November 1, 2010 NEW ROBUST RETALIATION PROTECTIONS FOR WHISTLEBLOWERS

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1 NEW ROBUST RETALIATION PROTECTIONS FOR WHISTLEBLOWERS Debra S. Katz 1 Matthew Stiff Katz, Marshall & Banks, LLP 1718 Connecticut Ave., N.W. Sixth Floor Washington, DC (202) katz@kmblegal.com November 1, Debra S. Katz is a partner with Katz, Marshall & Banks, LLP, a plaintiffs employment and civil rights law firm based in Washington, D.C. Matthew Stiff is an associate with the firm. The firm specializes in the representation of plaintiffs in employment law matters, including whistleblower, discrimination, sexual harassment, retaliation, disability, family and medical leave, contract, and executive compensation matters. Copyright 2010, Katz, Marshall & Banks, LLP.

2 Table of Contents I. INTRODUCTION... 3 II. THE DODD-FRANK ACT... 4 A. Commodity Futures Trading Commission Whistleblower Incentive Program and Anti-Retaliation Provisions... 4 B. Securities and Exchange Commission Whistleblower Incentive Program and Anti-Retaliation Provisions... 8 C. Newly-Created Whistleblower Protections for Financial Services Employees... 9 D. Strengthening the Anti-Retaliation Employee Protections of the Sarbanes-Oxley Act E. Amendments to the False Claims Act III. THE SARBANES-OXLEY ACT IV. TARP FRAUD V. THE McCASKILL AMENDMENT VI. THE IRS WHISTLEBLOWER INCENTIVE PROGRAM VII. USEFUL INFORMATION AND RESOURCES A. Statutory Text B. Blogs, Commentaries and Articles

3 I. INTRODUCTION The recent trend towards more expansive whistleblower protection and incentive laws has its roots in the massive corporate scandals of the early 2000s: Enron and Arthur Andersen, WorldCom and Tyco. Popular outrage over the greed and corruption exhibited by these companies prompted the nearly unanimous passage of the Sarbanes-Oxley Act of 2002 ( SOX ). In addition to providing a detailed, comprehensive set of rules and regulations for publicly traded companies designed to prevent shareholder and accounting fraud, SOX contained a whistleblower provision to protect employees who reported corporate fraud from retaliation by their employers. See 18 U.S.C. 1514A ( SOX 806 ). The next wave of major corporate whistleblower protections accompanied the extraordinary infusion of government funds into the private sector following the sharp downturn of the housing and financial markets in The Troubled Asset Relief Program ( TARP ), also known as the bailout, involved a direct transfer of federal funds to major financial institutions to prevent their collapse. Realizing the high potential for fraud in such cases, the government set up a hotline and website for individuals to report fraud by institutions and local governments receiving TARP funds. Such individuals may also be able to bring qui tam actions against the institutions under the False Claims Act. Another major government spending initiative followed. The American Recovery and Reinvestment Act ( ARRA ), also known as the stimulus, provided funds to encourage construction and other projects designed to revitalize local economies and create jobs. Section 1553 of ARRA, known as the McCaskill Amendment, is an anti-retaliation provision that protects whistleblowers who report fraud, gross mismanagement, or waste of ARRA funds. Most recently, the Dodd-Frank Act, a massive financial regulatory overhaul, made sweeping changes to existing whistleblower protections and added new whistleblower incentives. The Act closed loopholes and strengthened SOX and the False Claims Act. The Act also created a Securities and Exchange Commission whistleblower incentive program, as well as a Commodity Futures Trading Commission whistleblower incentive program, both of which reward those who provide information to the government on securities violations by giving whistleblowers a share of any money the government recovers. Dodd-Frank created a specific whistleblower-protection program for those who work in the financial industry to encourage them to come forward with information related to fraudulent conduct in the sale and marketing of consumer financial products or services. This proliferation and expansion of federal whistleblower protections has garnered praise from some and caused great concern for others. Plaintiffs attorneys and consumer advocates argue that the reforms are necessary to prevent the sort of fraud that wrought havoc on the economy in the last decade, largely at the expense of the nation s working people. They note that employees are in the best position to identify corporate misconduct, but that many are afraid to come forward because the risks far outweigh the rewards. The corporate defense bar and their clients, on the other hand, argue that the new laws particularly the whistleblower-reward programs create a perverse incentive for employees to compile and sit on information about 3

