Congress Considers Proposed Protections for Intelligence Community Whistleblowers

The United States House Oversight and Reform Subcommittee on Government Relations is considering proposed changes to protections available to U.S. Intelligence Community (IC) whistleblowers.

The Subcommittee’s January 28, 2020, public hearings received testimony from David K. Colapinto, National Whistleblower Center, Glenn A. Fine, U.S. Department of Defense, Elizabeth Hempowicz, Project on Government Oversight, Michael E. Horowitz, U.S. Department of Justice, and Paul Rosenzweig, R Street Institute.

The witnesses emphasized that whistleblowers’ disclosures should be pursued – not the whistleblowers personally – and that the whistleblower’s motive, whether benign or otherwise, should not determine whether the whistleblower’s disclosure is valid. Each stressed the need for greater and more robust whistleblower anonymity and confidentiality protections.

The witnesses recommended:

  • Broadening avenues through which protected disclosures can be made, and eliminating bureaucratic and process bottlenecks that slow the ability to bring information forward;
  • Rebalancing burdens of proof to give whistleblowers greater parity with civilian whistleblowers;
  • An expansive definition of adverse personnel actions to include public harassment, retaliatory investigations, and security clearance actions;
  • Establishing anonymity and confidentiality protections to address outing of whistleblowers by any individual who learns of the whistleblower’s identity; and
  • Granting testimonial subpoena power to enable the inspectors general (IGs) to conduct thorough assessments of both the whistleblower’s disclosure and the investigations of retaliatory personnel actions.

As a further deterrent, the witnesses recommended restoring claimants’ rights to pursue civil remedies for violations of the disclosure-without-consent rule, and to provide damages for whistleblower confidentiality breaches. Claimants should be allowed, the witnesses urged, access to federal courts and jury trials after exhausting administrative remedies up through the Merit Systems Protection Board (MSPB) on retaliation claims. Pointing to the deterrent effect in Title VII employment discrimination cases that grant the right to jury trial, the witnesses urged a similar arrangement to better protect federal whistleblowers. They testified that persistent, unresolved issues with the current claim adjudication process (in which the MSPB is the sole forum of last resort) leave whistleblowers vulnerable and send a message that they are not protected by the system.

Finally, on process delays at MSPB, the witnesses noted that not only does the MSPB lack a quorum of standing members (since January 2017), but it lacks any members whatsoever due to executive and legislative branch inaction. Further, even when the board is up and running, an estimate shows that the MSPB would need at least three years to address the existing backlog of more than 2,000 cases, not considering the nearly 60 cases added to the backlog each month.

Please contact a Jackson Lewis attorney with any questions.

New York Enacts Legislation Related to Board Diversity

New York recently enacted the “Women on Corporate Boards Study” law (S. 4278), joining a growing number of states requiring organizations to report their board composition. The new law applies to domestic and foreign corporations “authorized to do business” in the state. Given the expanse of companies doing business in New York, this law may have a broad reach and impact organizations based far from New York.

New York’s new law mandates a study on the number of female directors on the boards of corporations doing business in New York. Under the new law, both foreign and domestic corporations, including publicly traded and privately held, are required to report the number of directors appointed to their board and to report how many directors are female. The New York Department of State will collaborate with the Department of Taxation and Finance to conduct the study, which will include an analysis of the change in the number of women directors compared to prior years and the collective percentage of women directors on all such boards. The initial study will be published by February 1, 2022.

In support of the legislation, New York State Senator Liz Krueger noted that “New York is home to some of the world’s largest and most influential corporations, so what we do here reverberates far beyond our borders.”

