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

Stephen Kohn offered additional tips for whistleblowers and their advocates.

• Noting that the SEC rule for anonymous whistleblowers requires that they be made through counsel, Kohn suggested that an attorney could review the documents available for submission and select those that well establish the whistleblower's claim while minimizing the risk of "fingerprinting." In "fingerprinting" a corrupt corporate manager would use the scope of a government investigation, and the documents relied upon, to narrow the group of suspected whistleblowers.
• The SEC Rule 21F-4(b)(4)(v) allows internal auditors to submit their own whistleblower reward claims in three circumstances:

(i) a report to the Commission is necessary to prevent substantial harm to the entity or investors;
(ii) the entity is engaging in conduct that will impede our investigation; or
(iii) 120 days have elapsed.

• The 120 day time limit will create a dilemma for corporate managers. If they fail to self-report a violation to the SEC within 120 days, their own internal compliance personnel can start filing their own whistleblower reward claims to the SEC.
• Since the SEC rules count reports to internal compliance programs in determining who was the first to file, whistleblowers should preserve evidence of their submissions to internal compliance.

Sean X. McKessy added these points:

• Each time the SEC completes an enforcement action for over $1 million, it must post a notice of the action on its web page. This posting starts a 90-day clock. During the 90-days, any whistleblower seeking a reward from this enforcement action must file a claim for it. His office will then review the claims and determine what rewards, if any, it can make from the enforcement penalty.
• The SEC Office of the Whistleblower plans to begin posting notices of eligible SEC enforcement actions on August 12, 2011.
• Those whistleblowers who submitted anonymous claims before August 12, 2011, must provide their lawyer with a signed TRC form [tips, complaints and reports] by October 11, 2011. Anonymous claimants filing on or after August 12, 2011, must provide their signed TRC from to their attorney before they file.
• Since the SEC gets over 30,000 tips a year, his office will be relying on the SEC Office of Market Intelligence to perform a triage function. Everyone at the SEC is looking for a good case, so it is in the interest of the whistleblower to make a good submission. Good submission have detailed information about dates, names, documents and witnesses. "Give us the iceberg," McKessy urges.
• Any written submission to the SEC on or before August 11, 2011, can qualify for a Dodd-Frank reward. However, whistleblowers must pay attention to the SEC notices of eligible enforcement claims and submit their claims for rewards before the 90 day time limit expires.
• If there are multiple claimants for the same reward, the reward goes to the whistleblower who was first to file, either with the SEC or with the company's internal compliance program.  Don't sit around waiting for a fraud to grow.  Be the first to file. The TCR portal is linked here. It will be updated on August 12, 2011.
• Rewards can be increased in size based on (1) the significance of the information provided, (2) the whistleblower's cooperation, (3) the extent of the SEC's "law interest" in the case, and (4) the whistleblower's cooperation with internal compliance.
• Rewards can be reduced based on (1) the whistleblower's culpability in the violation, (2) undue delay in reporting, and (3) interference with internal compliance efforts.
• When making a submission to the SEC, please disclose any other reports you have made.  For example, if you disclose that you have also filed an IRS whistleblower report, or a report to the Department of Justice, then the SEC can share your information with those agencies and coordinate enforcement actions.
• If the SEC staff recommends an award of less than 30%, you have 30 days to request an opportunity to review the record and meet with the staff. Exercising both options is a good idea. The time to appeal to the Claims Review Board (CRB) is 60 days.
• Denials of rewards, and rewards of less than 10%, are reviewable in U.S. Circuit Courts of Appeals.
• Retaliation against a whistleblower is also a violation of the Securities Exchange Act. In addition to pursuing remedies from the Department of Labor, a whistleblower can ask the SEC to commence an enforcement action.
• Don't expect fast action on whistleblower claims.  It will take time for the Office's staff of 7 to complete work on the rewards program.
• Help spread the word that the SEC Office of the Whistleblower is open now for business.

Dean Zerbe adds:

• When making a submission, ask when will be a suitable time to call back to discuss it again.
• Fraud violations are often also tax violations. If someone is accepting a bribe, what are the odds that they will be reporting it on their tax return? File a whistleblower report with the IRS too.

Supplemental statutory material for the seminar is available here.