4 potential corporate fraud or illegalities, and report it to the government only when they see the possibility of receiving a large enough bounty to justify the risk their actions pose to their jobs. The corporations say that this leaves no opportunity to use the internal channels to correct minor problems before they become major liabilities. Companies also argue that the enticement of large payouts will lead to more bogus complaints that will be costly to defend and will ultimately hurt employees. With many regulations still to be written and few reported federal cases, it is unclear what long-term impact the most recent whistleblower provisions will have in curbing fraud, corruption and other violations. What is known, however, is that the reforms have already sparked a surge in complaints by whistleblowers and requests for compliance assistance by corporations a trend that is likely to continue for the foreseeable future. This article provides a brief overview of some of the new corporate whistleblower provisions and identifies resources for obtaining additional information. II. THE DODD-FRANK ACT On July 15, 2010, Congress approved a massive overhaul of the nation s financial regulatory system. President Barack Obama signed the bill into law on July 21, Congress designed the Wall Street Reform and Consumer Protection Act popularly known as the Dodd- Frank Act to address some of the root causes of the collapse of the financial sector in As part of its comprehensive program to ensure corporate accountability and compliance, the Dodd- Frank Act strengthened and created numerous whistleblower protections. As noted in Section II above, Congress expanded the whistleblower provision of the Sarbanes-Oxley Act ( SOX 806 ) by extending the statute of limitations, clarifying the scope of coverage and right to a private civil action, and ensuring that the protections of SOX 806 were non-waivable by employees in most cases. As detailed below, the Dodd-Frank Act also strengthened the False Claims Act and created new whistleblower protections and incentive programs to reward individuals who report violations of the law that result in monetary sanctions against the offending party. A. Commodity Futures Trading Commission Whistleblower Incentive Program and Anti- Retaliation Protections. In 1974, Congress created the CFTC as an independent agency with the mandate to regulate commodity futures and option markets in the United States. Congress has subsequently expanded the CFTC s mandate several times, most recently by the Commodity Futures Modernization Act of At the time of the CFTC s creation, the majority of futures trading took place in America s agricultural sector. Over the subsequent decades, however, the futures industry became increasingly varied and complex. The CFTC now oversees futures markets in the energy, agriculture, metals, financial, soft commodities (e.g., sugar, coffee, cocoa, etc.), and livestock industries. The CFTC describes its present mission as assuring the economic utility of the futures markets by encouraging competitiveness and efficiency, protecting market participants against fraud, manipulation, and abusive trading practices, and ensuring the financial integrity of the clearing process. The CFTC 4

5 is overseen by five commissioners appointed by the President, with the advice and consent of the Senate. These commissioners serve staggered five-year terms. 1) CFTC Whistleblower Incentive Program Section 748 of the Dodd-Frank Act amends the Commodity Exchange Act, 7 U.S.C. 1 et seq., to create an incentive program for whistleblowers who provide original information to the CFTC that results in the imposition of monetary sanctions greater than $1 million. The statutory language establishing this incentive program is as follows: In any covered judicial or administrative action, or related action, the Commission, under regulations prescribed by the Commission and subject to subsection (c), shall pay an award or awards to 1 or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action, in an aggregate amount equal to (A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and (B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions. The Dodd-Frank Act further defines these bolded CFTC Whistleblower Program terms as follows: Covered judicial or administrative action: Any judicial or administrative action brought by the CFTC under the Commodity Exchange Act that results in monetary sanctions in excess of $1,000,000. Monetary Sanctions: these sanctions include any monies, including penalties, disgorgement, restitution, and interest ordered to be paid, as well as any monies deposited into a disgorgement fund or other fund pursuant to Section 308(b) of the Sarbanes Oxley Act of 2002 as a result of such action or any settlement of such action. Whistleblower: any individual (or individuals acting jointly) who provides information relating to a violation of the Commodity Exchange Act in a manner established by rule or regulation of the CFTC. Original Information is information that is: (A) derived from the independent knowledge or analysis of a whistleblower; (B) not known to the CFTC from any other source, unless the whistleblower is the original source of the information; and 5

