Board Created by the Sarbanes-Oxley Act of 2002

Written by Holly L. Cini and Sarah J. Ryan

The Securities and Exchange Commission recently announced the appointment of William D. Duhnke III as Chairman and J. Robert Brown, Kathleen M. Hamm, James G. Kaiser, and Duane M. DesParte as board members of the Public Company Accounting Oversight Board (PCAOB). The Sarbanes-Oxley Act of 2002 established the PCAOB to oversee public companies and broker-dealers.  The PCAOB’s activities include conducting inspections and pursuing disciplinary actions.

None of the prior President Obama-era board members were reappointed.  One departing board member noted that the SEC has never before declined to reappoint PCAOB board members who are eligible for another term.  The total replacement of the board may have been as a result of clashes between the prior board and the SEC and the accounting industry.

Chairman William D. Duhnke III has acted as General Counsel to U.S. Senate Committee on Rules and Administration and previously served in the U.S Navy.  J. Robert Brown has been teaching for 25 years and is currently a professor at the University of Denver.  Kathleen Hamm works as counsel for Promontory Financial Group, an IBM company, and previously worked at the U.S. Department of Treasury, the American Stock Exchange, and the SEC.  James Kaiser is a partner at PricewaterhouseCoopers where he has worked for 38 years.  Duane DesParte will soon retire as Senior Vice President and Corporate Controller of Exelon Corporation.  He was previously an audit partner at Deloitte & Touche.

Plans to ‘Reframe’ Title IX Enforcement Announced

The Trump Administration believes that Obama-era guidance regarding sexual assault on college campuses created a “failed system” that was a “disservice to everyone involved,” Education Secretary Betsy DeVos said on September 7, 2017. According to DeVos, “There must be a better way forward.”

Enacted in 1972, Title IX is a federal law that prohibits discrimination based on sex in the educational setting. This includes protection from sexual harassment, including sexual violence.

In April 2011, under the Obama Administration, the Department of Education Office for Civil Rights issued guidance to educational institutions across the country, known as the “Dear Colleague Letter” (DCL). This DCL, in conjunction with the 2014 Q&As, stated that sexual violence is a form of discrimination under Title IX and that educational institutions had to address sexual violence in order to provide equal access to education. The DCL also set forth expectations for educational institutions in addressing sexual violence claims. Critics have said the guidance is unfair toward the accused and has created a quasi-legal system.

While DeVos made clear that the Trump Administration plans to step away from the sexual assault guidelines issued during the Obama-era, she did not announce any new policies that would be put in place immediately to help combat sexual assault on college and university campuses across the country. However, she said that, in developing rules to replace the current policy, the Department of Education would launch a notice-and-comment process to incorporate the insights of all parties and it also would seek university, legal, and medical expertise. Further, DeVos said “the era of ‘rule by letter’ is over” (apparently referring to the 2011 DCL and its subsequent guidance), and promised that the Office for Civil Rights, which is comprised of unelected officials, would stop its previous practice of issuing guidance through letters.

Jackson Lewis will continue to monitor this situation and provide updates.

New DOJ Policy Likely to Result in Increase in Forfeitures

Attorney General Jeff Sessions has announced a new Department of Justice policy regarding the federal adoption of assets seized by state or local law enforcement under state law. The new policy, issued on July 19, 2017, is intended to strengthen and streamline the civil asset forfeiture program allowing a more aggressive pursuit of asset forfeiture cases and the increased sharing of proceeds of those seizures with local law enforcement.

The asset forfeiture program encompasses the seizure and sale of assets that represent the proceeds of, or were used to facilitate crimes. In other words, federal and local law enforcement remove the proceeds of crime and other assets relied upon by criminals to perpetuate their criminal activity.  Those assets are then sold and the proceeds used to further law enforcement objectives. In some instances, the government can forfeit these assets even if there is no pending criminal charge.

In 2014, more than $5 billion was taken through the asset forfeiture program. Because of this high dollar amount and because of reported abuses of this forfeiture power, then-Attorney General Eric Holder in 2015 enacted new policies in an effort to limit asset forfeiture to the most serious illegal transactions.  This policy was intended to specifically curtail the kind of forfeiture that allowed local police to share part of their proceeds with federal authorities, otherwise known as “equitable sharing.”