Donna Boehme's Resource Guide on Empowered Chief Ethics and Compliance Officer (CECO) Role

Attorney E. Patrick McDermott of Annapolis, Maryland, presented the argument for the complainants, Kathy Sylvester and Theresa Neuschafer. McDermott (pictured on the right, with Stephen Kohn and Kathy Sylvester) explained how the employer, Parexel International, had trained them to make reports pursuant to SOX, and how they had received an email specifically identifying the breach of Good Clinical Practices (GCP) was fraudulent. This, McDermott argued, was a reasonable basis to believe that a SOX violation had occurred and should be reported. Judge Corchado suggested that the Board members were familiar with the facts and would like to hear more about the legal issues. Judge Brown cautioned that the ARB is an appellate body and is limited in what it can review.  Judge Corchado asked why this would not be an issue for the Food and Drug Administration (FDA). McDermott responded that his clients wanted their jobs back, and SOX was an appropriate law to accomplish that goal.  Judge Brown asked what the practical difference is between a dismissal under Rule 12(B) of the Federal Rules of Civil Procedure (FRCP) and a summary decision under 29 CFR 18.40.  McDermott responded that the ALJ had misapplied the law to dismiss this case.

Attorney Joseph Schuler of Reston, Virgina, argued on behalf of Parexel. He argued that the ARB's 2006 decision in Platone v. FLYi, Inc., was "well-grounded in law and logic."  He agreed that whistleblowers do not have to cite any specific law when they raise a concern, but a standard is needed to avoid claims from "legally sophisticated gadflies."  Judge Corchado asked him if he would agree that even in Rule 12(B) motions, judges can make reasonable inferences. Schuler agreed that they can. Judge Corchado next asked if it is reasonable to infer that if a company is recording fraudulent data in clinical tests, that it is doing so to make the company look good. Schuler responded that this was "too far of a stretch." Schuler went on to argue that the misconduct alleged should be misconduct of a person sufficiently high enough in the company such that it can be said that the company itself engaged in the fraud. This argument ignores how many of the laws enforced through SOX are often violated by corrupt employees who are embezzling from or defrauding their own employer. No company or even management action is necessary to find these violations. SOX Section 806 prohibits retaliation by the company, but does not require that the protected activity identify a violation by the company.

Judge Corchado used this argument to present an idea that had not been presented by any of the briefs.  He quoted from the following portions of 29 CFR Section 1980.109(a):

Neither the Assistant Secretary's determination to dismiss a complaint without completing an investigation pursuant to § 1980.104(b) nor the Assistant Secretary's determination to proceed with an investigation is subject to review by the administrative law judge, and a complaint may not be remanded for the completion of an investigation or for additional findings on the basis that a determination to dismiss was made in error. Rather, if there otherwise is jurisdiction, the administrative law judge will hear the case on the merits. [Emphasis added.]

Judge Corchado asked if this rule calls on ALJs to focus on hearing cases on the merits. Schuler responded that a motion to dismiss under FRCP 12(B) is an adjudication on the merits. He argued that a judge should be able to dismiss a case "once the essential facts are before the ALJ." Judge Corchado asked if investors would be interested in knowing whether test results had been doctored. Schuler said that if it was just one set of data, and that the data had been submitted to the company for correction, then no, they would not. Judge Igasaki asked if there was some level of clinical fraud that would be wide enough to trigger SOX concerns. Schuler said that Van Asdale v. Int’l Game Technology, 577 F.3d 989, 997 (9th Cir. 2009), was an example of a level sufficient enough to indicate an intent to commit fraud. If there was evidence that nurses routinely omitted data, that would be a different case, he said. "There are mistakes in every workplace, and there are mistakes in clinical research," Schuler conceded, but they don't become SOX violations until management condones them.  Judge Royce asked about the situation where a company's information technology (IT) system is vulnerable, and whether that would be enough information to protect an official report of a SOX concern, or whether evidence of an intent to defraud is always required. Schuler answered that it was. He argued that the statutes listed in SOX Section 806 (18 U.S.C. 1514A(a)(1)) require fraud, and this requirement should carry over to the other violations as well, unless a cover-up is alleged.

Attorney Jonathan Rees of the Solicitor of Labor's Office took the opposite view.  He said that the SOX statute does not require a complainant to establish fraud, except to the extent that it is required under the specific statute. He urged the ARB to look at O'Mahony v. Accenture Ltd, 537 F.Supp2d 506 (S.D.N.Y. 2008) and Rayna v. ConAgra Foods, Inc., 506 F.Supp.2d 1363 (M.D.Ga. 2007). These cases applied the doctrine of the "last antecedent" so that the phrase "relating to fraud against shareholders" in 18 U.S.C. 1514A(a)(1) applies only to "or any provision of Federal law" because there is no comma separating these phrases. He told Judge Royce that materiality is required only for fraud claims and certain SEC rule violations, but that some SEC rules do not require proof of materiality. He reminded that ARB that complainants do not have to prove a violation, but only a reasonable belief of a violation. Judge Corchado asked Rees if he was aware of any Fourth Circuit decision saying that OSHA complaints must meet the Iqbal or Twombly standards.  Rees said no. Rees also told Judge Corchado that 29 CFR Section 1980.109 "reinforces that de novo review" is the standard at the ALJ stage. This is consistent with the notion that a case is not to be adjudicated on the pleadings or on the OSHA complaint.