6 (C) not exclusively derived from an allegation made in a (1) judicial or administrative hearing, in a (2) governmental report, hearing, audit, or investigation, or (3) from the news media, unless the whistleblower is a source of the information. Additionally, original information triggers the CFTC whistleblower program so long as the original information was submitted to the CFTC after the date of enactment of the Dodd-Frank Act. Moreover, awards issued pursuant to the CFTC Whistleblower Program are available to whistleblowers who provided timely original information to the CFTC even where the violation of the Commodities Exchange Act (or its implementing rules and regulations) occurred prior to the enactment of the Dodd-Frank Act. Successful enforcement: Successful enforcement includes any settlement of covered actions. Determining the Size of the CFTC Whistleblower s Award: As stated above, the CFTC whistleblower s award shall be not less than 10 percent and not more than 30 percent of the total monetary sanctions that have been collected as imposed via the covered action or related actions. The determination of this award rests with the discretion of the CFTC. The Dodd-Frank Act lists certain criteria that should guide the CFTC s discretion. These criteria include: 1. The significance of the CFTC whistleblower s information to the success of the covered judicial or administrative action against the wrongdoer; 2. The degree of the CFTC whistleblower s assistance (as well as the assistance of the whistleblower s legal representative) 3. The CFTC s programmatic interest in deterring violations of the Commodity Exchange Act (and its implementing regulations); and 4. Additional relevant factors as established by a rule or regulation of the CFTC. Grounds for Denial of the CFTC Whistleblower s Award: The Dodd-Frank Act envisions numerous scenarios in which an individual s employment precludes that person from eligibility as a CFTC whistleblower. These scenarios include: Any individual who is or was at the time of acquiring the original information submitted to the CFTC a members/officer/employee of the following: o Appropriate regulatory agency; 6

7 o The Department of Justice; o A registered entity; o A registered futures association; o A self-regulatory organization under Securities Exchange Act (e.g., Financial Industry Regulatory Authority [FINRA]); or o A law enforcement organization. The Dodd-Frank Act also disallows awards to any whistleblower convicted of a criminal violation related to the covered judicial/administrative action that produced the award. Whistleblowers are not eligible for awards where the whistleblower submits information to the CFTC that is based on facts underlying the covered action previously submitted by another whistleblower. Finally, the Dodd-Frank Act prohibits awards to any whistleblower who fails to submit information to the CFTC in such a form as required by CFTC rule or regulation. The Dodd-Frank Act permits a whistleblower to be represented by counsel when making a claim for an award under the CFTC Whistleblower Program. Additionally, the whistleblower may initially remain anonymous and act through her counsel, provided that the whistleblower eventually disclose her identity to the CFTC prior to the payment of the award. Appealing the CFTC Whistleblower s Award: Unlike Section 922 of the Dodd-Frank Act (the SEC Whistleblower Program), Section 748 permits CFTC whistleblowers to appeal any award determination of the CFTC. The whistleblower-appellant must file an appeal with the appropriate Circuit Court of Appeals not more than 30 days after the CFTC issues its award determination. Section 748 s CFTC program is distinct from Section 922 s SEC program, however, in that a whistleblower under the CFTC program has the right to appeal the size of the monetary award that she receives as the result of providing original information. 2) CFTC Whistleblower Anti-Retaliation Employee Protection Measures Section 748 of the Dodd-Frank Act also creates a private right of action for CFTC whistleblowers who experience adverse personnel actions on account of protected activity. This anti-retaliation protection provision protects whistleblowers who provide information to the CFTC in accordance with the above-described CFTC whistleblower program, or whistleblowers who assists in any CFTC investigation or judicial/administrative action that is based upon or related to the whistleblower s provision of information. 7