Other States Promoting Diversity on Boards

Board diversity has been gaining traction (see Seeking Unity, Not Uniformity*: Diversity and the Corporate Board of Directors), and New York is not the only state implementing laws related to diversity on corporate boards. California, Colorado, Illinois, Maryland, Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania, and Washington have similarly introduced or passed legislation or resolutions related to board diversity. Some highlights include:

  • California: Requires publicly held corporations with principal executive offices in California to have at least one female board director by the end of 2019. By the end of 2021, at least three female directors must sit on boards with six or more directors. (For boards with five or fewer directors, the numbers decrease.) For more information, see California Law Pushes Virtue of Diversity Requiring Females on Boards of Directors and JL Live: Corporate Board Diversity.
  • Maryland: Requires certain corporations to report the number of female board members and the total number of board members on an annual basis.
  • Illinois: Requires publicly held domestic and foreign corporations with a principal executive office in Illinois to report, beginning no later than January 1, 2021, the number of women and minority board members on an annual basis. See New Illinois Law Requires Corporations to Report Diversity on Corporate Boards for more information.

What’s Next?

According to the state’s press release on the new law, the New York legislation will take effect on June 27, 2020. Board diversity likely will remain a hot topic on both the state and federal level as we move into the new decade. For example, at the federal level, in November 2019 the U.S. House of Representatives passed the “Improving Corporate Governance Through Diversity Act of 2019” (H.R. 5084), which would amend the Securities Exchange Act of 1934 to require certain organizations to disclose the gender, race, ethnicity, and veteran status of their board of directors, nominees, and executive officers. The bill also requires the U.S. Securities and Exchange Commission to create a Diversity Advisory Group, which would ultimately “make[] recommendations of strategies that issuers could use to increase gender, racial, and ethnic diversity among board members.”

In addition to legislative initiatives at the federal and/or state level, we have also seen in recent proxy seasons an increase in the call for board diversity by large institutional investors, proxy voting firms and by activists, all seeking best practices for board and corporate governance.  Thus, whether prompted by legislation or otherwise, we expect that the call to diversify the appointment of directors to corporate boards may intensify in the coming years.

Preventing Retaliation Claims During and After an Internal Investigation

When an employee reports a concern regarding fraudulent or illegal behavior, an employer’s immediate response is likely to open an investigation, stop any wrongdoing, and take appropriate corrective action. In the race to manage a challenging situation, it is easy to overlook the possibility that an investigation not conducted properly might actually create additional liability, even if the original allegations are unfounded. Given the ongoing influx of whistleblower claims, employers should be alert to preventing potential retaliation claims arising out of internal investigations.

What laws should you be aware of?

A plethora of federal, state, and local laws prohibit employers from taking adverse actions against employees who report concerns such as safety violations, fraud, or discrimination; and against employees who participate in any related investigation.

Some whistleblower and anti-retaliation provisions are well known, such as those found in:

  • The Sarbanes-Oxley Act (SOX) and The Dodd-Frank Act;
  • The False Claims Act; and
  • Title VII of the Civil Rights Act of 1964.

However, the legal protections for whistleblowers who report alleged violations of law go far beyond these statutes. For example, in addition to investigating claims under SOX, the Occupational Safety and Health Administration (OSHA) is also responsible for investigating whistleblowing claims in more than 20 other federal statutes covering a broad range of industries and activities, including:

  • The Affordable Care Act;
  • The Consumer Financial Protection Act;
  • The Food Safety Modernization Act;
  • The Asbestos Hazard Emergency Response Act; and
  • The Consumer Product Safety Improvement Act.

How should you take action?

Because there are abundant protections for employees who make complaints, employers should strive to conduct their investigations in a manner that does not create additional liability. Depending on the circumstances, this may include:

  • Establishing strong anti-retaliation policies that cover protected activity and provide multiple avenues to report alleged misconduct;
  • Informing employees reporting concerns and those participating in an investigation that retaliation is strictly prohibited and that they should report any perceived retaliation immediately;
  • Making explicit to those accused of potential misconduct that retaliation against employees who have either complained or participated in an investigation is prohibited and that violating this policy can lead to disciplinary action up to and including termination; and
  • Independently reviewing personnel decisions regarding employees who have complained or otherwise participated in an investigation.