Now, Sessions has reversed this two-year-old policy. He proposes to curb the abuses by expediting notice procedures and requiring that local law enforcement agencies engage in training before participating in equitable sharing.  Yet, these steps will be weighed against local law enforcement’s interest in keeping the assets they seize, a balancing test that will allow local law enforcement to circumvent tight budgets.

With equitable sharing again on the rise, it is realistic to expect forfeiture cases to continue to grow under this new policy. Jackson Lewis attorneys experienced in white collar and government enforcement matters are available to advise companies on the scope of law enforcement seizure rights, asset forfeiture, and the Mandatory Victims Restitution Act.

Department of Justice Renews Commitment to Enforcement of Foreign Corrupt Practices Act

During his campaign, President Donald Trump raised uncertainty with statements that he disapproved of the Foreign Corrupt Practices Act. Since then, however, the Department of Justice has emphasized its continued enforcement efforts for FCPA violations.

On April 18, 2017, at the Anti-Corruption, Export Controls & Sanctions Compliance Summit, DOJ’s Acting Principal Assistant Attorney General Trevor McFadden made the first statements from a top government official since President Trump took office concerning the FCPA.

First, McFadden reiterated the DOJ’s commitment to the concepts articulated in the Yates Memorandum. The Yates Memorandum, issued on September 9, 2015 by the then-Deputy Attorney General Sally Yates, emphasized that DOJ would focus on the role of the individual in criminal misconduct, as opposed to simply that of the corporation. McFadden said DOJ will continue to hold individuals accountable for corporate misconduct.

Second, McFadden repeated support for the concepts behind the FCPA Pilot Program, stating, “[T]he department regularly takes into consideration voluntary self-disclosures, cooperation and remedial efforts when making charging decisions involving business organizations.” On April 5, 2016, the Department of Justice released a FCPA Enforcement Plan and Guidance on enforcement, announcing an FCPA enforcement pilot program to promote greater accountability for individuals and companies that engage in corporate crime by motivating voluntary self-disclosure of FCPA-related misconduct, full cooperation with DOJ, and, where appropriate, remediating flaws in controls and compliance programs.

Third, on the speed and length of FCPA investigations, McFadden said that the DOJ is compelled to investigate “expeditiously” and conclude investigations as soon as possible. He stated that companies must be prepared to meet the DOJ’s desire for speed with prompt and thorough investigations.  Companies working with the DOJ must “prioritize internal investigations and … respond to Fraud Section requests promptly to ensure there are no unnecessary delays.” McFadden said this faster resolution process will “be good for cooperating companies.  No executive wants to deal with a lingering government investigation or the associated costs and distraction from the company’s mission.” Ultimately, McFadden said, it was his “intent … for our FCPA investigations to be measured in months, not years.”

On April 24, 2017, Attorney General Jeff Sessions at the Ethics and Compliance Initiative Annual Conference reemphasized the DOJ’s commitment to enforcing the FCPA. He stated generally that the DOJ will continue to prosecute corporate fraud and acknowledged “one area where this is critical is enforcement of the Foreign Corrupt Practices Act.”  Bolstering McFadden’s earlier statements concerning the Yates Memorandum, he reiterated that the DOJ will seek to hold individuals accountable for corporate wrongdoing.  Lastly, pointing to the importance of corporate compliance programs, Sessions affirmed that DOJ would continue to look favorably on corporations that have good compliance programs, cooperate during government investigations, self-disclose wrongdoing, and take steps to remediate identified problems.

Jackson Lewis attorneys have deep experience representing corporations, businesses and executives in FCPA investigations and are available to advise companies and individuals involved in government investigations, to conduct prompt and thorough internal investigations, or to defend such persons or entities if and when criminal charges are filed.

Former NHL Player receives probation for drug offense

Former NHL player Kevin Stevens avoided a federal prison sentence yesterday following a hearing in U.S. District Court in Boston.  Stevens, who played in the NHL for 16 years (1987-2002), including  parts of 11 seasons with the Pittsburgh Penguins, also starred at Boston College and for the 1988 U.S. Olympic team.  In the early 1990s, Stevens was considered one of the most dominant power forwards in the game, playing on a line with Mario Lemieux and scoring over 40 goals in four consecutive seasons. 

Stevens was charged in May, 2016 with conspiracy to possess with intent to distribute the addictive painkiller, oxycodone.  The criminal charges resulted from wiretaps and surveillance activity by the FBI and Massachusetts State Police into drug activity in the South Shore region of Massachusetts, which has been especially hard hit by the opioid crisis sweeping the nation.   