8 Forum: Section 748 s anti-retaliation protection provision permits a non-federal government employee to bring an action against the employer in federal district court. Federal government employees must bring the action pursuant to Section 1221 of Title 5 of the U.S. Code. Whistleblowers Statute of Limitations: Whistleblowers must bring the action no later than two years after the date of the adverse personnel action occurs. Remedies: A successful whistleblower is entitled to reinstatement, backpay and interest, compensation for special damages, litigation costs, expert witness fees, and reasonable attorneys fees. Pre-Dispute Waivers and Arbitration Agreements Null and Void: Section 748 of the Dodd-Frank Act renders any agreement, policy form, condition of employment, and pre-dispute arbitration agreement null and void, insofar as those agreements require arbitration of the dispute arising under Section 748. B. Securities and Exchange Commission (SEC) Whistleblower Incentive Program and Anti-Retaliation Provisions Section 922 of the Dodd-Frank Act amends the Securities Exchange Act of 1934, 15 U.S.C. 78a et seq., to create a new federal program by which the Securities and Exchange Commission ( SEC ) will reward whistleblowers who voluntarily provide original information to the SEC regarding securities violations that result in the imposition of monetary sanctions greater than $1 million. The provisions of Section 922 are a near mirror to the provisions of Section 748 s CFTC Whistleblower Incentive Program described above. Section 922 states that the whistleblower s financial reward for the provision of original information shall be not less than 10 percent and not more than 30 percent of the total collected monetary sanctions from the offending party. As is the case with the CFTC, the SEC maintains discretion in determining the size of the whistleblower s financial reward. In crafting this reward, the SEC will consider the significance of the information provided, the extent of the whistleblower s assistance, the programmatic interests of the SEC, and any other relevant factor that the SEC establishes by subsequent rule or regulation. However, unlike the CFTC Whistleblower Incentive Program, SEC Whistleblowers have no right to appeal the SEC whistleblower award to federal court. Similarly to Section 748 s CFTC Whistleblower program, Section 922 specifically forbids awards to whistleblowers who were employees of an appropriate regulatory agency, 8

9 the Department of Justice, a self-regulatory organization, the Public Company Accounting Oversight Board, or a law enforcement organization. Section 922 also prohibits financial rewards to whistleblowers who are convicted of a criminal violation related to the judicial or administrative action for which the whistleblower provided information, individuals who gain the original information by auditing financial statements as required under the securities laws and individuals who fail to submit information to the SEC as required by an SEC rule. In addition to creating the federal program designed to encourage the reporting of securities violations, Section 922 protects employees against retaliation when these employees provide information about their employer to the SEC in accordance with the program, or when these employees initiate, testify or assist in any investigation related to the program, or make required disclosures under SOX, the Securities Exchange Act of 1934, and any other law, rule, or regulation under the jurisdiction of the SEC. The Act creates a private right of action that may be filed in federal court. The remedies available to an aggrieved whistleblower vary slightly from the remedies available to the CFTC whistleblower. Under Section 922 whistleblower s remedies under this new provision include reinstatement, double back pay with interest, attorneys fees, and the reimbursement of other related litigation expenses. C. Financial Services Industry Anti-Retaliation Employee Protection Measures. Section 1057 of the Dodd-Frank act prohibits retaliation against whistleblowers who expose wrongdoing in the financial services industry. Specifically, Section 1057 prohibits persons or service providers covered under Title X of the Dodd-Frank Act from terminating or otherwise discriminating against any covered employee (or authorized representatives of covered employees) by reason of the fact that such employee or representative has: (1) provided, caused to be provided, or is about to provide or cause to be provided, information to the employer, the [Bureau of Consumer Financial Protection ( Bureau )], or any other State, local, or Federal, government authority or law enforcement agency relating to any violation of, or any act or omission that the employee reasonably believes to be a violation of, any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau; (2) testified or will testify in any proceeding resulting from the administration or enforcement of any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau; (3) filed, instituted, or caused to be filed or instituted any proceeding under any Federal consumer financial law; or (4) objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be 9

10 in violation of any law, rule, order, standard, or prohibition, subject to the jurisdiction of, or enforceable by, the Bureau. Section 1057 covers employers who engage in the offering or provision of a consumer financial product or service. The scope of coverage also encompasses affiliates who provide a related material service to the employer, including the design, maintenance, and/or operation of the financial product or service, or for the processing of related transactions. Covered services and employment included property appraisals, financial advisory services, credit counseling, credit rating, real estate settlement, and loan underwriting. It is important to note that Section 1057 s anti-retaliation prohibition protects employees or authorized representatives both when that employee/representative acts in the foregoing manners on her own initiative, or instead during the employee s execution of her duties in the normal course of affairs. Covered Employees: any individual who performs tasks related to the offering/provision of a consumer financial product or service. Procedures: in order to trigger the protections afforded by Section 1057, the covered employee must file a Complaint with the Secretary of Labor not later than 180 days after the unlawful retaliation occurred. Currently, the Occupational Safety Health Administration ( OSHA ) acts on behalf of the Secretary of Labor in these investigations (this however, could be subject to change if OSHA is stripped of its investigation responsibilities for whistleblower complaints). OSHA will then inform the person(s) named in the Complaint of the allegations and provide an opportunity for written response. OSHA will initiate its investigation within 60 days after the filing of the Complaint. Section 1057 tracks many of the same provisions of the Sarbanes Oxley Act antiretaliation provisions, where the Secretary of Labor may order relief upon a finding of reasonable cause that retaliation occurred. Parties may file objections to the Secretary of Labor s written determination no later than 30 days after issuance, and request a hearing. Elements: In order to prevail in an action under Section 1057 of the Dodd-Frank Act, the aggrieved employee must prove the following: o The employee engaged in protected activity; o The employer knew of the employee s protected activity; o The employer took an adverse employment action against the employee; and o The employee s protect activity contributed to the employer s adverse employment action. 10

