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.

Self-Disclosure Analysis of FCPA violations and the New Administration

On April 5, 2016, the Department of Justice had set forth a Foreign Corrupt Practices Act (“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 companies to voluntarily self-disclose FCPA-related misconduct, fully cooperate with the DOJ, and, where appropriate, remediate flaws in their controls and compliance programs.

The pilot program became effective immediately and was given a one-year limit. As long as a company self-disclosed before April 5, 2017, the Guidance would continue to be applied even after the expiration date.  Because of this upcoming expiration, companies have been wondering whether they should accelerate their self-disclosure analysis.

On March 10, 2017, Kenneth Blanco, Acting Assistant Attorney General for the DOJ’s Criminal Division, announced at the annual ABA White Collar Conference in Miami, Florida, that the FCPA Pilot Program would stay in place beyond its current April 5, 2017 expiration date so the DOJ could “begin the process of evaluating the utility and the efficacy, whether to extend it, and what revisions if any we should make to it.” Blanco said “[t]he program will continue, however, in full force until we reach a final decision on those issues.”

Despite this uncertainty, companies considering accelerating their analysis should take a closer look.  The incentives contained in the Pilot Program, such as leniency in fines, were routinely found in settlements even before the program was piloted.  While it is not assured that after the DOJ’s “self-examination” penalties would not become harsher, it is equally, if not more, likely that the next program could offer companies even more significant incentives to engage proactively with the government and leniency for self-disclosures.

Consequently, an accelerated disclosure should not undermine a company’s own complete internal evaluation of possible FCPA issues.  Until the DOJ clarifies its position as to cooperation with or without self-disclosure, companies should consider cautiously whether anything significant needs to be disclosed while understanding the consequences arising from such disclosure.

Jackson Lewis attorneys are available to advise companies on scope of the FCPA, investigations of possible FCPA violations, and the consequences that may arise from self-disclosure, and to assist in the defense of FCPA allegations.

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 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.