Jackson Lewis helped to guide Stevens’ through the criminal justice process, in which he elected to plead guilty and accept responsibility for his actions.  As more fully detailed in a sentencing memorandum filed with the Court, it was argued that Stevens’ involvement with addictive painkillers resulted from a devastating on-ice injury that he suffered during a Stanley Cup playoff game in May, 1993.  Stevens was knocked unconscious while checking an opposing player and fell defenselessly face-first to the ice, resulting in multiple broken facial bones and a severe concussion.  The injury required extensive surgery, the insertion of several metal plates, and over 150 stiches.  To deal with the intense pain, Stevens was prescribed powerful painkillers, including Percocet, Vicodin and Oxycodone.  Unfortunately, he developed an addiction to the drugs, which he battled for the next 25 years.  It was the grip of this addiction which led Stevens to continue to seek out painkillers and eventually become the subject of an ongoing investigation by law enforcement. 

Despite facing up to two years of incarceration, U.S. District Judge George O’Toole accepted the defense recommendation and imposed a probationary sentence and a $10,000 fine.  Judge O’Toole was impressed with Stevens’ progress since his arrest, and his demonstrated commitment to sobriety over the past year.  The Judge also commented that he believed that Stevens could be an effective advocate to young people concerning the dangers of drug use and addictive painkillers, and thus could make a contribution which might help solve the ongoing opioid crisis.  Following the hearing, counsel for Stevens’ commented: “the sentence imposed today reflects the proper balance between punishment for criminal activity and a recognition that the conduct at issue resulted from a combination of head trauma and a resulting addiction to painkillers.  Kevin Stevens has made great progress with his sobriety since his arrest in this case, and I am confident that will continue.”  Stevens was represented by Paul Kelly and John Commisso of Jackson Lewis (Boston).

 

Government Failure to Prove Actual Losses Means No Restitution to Victims under Restitution Act, Court Rules

The Mandatory Victims Restitution Act of 1996 provides that defendants convicted of crimes committed by “fraud or deceit” must compensate victims for the full amount of their losses. A question that courts often face is whether the government and victim have provided sufficient evidence of their actual losses to obtain restitution under the MVRA. The U.S. Court of Appeals for the Eleventh Circuit, in Atlanta, has provided new guidance in United States v. Stein, No. 14-1521 (11th Cir. Jan. 18, 2017).

After a two-week trial, the defendant was convicted of mail fraud, wire fraud, and securities fraud based on evidence that he fabricated press releases and purchased money orders to inflate the stock price of his client, Signalife, Inc., a publicly traded medical devices manufacturer. The district court sentenced the defendant to 205 months in prison, ordered $5 million in forfeiture, and $13 million in restitution to 2,415 investors of Signalife.

In his appeal to the Eleventh Circuit, the defendant argued the district court erred in calculating actual loss for the purpose of the MVRA. He argued that in estimating actual loss the district court erroneously presumed that all purchasers of Signalife stock during the period of fraud relied on false information advanced by the defendant. He also argued that the district court failed to take into account other market forces that likely contributed to investor losses.

The Eleventh Circuit held the government’s burden was to show investors relied on the defendant’s fraudulent information to satisfy the “but for” causation requirement under the United States Sentencing Guidelines. The Court also held the government must show investor reliance to prove “but for” causation for restitution purposes.

In cases like this, with numerous victims, the government may show reliance by direct evidence or specific circumstantial evidence. In showing specific circumstantial evidence, the government must offer enough evidence from which the district court may reasonably conclude that all of the investors relied on the defendant’s fraudulent information.

In this case, the Court concluded, the record contained no direct, individualized evidence of reliance for each investor, and the circumstantial evidence in the record was too limited to support a finding that the investors relied on the fraudulent information the defendant distributed. Therefore, the Court of Appeals reversed the district court’s $13 million restitution order.

Stein reminds companies of the importance of conducting an internal investigation of any actual losses caused by employee or third party fraud to ensure that a court will order the criminal defendant to pay the victim-company full restitution. Jackson Lewis attorneys are available to conduct such investigations and to advise companies on the Mandatory Victims Restitution Act and their rights in collecting amounts lost to criminal acts.

LexBlog