11 The employee bears the burden of proving by a preponderance of the evidence that the protected activity was a contributing factor to the employer s adverse employment action. The employer must then prove by clear and convincing evidence that it would have executed the same adverse employment action even in the absence of the employee s protected activity. Protected activity: protected activity includes the actions described above (e.g., employee provides information to law enforcement agency regarding a violation of Title X of the Dodd-Frank Act, employee institutes a proceeding through filing under any federal consumer financial law, etc.). An employee s reasonable but mistaken belief that an employer has violated Title X of the Dodd-Frank Act constitutes protected activity. Right to Jury Trial: If the Department of Labor fails to issue a final order within 210 days of the filing of the Complaint, the employee may remove the case to federal court. Either party can then request a trial by jury. Remedies: An employee who prevails under an action brought pursuant to Section 1057 is entitled to the following relief: o Reinstatement or front pay; o Back pay with interest; o Compensatory damages; o Attorneys fees; and o Litigation costs, expressly inclusive of expert witness fees. D. Strengthening the Anti-Retaliation Employee Protections of the Sarbanes-Oxley Act. 1) Expanding the Scope of SOX Coverage. Section 929A of the Dodd-Frank Act expands the scope of SOX coverage to include certain subsidiary entities of publicly-traded corporations. Prior to the enactment of the Dodd- Frank Act, employers frequently avoided the application of SOX s employee protection provisions by arguing that they were not a covered entity under SOX. With the exception of certain limited circumstances, the Department of Labor consistently interpreted SOX s whistleblower protection provisions to apply solely to publicly traded companies subject to the registration and reporting requirements of the Securities Exchange Act of Because of this restrictive interpretation that arguably contravened the plain language of SOX, wholly-owned 11

12 subsidiaries of publicly-traded companies entities that are not subject to the registration and reporting requirements of the Securities Exchange Act frequently avoided the application of SOX in instances of unlawful retaliation. Section 929A of the Dodd-Frank Act corrects this restrictive interpretation of SOX coverage and ensures that the anti-retaliation provisions of Section 806 of SOX apply to employees of publicly-traded companies and to employees of subsidiaries of publicly-traded companies whose financial information is incorporated into the consolidated financial statements of a publicly-traded company. Accordingly, employers falling under this latter category can no longer avoid coverage of SOX merely because they do not file directly with the SEC. Moreover, the language of the Senate Committee Report on the Dodd-Frank Act provides strong basis for arguing that this amendment is not retroactive in nature as applied to currently pending cases Section 929A. Protection for employees of subsidiaries and affiliates of publicly traded companies Amends Section 806 of the Sarbanes-Oxley Act of 2002 to make clear that subsidiaries and affiliates of issuers may not retaliate against whistleblowers, eliminating a defense often raised by issuers in actions brought by whistleblowers. Section 806 of the Sarbanes-Oxley Act creates protections for whistleblowers who report securities fraud and other violations. The language of the statute may be read as providing a remedy only for retaliation by the issuer, and not by subsidiaries of an issuer. This clarification would eliminate a defense now raised in a substantial number of actions brought by whistleblowers under the statute. Senate Report at 114 (emphasis added). Because the legislative history characterizes Section 929A as a clarification of Section 806 s language not as an amendment that alters the existing landscape of the parties substantive rights the imposition of liability on wholly-owned subsidiaries of publicly-traded companies is arguably applicable to Complaints based on adverse employment actions that occurred prior to the enactment of the Dodd-Frank Act. 2) Increasing SOX Statute of Limitations. In addition to expanding the scope of SOX coverage, Section 922(c) of the Dodd-Frank Act increases the statute of limitations for SOX whistleblower claims from 90 days to 180 days. Section 922(c) also invalidates any agreement, policy form, or condition of employment, including a predispute arbitration agreement that has the effect of waiving rights and remedies available to SOX whistleblowers. Finally, Section 922(c) explicitly provides SOX whistleblowers with the right to a jury trial in federal court. E. Amendments to the FCA Anti-Retaliation Provisions. Section 1079B of the Dodd-Frank Act amends the FCA by expanding the concept of protected activity to include lawful acts done by the employee, contractor, or agent or associated others in furtherance of an action under this section or other efforts to stop 1 or more 12

