Whistleblower Protection Blog : Whistleblower Lawyer & Attorney : National Whistleblower Legal Defense and Education Fund : Whistleblower Protection, Fraud Claims : Washington DC

Dr. Aaron Westrick has won reinstatement of his claims under the California False Claims Act. Last Thursday, May 26, 2011, the California Court of Appeal for the Second District (in Los Angeles) issued its decision in State of California ex rel. Westrick v. Itochu International, Inc., Case No. B223053. On January 26, 2010, the Superior Court of Los Angeles County dismissed Westrick's complaint, holding that his complaint did not plead the allegations of fraud with specificity. The Court of Appeal has now reversed and reinstated Westrick's claims.

Dr. Westrick began his career as a police officer in Michigan. In 1982, he was shot by a fleeing burglar with a .357 Magnum from approximately five feet away. A Second Chance bulletproof vest, made of Kevlar, saved his life. Westrick subsequently earned a Ph.D. in sociology and criminal justice. In 1996, Second Chance hired Westrick as its director of research. On July 5, 2001, Dr. Westrick received a letter from the Japanese Toyobo Company stating that, “the strength of Zylon fiber decreases under high temperature and humidity conditions.” Dr. Westrick recognized that Zylon would degrade and that police officers would die while wearing "bullet-proof" vests made of Zylon. He asked his employer to recall its Zylon vests and have them tested.  In June 2003, Officer Tony Zeppetella of Oceanside, California, was killed when his $766 Zylon vest failed to stop two bullets. That same month, a police officer in Pennsylvania was seriously wounded when a bullet pierced his Zylon vest.

My colleague, Erik Snyder, presented Dr. Westrick's argument to the Court of Appeal. It was Erik's first oral argument. Based on this result, we can expect many more advances for whistleblower rights in Erik's legal career. Congratulations to Erik and Dr. Westrick.

For more information about Dr. Westrick's claims and the problems with Zylon, see this prior blog post. Some excerpts from the Court's new decision follow in the continuation of this blog entry.

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On May 25, 2011, the Department of Labor's Administrative Review Board (ARB) issued a major decision in favor of whistleblowers. In Sylvester v. Parexel International, ARB Case No. 07-123 (ARB May 25, 2011), the ARB held that a whistleblower only needs a "reasonable belief" of a violation to engage in protected activity under the 2002 Sarbanes-Oxley Act (SOX). The ARB makes clear that a whistleblower does not have to wait for a violation to actually happen, and need not inform management of the basis of that reasonable belief. Indeed, since SOX prohibits companies from violating rules of the Securities and Exchange Commission (SEC), a whistleblower can have a reasonable belief about a violation that has nothing to do with any fraud against shareholders. The ARB also rejects the idea that a SOX violation has to be "material" to form the basis of a whistleblower's "reasonable belief." The ARB has also freed whistleblowers of the unnecessary hurdle of "pleading" their claims under the high "Iqbal" standard.

The Sylvester decision is a significant departure from the decision of the prior administration. All those decisions that required protected activity to "definitively and specifically" implicate a violation of law are now out-of-date. Indeed, in separate concurring opinions, three of the four ARB judges specifically rejected the "definitively and specifically" standard since it is not in the statute.

When considered together with Brown v. Lockheed Martin Corp, ARB No. 10-050, ALJ No. 2008-SOX-49 (ARB Feb. 28, 2011) (no fraud against shareholders need be shown), and Johnson v. Siemens Building Technologies, Inc., ARB Case No. 08-032 (ARB Mar. 31, 2011) (SOX covers the employees of subsidiaries), the Sylvester decision marks a decided turn in favor of recognizing whistleblowers as servants of the public purpose and deserving of strong protection. The ARB is clearing away the hurdles that made SOX so difficult for whistleblowers during its first eight years.

Pictured above are Stephen M. Kohn, Kathy Sylvester and her attorney E. Patrick McDermott. Stephen Kohn co-wrote amicus briefs with me on behalf of the National Whistleblowers Center and Douglas Evans. Congratulations to Kathy Sylvester, her co-complainant Theresa Neuschafer, and their attorney, Patrick McDermott of Annopolis, Maryland. They have helped breath new life into SOX on behalf of future generations of whistleblowers.

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Today the U.S. Securities and Exchange Commission (SEC) issued its final rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. By a vote of 3-2, the SEC approved these final rules this morning. The SEC has released a fact sheet summarizing the new rules.