For more guidance in lowering the risk of retaliation claims while conducting internal investigations, please contact a Jackson Lewis attorney.

Teri Wilford Wood Speaks on Board Diversity

Ever since California enacted legislation in 2018 requiring a certain number of female board directors for publicly-held corporations with principal executive offices in California, board diversity continues to be a significant topic.  Maryland, Massachusetts, Colorado, Illinois, New York, Ohio, Washington, New Jersey, Michigan and Pennsylvania have introduced or passed legislation or resolutions related to board diversity.  Likewise, in November 2019, the U.S. House of Representatives passed the “Improving Corporate Governance Through Diversity Act of 2019” (H.R. 5084) related to, among other things, board diversity.

Teri Wilford Wood, a member of the Corporate Governance and Internal Investigations Practice Group, recently spoke on the topic of board diversity, providing additional insight on the issue.  Given the significant level of activity in this area, we anticipate board diversity will remain an important topic in 2020.

Dodd-Frank Whistleblower Claims are Arbitrable, Second Circuit Holds

In a win for employers, the Second Circuit Court of Appeals recently held that whistleblower claims under the Dodd-Frank Act are arbitrable.  Daly v. Citigroup Inc., 939 F.3d 415 (2d Cir. 2019).  The Second Circuit also held that a plaintiff’s failure to exhaust administrative remedies related to a Sarbanes-Oxley Act claim serves as a jurisdictional bar, warranting dismissal of the claim.

Overview

The plaintiff, a former employee, brought suit against the employer alleging, among other things, whistleblower retaliation claims under the Dodd-Frank Act (“Dodd-Frank”) and the Sarbanes-Oxley Act (“SOX”).  The employer (1) filed a motion to compel arbitration of certain claims, including the Dodd-Frank claim; and (2) sought dismissal of the SOX claim.

The district court concluded that although the plaintiff’s SOX claim was not arbitrable, the remainder of her claims (including Dodd-Frank) were arbitrable.  The district court dismissed the plaintiff’s SOX claim because she did not file a complaint with the Occupational Safety and Health Administration (“OSHA”) in a timely manner, thus failing to exhaust her administrative remedies.  The Second Circuit affirmed.

Arbitrability of Dodd-Frank Whistleblower Claims

In determining the arbitrability of the Dodd-Frank whistleblower claim, the Second Circuit examined the statutory text and framework.

The court noted that although SOX contains an anti-arbitration provision, Dodd-Frank does not.  This was significant:  “[N]othing in Dodd-Frank’s text suggests that claims arising thereunder are nonarbitrable.  Dodd-Frank amended several statutory provisions to include anti-arbitration provisions but did not do so with respect to its own whistleblower provision….Congress’s failure to attach an anti-arbitration provision to the Dodd-Frank whistleblower provision…while simultaneously amending similar statutory regimes to include the same, is a strong indication of its intent not to preclude Dodd-Frank whistleblower claims from arbitration.”

Further, the court underscored that the SOX anti-arbitration provision was limited to “this section,” i.e., SOX’s whistleblower provision.  The court observed, “The Dodd-Frank cause of action, by contrast, is not located in the same section, or even the same title, of the federal code.”  The court noted that even if ambiguity existed, it “still could not infer that Congress intended to extend” SOX’s anti-arbitration provision to Dodd-Frank given the differences between the two statutes.

Finally, the plaintiff argued that the court cannot separate her various claims (including Title VII, Equal Pay Act, and Dodd-Frank) from her SOX claims “because they arise out of the same act of whistleblowing.”  The court rejected this argument: “We cannot simply lump all of the plaintiff’s claims together for purposes of determining their arbitrability, even if they pertain to the same conduct….The plaintiff’s SOX whistleblower claim cannot save her otherwise arbitrable claims from their fate.”