13 violations of [the False Claims Act]. As a result, 31 U.S.C. 3730(h) now encompasses a broader range of activities that could further a potential qui tam action or could halt a violation of the FCA, including protections against associational discrimination. The extent to which the Fourth Circuit is willing to interpret this amended language as encompassing a greater scope of protected conduct remains to be seen. III. THE SARBANES-OXLEY ACT 806 SOX requires publicly traded companies to make certifications about their financial conditions and imposes stiff penalties on companies and their officers for misrepresenting their finances to shareholders and would-be investors. As noted above, SOX also contains protections for employees to serve as the front-line protectors of financial integrity and reporting. Modeled after the whistleblower provisions in federal nuclear and environmental laws, 806 of SOX provides a civil action for employees of publicly traded companies who face retaliation for providing information about, or participating in investigations relating to, what they believe to be violations of securities laws or fraud on the part of their employers. As detailed below, the Dodd-Frank Act made significant amendments to SOX designed to strengthen the law and close loopholes. 2 A. Covered Employers and Employees SOX whistleblower provisions apply to publicly-traded companies that are subject to the registration or reporting requirements of the Securities and Exchange Act, and, as stated above, now to their subsidiaries as well. Prior to the enactment of the Dodd-Frank Act, the Department of Labor had often interpreted SOX s whistleblower protection provisions to apply solely to publicly traded companies subject to the registration and reporting requirements of the Securities Exchange Act. This meant that wholly-owned subsidiaries of publicly-traded companies which were not subject to the registration and reporting requirements but whose finances flowed up to their parents balance sheets frequently avoided the application of SOX. The Dodd- Frank Act makes clear that the statute s employee-protection provisions apply not only to the employees of publicly-traded companies but also to the employees of subsidiaries whose financial information is incorporated into the publicly traded company s consolidated financial statements. SOX protects employees of such companies, as well as their subcontractors. The definition of employee is broad under the statute, and generally includes present and former workers, supervisors, managers, officers, and even independent contractors. Former employees are protected when their protected activity occurs during the course of their employment. SOX s protection of independent contractors depends on the degree to which the publicly traded company exerts control over the contractor s work. For instance, if the independent contractor 2 The DOL s Office of Administrative Law Judges publishes a whistleblower digest that offers summaries of relevant case law on the elements and applicability of SOX 806. Although at the time of this writing, it does not yet include decisions applying the revised whistleblower protections, it is a useful repository of recent and important decisions. See /SOX_DIGEST.HTM. 13

14 reports to company superiors on a daily basis, is given a specific list of daily contacts and appointments, has little or no control over hours or schedule and is required to complete most or all work at the company s offices, SOX most likely protects the contractor from retaliation for providing information about violation of federal securities and fraud law. See Bothwell v. American Income Life, 2005-SOX-57 (ALJ Sept. 19, 2005) (employing a common law agency test to determine whether SOX 806 applies to an independent contractor). B. Protected Activity An employee engages in protected activity when he or she complains internally or to regulators that the company has violated a federal rule or law relating to fraud on shareholders. An employee is protected only for raising possible violations of federal laws and regulations, so if an employee complains about violations of state regulations, without reference to possible federal law violations, the employee will not be protected by SOX. See Allen v. Stewart Enterprises, Inc., ARB No , ALJ Nos SOX-60 to 62 (ARB July 27, 2006). Certain common activities are generally not protected. For example, while an employee is protected by SOX 806 when he points to potential fraud in violation of the law, the employee is not protected when merely making general inquiries about the company s financial losses or accounting or reporting errors. See, e.g., Fraser v. Fiduciary Trust Co., Int l, No. 1:04-cv-06958, 2009 WL (S.D.N.Y. Aug. 25, 2009). Moreover, an employee s complaint about the company s violations of its own internal policies and ethical standards, or even its failure to follow generally accepted accounting practices ( GAAP ), typically does not fall under the SOX whistleblower protections. See, e.g., Day v. Staples, Inc., 555 F. 3d 42 (1st Cir. 2009). The reason for these limitations is that at the heart of protected allegations is that the conduct violated the law and would have a negative impact on shareholders and investors. Thus an employee is protected only if he reasonably believes and suggests that these practices are illegal under federal securities and fraud laws. While the employee must reasonably believe the employer is engaged in fraud or a violation of securities laws, however, he need not be right in that belief. As long as the employee s belief is reasonable, the employer cannot retaliate against the employee for speaking out, even if the belief ultimately proves to be wrong. See id. C. Prohibited Adverse Employment Actions SOX 806 prohibits an employer from taking an adverse employment action against an employee for engaging in protected activity. The Department of Labor ( DOL ) has adopted the standard set forth in Burlington Northern & Santa Fe Ry. Co. v. White, 548 U.S. 53 (2006) (assessing the degree of impact that an employer s action must have on an employee in order to be adverse under Title VII and noting that the reasonable worker must be assumed to be in the [complainant s] position, considering all the circumstances ). In 2007, the DOL s Administrative Review Board confirmed that this standard applied in whistleblower cases as well, dismissing an administrative law judge s use of the tangible consequence test in analyzing employer retaliation: 14