The outcome is a major victory for whistleblowers.  The SEC rejected proposals put forward by corporate attorneys asking that whistleblowers be barred from rewards unless they made their first disclosures about the violations to company officials. The SEC rules also protect whistleblowers from retaliation no matter whether they made their disclosures internally or externally.

The National Whistleblowers Center (NWC) has led a public advocacy campaign for months to urge the SEC to reject the industry proposals to gut Dodd-Frank. When the SEC's proposed rules were first published, the NWC issued an emergency Action Alert to mobilize opposition to what could have been the gutting of a landmark whistleblower protection act. Numerous citizens and organizations pounded the SEC with demands that they protect whistleblowers. The result is evident in today's final rule. The SEC cited NWC comments 44 times -- more than it cited to the comments of any other group.

In response, each of the Commissioners opened their doors to personally meet with the NWC staff attorneys and supporting experts we invited. The NWC also filed nine extensive formal comments refuting the Chamber of Commerce's misinformation and explaining how many of the proposed rules undermined whistleblower protection. The Commission listened.

Stephen M. Kohn, Executive Director of NWC, said, "The SEC refused to buckle under tremendous pressure from Wall Street lobbyists (led by the Chamber of Commerce) who worked overtime trying to undermine historic corporate whistleblower protections contained in the Dodd-Frank Act." Mr. Kohn's full statement today follows in the continuation of this blog entry.
 

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Tomorrow, May 25th at 9:30 a.m. EST, the Securities and Exchange Commission (SEC) will meet to vote on its final rules for the whistleblower provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rules will directly relate to the new "bounty" provisions in the Securities Exchange Act, which requires the SEC to pay whistleblower rewards.  You can watch the SEC meeting live online by clicking here.

Stephen M. Kohn, NWC Executive Director, issued the following statement:

Stayed tuned for our full comments once the final rules have been released.

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The Securities and Exchange Commission (SEC) has just announced that it will hold a vote on its whistleblower regulations at its meeting scheduled for next Wednesday, May 25, 2011, at 9:30 a.m. The regulations are controversial. Business interests have been pushing hard for a series of hurdles that will weaken the Dodd-Frank Act. The National Whistleblowers Center (NWC) submitted comments urging the SEC to clear away the hurdles and breath life into the Dodd-Frank whistleblower reward program.

Senator Charles E. Grassley (R-IA) recently released a letter to Mary Schapiro, the Chairman of the Securities and Exchange Commission (SEC) expressing his "serious concerns" with the Proposed Rules for implementing the whistleblower provisions of Dodd-Frank. Aruna Viswanatha writes this evening in the Main Justice Just Anti-Corruption page that Sen. Grassley, "slammed the tentative rules the agency had proposed last year as deferring too much to business interests."

Investors, consumers and law enforcement will all benefit if the SEC sees the light and adopts rules that support whistleblowers whenever they raise concerns about waste, fraud and dangers to the public.

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Senator Charles E. Grassley (R-IA) recently released a letter to Mary Schapiro, the Chairman of the Securities and Exchange Commission (SEC) expressing his “serious concerns” with the Proposed Rules for implementing the whistleblower provisions of Dodd-Frank. Senator Grassley pointed out that that the “SEC does not have distinguished record of utilizing information from whistleblowers to correct wrongdoing in the public markets” and the whistleblower provisions of Dodd-Frank were created to remedy this serious problem.

The Senator laid out a number of his concerns with the SEC’s Proposed Rules including that the procedures for submitting a whistleblower claim are “overly complex, unduly burdensome, and include undefined terms that are often vague or overbroad.” He also explained that the exemptions the SEC created disqualify broad groups of people from filing whistleblower claims in contradiction of Congress’ intent.

One of Senator Grassley’s concerns has received a great deal of media attention – the SEC’s emphasis on internal compliance. As the Senator so aptly points out, “it is important to foster strong internal compliance functions, [but] the SEC should not throw the whistleblowers to the wolves by forcing them to take this first step. The SEC’s primary purpose is to protect investors-not internal compliance programs-from potential harm caused by fraud and misconduct.” The NWC has always maintained that whistleblowers should be protected from retaliation if they report to internal compliance, but requiring them to do so would violate the intent of Congress and would not be in the best interest of investors.