SOX’s Administrative Exhaustion as a Jurisdictional Prerequisite to Federal Court Lawsuit

The Second Circuit affirmed dismissal of the plaintiff’s SOX claim because she filed her complaint with OSHA at least two years after-the-fact, and not within the 180-day deadline.  The Second Circuit addressed uncertainty regarding whether dismissal was proper under Rule 12(b)(1) (lack of jurisdiction) or Rule 12(b)(6) (failure to state a claim), and ultimately concluded “…the text of SOX makes clear that Congress intended for its administrative exhaustion requirements to be a jurisdictional prerequisite to suit in federal court.”

The plaintiff asserted a “continuing violation” argument, claiming that her alleged continued difficulty in securing employment essentially caused the deadline to be extended.  However, the court rejected the argument and affirmed dismissal of the SOX claim.

Over $2 Billion in Sanctions Ordered by the U.S. Securities and Exchange Commission

In its 2019 Annual Report to Congress, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) whistleblower program announced a “momentous milestone”: The SEC has ordered over $2 billion in sanctions since the inception of the whistleblower program.

The Report outlined other key statistics from FY 2019.  Approximately $60 million was awarded to eight individuals in FY 2019.  Further, the Commission received over 5,200 tips in FY 2019, representing “the second largest number of tips received in a fiscal year.”  The Report noted that from FY 2012 to FY 2019, whistleblower tips to the Commission increased by approximately 74 percent.

The Report also highlighted current trends in whistleblower activity.  International activity was significant, as evidenced by the fact that in FY 2019 individuals from 70 foreign countries submitted whistleblower tips to the Commission.  In FY 2019, three of the whistleblower award recipients “were located abroad, or reported conduct that was occurring abroad, demonstrating the international reach of the program.”  Moreover, several award recipients “reported misconduct that was impacting retail investors, furthering a Commission priority to protect the Main Street investor.”  The Report noted that seven of the eight individuals who received whistleblower awards “reported their concerns to the company.”  Another trending category was cryptocurrencies, which accounted for nearly 300 tips in FY 2019.

The Report underscored the Office of the Whistleblower “continues to view anti-retaliation protections as a high priority to ensure that whistleblowers can report to the Commission without fear of reprisal.”  Similarly, the Report noted the Office of the Whistleblower “continues to work with investigative staff to identify and investigate practices in the use of confidentiality and other kinds of agreements, or engagement in other practices, to interfere with individuals’ abilities to report potential wrongdoing to the Commission.”

As evidenced in the SEC’s Report, the whistleblower program remains in full swing.  Being familiar with the SEC whistleblower program’s activities and priorities can provide valuable information as employers evaluate their policies and procedures.

Who is the Audience for an Internal Investigation Report?

Too often, internal investigators mistakenly conclude that their reports are for the exclusive review of decision-makers.  Sometimes, this may be true.  However, more often than not, there are two audiences of which an investigator should be mindful – a primary audience and a secondary audience.

The primary audience is the immediate recipient(s) of the report.  This can be a manager, a human resources director, the general counsel’s office, the president or chief executive officer, an audit committee, or the board of directors.  This audience is responsible for digesting the report and making business decisions based on the report.

The secondary audience includes third parties that may review the report for any number of reasons, but who are most often assigned to analyze and question the report.  These third parties can be regulatory bodies, government agencies, an opposing attorney, a court, jurors, or external auditors.  The secondary audience is often looking for fault and/or non-compliance.

Both audiences are equally important and neither audience’s role should be ignored by the report’s author.

The primary audience must understand the findings and conclusions in order to make appropriate decisions impacting an organization.  The primary audience should understand what took place, when it took place, and how, if at all, the underlying facts might relate to company policies or the law.  The primary audience must also understand possible options for remedial steps like training, disciplinary action against someone who violated policy, or termination of an employee.