15 [A]s the Supreme Court recently has clarified, the appropriate standard is whether the actions were materially adverse : that is, harmful to the point that they could well dissuade a reasonable worker from making or supporting a charge of discrimination. We already have applied this standard in AIR 21 cases, and we believe it also is appropriate to apply this standard in cases arising under the SOX and the Environmental Acts. Powers v. Paper, Allied-Industrial Chemical & Energy Workers Int l Union (PACE), ARB No , ALJ No AIR-19 (ARB Aug. 31, 2007). Thus, the DOL will consider an action materially adverse if it would dissuade a reasonable finance professional from raising concerns about practices that she believes to constitute fraud on shareholders. This would certainly include firings, demotions, cuts in pay or denial of promotion, but it can also include reassignment of job duties and responsibilities, assignment of undesirable shifts, harassment, micromanagement, excessive supervision, or exclusion from important company activities. D. Procedure for Filing a SOX Whistleblower Claim In order to pursue a SOX whistleblower claim, an employee must file a written complaint with any office of the Occupational Safety and Health Administration ( OSHA ) within 180 days of the retaliatory action. OSHA will conduct an investigation if it determines that the complaint contains the necessary elements of a claim, and will issue a preliminary determination. Either party may appeal the investigator s determination. This is done by requesting a hearing before an administrative law judge, which the party must do within 30 days of receiving a negative determination from OSHA. The proceedings that follow are very similar to those in any court, and an employee may even withdraw his or her complaint from the DOL proceedings and file a case in federal court 3 if the DOL fails to issue a final decision within 180 days of the date the employee first filed a complaint with OSHA. In either forum, the employee can engage in the full range of pre-trial discovery that is part of civil lawsuits, including obtaining relevant documents from the employer and taking depositions of the key decision-makers and other witnesses. E. Proving a SOX Whistleblower Claim In order to prove a SOX whistleblower claim, the employee need only show that her protected activity was a contributing factor in the employer s decision to take adverse action against her. See, e.g., Collins v. Beazer Homes USA, Inc F.Supp.2d 1365 (N.D. Ga. 2004). The whistleblower's protected activity does not have to be the employer's sole reason or even a significant reason for the adverse action, but only has to play some role in the employer s decision, however minor. 3 As noted above, the Dodd-Frank Act made clear that a SOX claimant who properly files in federal court has the right to a jury trial. 15