Senator Grassley did not have much sympathy for the SEC’s concerns. He explained that the DOJ and IRS have already been through this process and would be able to provide guidance on how to address the SEC’s concerns “without eviscerating whistleblower protections.” In sum, Senator Grassley’s letter tells the SEC to get over its hostility against whistleblowers and do its job.

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Rebuffing an open letter from the National Whistleblowers Center (NWC) asking for a face-to-face meeting, and brushing aside the potential consequences for the best whistleblower law ever enacted, three organizations filed a petition yesterday challenging the False Claims Act (FCA). The American Civil Liberties Union (ACLU), OMB Watch and the Government Accountability Project (GAP) filed the petition in the U.S. Court of Appeals for the Fourth Circuit in Richmond, Virginia. The case is ACLU v. Holder, Case No. 09-2086.

On March 28, 2011, the three-judge panel of the Fourth Circuit rejected the ACLU, OMB Watch and GAP challenge to the “seal” provision of the FCA. The FCA provides a reward program for whistleblowers who help the government recover money that companies obtain by fraud. The FCA provides for a temporary “seal” that shields the case from public disclosure while the government investigates the case to decide if it will intervene. The seal serves the government by preventing the fraudsters from getting wind of the government investigation. If companies knew the government was trying to prove they engaged in fraud, they might start destroying evidence that the government could later use to prove that fraud. The seal also protects the whistleblower from retaliation while the seal is in force. All FCA seals are temporary and will eventually be lifted so the public can see the claims made and the government's decision on whether to intervene. If a seal last for longer than sixty (60) days, it must be approved by the Court which considers whether it is in the public interest.

After the March 28 panel decision, the NWC issued an open letter to the ACLU, OMB Watch and GAP. The open letter asked for a face-to-face meeting with the the decision makers from these groups to discuss whether proceeding with this case was really in the public interest. The NWC letter warned that the challenge to the FCA threatened the right of whistleblowers to file claims confidentially and could  undermine America's "most effective whistleblower law."

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In a major setback for whistleblowers, a panel of the Ninth Circuit U.S. Court of Appeals has decided that going to the media can never be protected activity under the Sarbanes-Oxley Act (SOX).

The decision, issued in the case of Tides v. Boeing Corporation, upheld the firing of two Boeing employees, Nicholas P. Tides (a compliance specialist) and Matthew C. Neumann (an auditor) after they provided the Seattle Post-Intelligencer with credible allegations of unethical activity and fraud.

The National Whistleblowers Center (NWC) filed an amicus curiae ("friend of the court") brief on behalf of the whistleblowers. The employees were represented by Seattle attorney John J. Tollefsen, of Tollefsen Law PLLC.

According to Stephen M. Kohn, Executive Director of the NWC: "This ruling is a major setback. Permitting companies to fire workers who talk to the press will have a chilling effect on whistleblowers, and stifle the ability of the government to learn about misconduct."

Mr. Kohn added, "The ruling is illogical. Under this decision, corporate insiders can discuss fraud among themselves, but if an employee attempts to alert investors or the news media, they can be fired. The news media has historically played a vital role in informing government officials and the public about potential wrongdoing. We hope that Nicholas Tides and Matthew Neumann appeal this ruling."

Loyola Law School professor Michael Waterstone told the Los Angeles Times that this decision, "certainly makes it less likely that [employees will] report behavior to journalists or members of the media."

I am disappointed that the panel did not even mention the prior Ninth Circuit cases that adopted a balancing test to determine if employee disclosures are protected under other laws.  See Wrighten v. Metropolitan Hosp., Inc., 726 F.2d 1346, 1355 (9th Cir. 1984) (protecting a press conference under Title VII); O’Day v. McDonnell Douglas Helicopter Co., 79 F.3d 756 (9th Cir. 1996) (ADEA). On page 8, footnote 6, the Tides court says that it would not consider whether going to the media might be protected under 18 U.S.C. § 1514A(a)(2). The court now points practitioners to raise media disclosure cases under § 1514A(a)(2), Hopefully, though, the rest of the Ninth Circuit will be moved to correct this unfortunate panel decision before any new cases reach the court.

CASE UPDATE:  On May 16, 2011, attorneys for Nicholas Tides and Matthew Neumann filed a petition for rehearing en banc. This means that the other judges of the Ninth Circuit will have a chance to vote on whether they want to reconsider this terrible panel decision that denied protection for disclosures to the media.  Hopefully, the other judges of the Ninth Circuit will remember the Wrighten and O'Day decisions and apply their holding here for the benefit of Tides and Neumann.

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