The secondary audience must understand the same issues as the primary audience.  However, the secondary audience must also understand a number of key points important to legal defenses:  (1) the company takes allegations of wrongdoing seriously; (2) it employs measures to address wrongdoing; (3) it responds to allegations of wrongdoing with a prompt and thorough investigation of the facts; (4) it remedies any wrongdoing; (5) it prohibits retaliation; and (6) the company directs and encourages employees and management alike to comply with laws, regulations, and internal policies.

Report authors should avoid the trap of thinking an investigative report will only be reviewed by internal decision-makers.  While the primary, internal audience is important, the secondary audience is often the one analyzing the report for fault, mistakes, misstatements, or other blemishes that may result in company liability.

The Importance of Developing an Investigation Plan

The importance of a prompt and thorough internal investigation is more evident than ever, and an effective investigation plan can protect the company’s interests when reviewing internal complaints.  Consider the following when developing an investigation plan.

Take Necessary Immediate Action: When receiving a complaint, outline the issues involved to determine if there are any necessary immediate action items. Should the company separate the employees involved (e.g., implement schedule changes or a leave of absence, with an eye toward avoiding negative action against the complainant)? Is there threat of imminent harm to an individual? Will the investigation be compromised if the company does not take immediate action?

Review: Review applicable policies (e.g., harassment, work rules, progressive discipline) and company practices related to the outlined issues. Review personnel files and other documents to assess whether there is a history of improper conduct, similar complaints in the past, and information relating to motive or bias.

Identify An Investigator: Who has experience and/or training for this particular complaint? Consider whether the identified investigator is directly or indirectly involved with the complaint. Is the individual a close friend of or in a subordinate position to the complainant or the accused? If yes, the investigator may not be perceived as objective. Will the investigator be an effective witness in future administrative or civil proceedings? Is the investigator knowledgeable of company policies? Depending on the circumstances, assistance from an outside investigator or legal counsel may be necessary. Consider whether there are threats of legal action, serious acts, previous lawsuits by the complainant, or whether the company failed to act on prior known complaints.

Develop An Interview Strategy: At the onset, identify key witnesses, when and where to conduct each interview (off-site, in private, conference room), and prepare a list of questions for each interviewee. Reference the outline of issues to ensure questions are tailored to elicit critical information and details associated with each issue. Anticipate that the witness list may be subject to change as the interviews progress. If necessary, witnesses may also be taken out of order and questions may be modified.

Preserve Evidence: Through the course of an investigation, key documents, files, audio and visual recordings may be identified. Take measures to preserve these sources of information as needed. In light of potential allegations of cyberbullying and harassment, ask an employee if they are willing and able to provide a copy of any purported harassing or discriminatory on-line post or text message. Further, ask the employee to retain the information until otherwise informed. Document such a request in the investigation plan.

With these investigation plan practices in mind, the company may be better prepared to resolve workplace disputes and establish it conducted a reasonable, good faith investigation.

Department of Justice Guidance on Companies’ Claim of Inability to Pay Criminal Fines

The Department of Justice Criminal Division has clarified its policy on the Department’s assessment of a company’s claim that it cannot afford to pay a criminal fine in a memorandum issued on October 8, 2019.  Criminal Division department head Brian Benczkowski had previewed the memorandum during a speech in September.

While the DOJ already permitted corporate defendants to seek reduction of criminal fines, the Benczkowski memo sets forth more specific guidelines on the factors that will support a claim for fine reduction, signaling efforts to make the criminal fine assessment procedures more transparent.  The Benczkowski memo is particularly useful, considering the Federal Sentencing Guidelines on corporate criminal fines can be confusing and vague.  The defense often has difficulty determining what facts it must demonstrate to establish a company’s inability to pay.

The Federal Sentencing Guidelines permit reduction of criminal fines if a company is unable to pay the fine, even on installment (aka, a corporate poverty claim).  Before asserting an inability to pay, the company and the government must agree on what the fine should be under the law, notwithstanding the company’s finances.  Then, companies seeking to establish an inability to pay must complete an 11-question questionnaire on the company’s finances, including assets and liabilities, current and anticipated cash flow, and working capital needs.