Attorney John Avery appeared on behalf of the Securities and Exchange Commission (SEC). He initially explained that the SEC will not issue an amicus brief unless all the Commissioners have had an opportunity to review a detailed staff memo on the issue, and the alternative positions the Commission could take.  He said that was done in this case, and the SEC's position is limited to what it states in its brief. He said that the SEC urges the ARB to hold that SOX does not add any requirement to show a fraud against shareholders.  For example, he notes that the statutes listed in SOX include frauds against persons other than shareholders. The SEC also has rules on periodic reporting, and violations of these rules might not involve any fraud, but could merely create conditions in which fraud would not be detected. Judge Corchado used the opportunity to say that he could not understand how the Welch case would not represent a fraud against shareholders. Reference, Welch v. Chao, 536 F.3d 269, 276 (4th Cir. 2008). Judge Corchado said that representing $195,000 as income when it is not clearly implicates the type of fraud SOX seeks to prevent.  Avery agreed. Avery went on to say that the phrase "definitively and specifically" is an "odd use of words invented out of whole cloth by the Sixth Circuit." He referred to American Nuclear Res., Inc. v. United States Dep’t of Labor, 134 F.3d 1292, 1295 (6th Cir. 1998). I had argued that this case is outdated in light of Crawford v. Metropolitan Government of Nashville and Davidson County, 555 U.S. ___, 129 S.Ct. 846 (2009). Avery noted that even the ANR decision recognized that protected activity should be construed broadly. He also noted that the statute protects reporting any violation of SEC rules or regulations, and those violations do not require any showing of fraud or materiality.  Judge Corchado asked if the SEC is concerned with the financial value of a company's good will such that a suppression of detracting information would be a violation.  Avery said, "yes, absolutely."  Avery said that the ARB should not use any accountant's numerical threshold as the issue "may be extremely important to investors."

Attorney Stephen M. Kohn presented argument for the National Whistleblowers Center (NWC) and Doug Evans. Kohn's argument focused on Passaic Valley Sewerage Comm. v. U.S. Department of Labor, 992 F.2d 474, 478-79 (3rd Cir. 1993). He noted how this is the only case that the Senate report cited to express the legislative intent about the scope of protected activity. See Cong. Rec. S7418, S7420 (daily ed. July 26, 2002). The Passaic Valley standard protects any concern that is not frivolous or an abuse of the statute. It is inconsistent with the "definitively and specifically" standard, and the words "definitively and specifically" do not appear in the SOX statute. Judge Corchado expressed appreciation for the "helpful history." Judge Corchado asked if there is some relatedness requirement for protected activity. Kohn answered yes. He urged the Board to use common sense. Under this standard, misinformed and even wrong ideas would still be protected as long as they are not frivolous or an abuse of the statute.  Kohn said that the "definitively and specifically" standard has a chilling effect on protected activity and he urged the Board to reject it.  He said that the Passaic Valley standard actually has roots in the Federal Mine Safety Act and Munsey v. Federal Mine Safety and Health Review Comm’n, 595 F.2d 735, 742-743 (D.C. Cir. 1978). The idea is to protect the channels of communication and encourage employees to raise concerns.

Kohn explained that SOX also amended 18 U.S.C. 1513(e), the obstruction of justice statute, to clearly prohibit retaliation against employee whistleblowers. You can read more about the significance of this amendment here. It makes clear that Congress wants to protect whistleblowers whenever they report any violation of law. "It makes common sense," Kohn said. "If an employee sees a violation and reports it, that could implicate the statute."  He cited the reports of the Association of Certified Fraud Examiners as showing that employees are the number one source for detecting fraud. They want employees to be encouraged to report "suspicious activity." Any higher standard will leave some frauds undetected.

Kohn also discussed the legal standards for a federal agency to change policy. Under FCC v. Fox Television Stations, Inc., 556 U.S. ___, 129 S. Ct. 1800 (2009), the agency merely needs to acknowledge the prior policy and explain why it is changing the policy.  It is permitted to do so as long as the new policy is also within the agency's authority. Then, the courts should give deference to the new policy.

Attorney Porter Wilkinson (from the Washington office of Gibson Dunn & Crutcher) attended on behalf of the U.S. Chamber of Commerce, but did not present oral argument.

Chief Judge Paul Igasaki announced at the end of the argument that he hopes the ARB will be issuing its decision soon.  He thanked the attorneys for their participation.  He said the case was well presented and helped crystallize the issues.