Criminal Division attorneys use the responses when applying the statutory sentencing factors (18 U.S.C. § 3572(a) & (b)), the Federal Sentencing Guidelines (U.S.S.G. § 8C2.2 & 8C3.3), and the Justice Manual’s principles on consideration of collateral consequences in corporate criminal cases.  Footnote four of the Benczkowski memo confirms that Criminal Division attorneys may adjust a proposed fine based on a significant adverse collateral consequence, even if that consequence might not threaten the organization’s viability.  Significantly, the Benczkowski memo identifies adverse collateral consequences deemed relevant and irrelevant to the assessment of a company’s inability to pay claim.

Relevant collateral consequences include the company’s ability to fund pension obligations or provide the amount of capital, maintenance, or equipment required by law or regulation.  Additionally, Criminal Division attorneys may consider whether the proposed monetary penalty is likely to cause layoffs, product shortages, or significantly disrupt competition in a market.

Collateral consequences generally deemed irrelevant include adverse impacts on growth, future opportunities, planned or future product lines, future dividends, unvested or future executive compensation or bonuses, and planned or future hiring or retention.

While Criminal Division attorneys have significant discretion to reduce a company’s criminal fine or monetary penalty, it is subject to certain limitations.  The Benczkowski memo mirrors the language of both the statutory sentencing factors and Federal Sentencing Guidelines in checking this discretion.  Attorneys may only recommend an adjustment to the monetary penalty to the extent necessary to avoid (1) threatening the continued viability of the organization and/or (2) impairing the organization’s ability to make restitution to victims.

Benczkowski explained that the clarified guidelines are meant to promote transparency and incentivize corporate compliance. Generally, members of the defense bar have acknowledged the DOJ’s movement toward transparency and welcomed the new guidance.  If a company receives a reduction in fines, the reasons for granting it will likely be in the settlement, offering other companies insight into what may qualify as a “significant collateral consequence” for the purposes of fine reduction.  Ultimately, the Benczkowski memo and the DOJ policy contained therein signals a new era of cooperation, providing relief to companies facing financial ruin in the face of steep criminal fines, while incentivizing cooperation and compliance with the Criminal Division.

The White Collar and Government Enforcement practice group at Jackson Lewis, PC is experienced in handling corporate sentencing issues and available to assist clients facing such matters.

Considerations in Selecting an Investigator

A threshold issue in any internal investigation is the selection of an investigator.  A number of considerations will guide a company’s decision.

Internal or External Investigator

There are several factors to consider in selecting an investigator, and practical considerations frequently indicate that the investigation be conducted by an internal investigator.  However, employers often opt to engage external investigators for a variety of reasons, including high stakes or highly sensitive matters, investigations of a high-level officer, or investigations of an employee in the internal investigator’s chain of command.

If an external investigator is selected, the company should provide the investigator access to material company policies.  It may be appropriate to identify an independent company representative to assist the investigator in gaining access to personnel files and other documents and information needed to conduct the investigation.  In some cases, a special committee composed of subject matter experts from relevant areas of the company may be desirable to assist in the investigation.

Ability to Testify

Another consideration is whether the investigator will be available to the company to testify in disciplinary proceedings, arbitrations, and litigation.  The company should discuss this issue with the investigator at the onset to confirm that the investigator has the requisite experience, capability, and willingness to testify in such proceedings.

Special Considerations for Attorney-Investigators

Other considerations apply when the investigator is an attorney.  For example, if an attorney conducts the investigation, the company should consider that in future proceedings, the investigator may be a witness.  Additionally, in certain circumstances, the factual investigation and findings of an outside attorney may be subject to disclosure in future proceedings, even if the company takes the initial position that the investigator’s work is subject to the attorney-client communication privilege or the attorney work-product doctrine.

Ultimately, several factors affect a company’s decision in selecting an investigator.  The decision should be given significant weight, as it can impact the effectiveness of the investigation as a whole.

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