16 Employees bringing actions under SOX may satisfy the contributing factor standard in either of two ways. In rare cases, the employee may be able to present what is called direct evidence, such as the fact that the supervisor warned the employee that reporting possible fraud to securities regulators would result in termination. More often the employee will have to prove his or her case through circumstantial evidence, which may include the close timing between the protected activity and the adverse action, the fact that the employer has purportedly fired the employee based on conduct for which it has not disciplined other employees, the employer's history of retaliating against whistleblowers, or even the fact that the employer has failed to comply with its own procedures or has presented false reasons for its actions. F. Remedies Available to Successful Claimants The Sarbanes-Oxley Act entitles employees who prevail on their whistleblower claims to a full make-whole remedy, which may include reinstatement, back pay and benefits, front pay, and compensatory damages for emotional pain and suffering. Employees who prevail in such proceedings may also recover their litigation costs, including attorneys fees. G. Non-Waivability of Rights As part of its overall scheme of protecting the rights of whistleblowers and encouraging the reporting of corporate malfeasance, 922(c) of the Dodd-Frank Act invalidates any agreement, policy form, or condition of employment, including a predispute arbitration agreement that has the effect of waiving rights and remedies available to SOX whistleblowers. H. Improvements in OSHA Investigations At the time of this writing. OSHA is engaged in what David Michaels, Assistant Secretary of Labor for Occupational Health and Safety, has called a top-to-bottom review of his agency s handling of complaints filed under the OSHA Whistleblower Protection Program. The promised overhaul follows sharp criticism of the program, most recently by two federal watchdog offices the Government Accountability Office and DOL s own Office of Inspector General. 4 Both reports faulted the OSHA investigative process in a host of ways that resulted in the agency s issuing determinations in favor of employees in a miniscule percentage of cases. Even ahead of completion of the top-to-bottom review, OSHA has begun implementing a number of measures that should ensure complainants of more fair investigations and more favorable outcomes more of the time. See Response to OIG s Draft Audit Report, a memorandum from D. Michaels to E. Lewis (Sept. 30, 2010), Appendix D to the OIG s report. 4 See Whistleblower Protection: Sustained Management Attention Needed to Address Long-standing Program Weaknesses, U.S. Government Accountability Office (August 2010), available online at and Complainants Did Not Always Receive Appropriate Investigations Under the Whistleblower Proteciton Program, DOL Office of Inspector General (Sept. 30, 2010), available online at 16

17 IV. TARP FRAUD The Troubled Asset Relief Program ( TARP ), also commonly referred to as the bailout, came amidst perhaps the most serious banking and mortgage crisis in the country s history. Many commentators have noted that TARP, as a direct transfer of funds to financial institutions, carries a high risk of fraud. This fraud may take many forms. For example, a financial institution might misrepresent its liabilities in order to meet the requirements to qualify for TARP funds. Alternatively, a mortgage lender might misstate the value and status of the mortgages it holds. Large corporations and lenders might also agree to shift assets in order to obtain TARP funding. Unlike the McCaskill Amendment to the American Recovery and Reinvestment Act, described below, TARP creates no new statutory rights for whistleblowers. Instead, an employee who believes that their employer has defrauded the federal government in order to receive TARP funds, or is misusing TARP funds, may be able to bring a qui tam suit under the False Claims Act. The False Claims Act applies to most federally funded contracts or programs, including TARP. If the government recovers funds through an employee s lawsuit, he or she is eligible to receive between 15 and 30% of the recovery. V. THE McCASKILL AMENDMENT The American Recovery and Reinvestment Act of 2009 ( ARRA ), signed into law on February 17, 2009, provides an unprecedented $787 billion federal spending package intended to stimulate the flagging U.S. economy. Congress included important provisions in the bill to ensure oversight and accountability of this colossal disbursement of American taxpayer dollars. Introduced by Senator Claire McCaskill (D-MO), 1553 of the Act provided extensive whistleblower protections to ensure that the employees of private contractors and state and local governments that receive stimulus funds are free to report fraud, waste and other violations of the Act without fear of reprisal. A. Covered Employers and Employees The purpose of the McCaskill Amendment is to protect employees who speak up about fraud, waste, and the abuse of stimulus funds. Covered employers are non-federal entities such as private contractors and state and local governments that receive grants, contracts, or other funds made available or appropriated by the ARRA. Protected employees are any workers who perform services on behalf of covered employers. The ARRA does not provide whistleblower protections for federal employees or members of the armed services. B. Protected Activity Unlike whistleblower laws that concentrate primarily on complaints of fraud, such as the Sarbanes-Oxley Act and the False Claims Act, the McCaskill Amendment also includes protections for employees who blow the whistle on mismanagement and waste. Under the amendment, covered employers may not retaliate against an employee who discloses information to the Recovery Accountability and Transparency Board; an inspector general; the Comptroller 17

18 General; a State or Federal regulatory or law enforcement agency; the head of a Federal agency, or their representatives; a court or grand jury; a person with supervisory authority over the employee (or person working for the employer who has the authority to investigate, discover, or terminate misconduct); or a member of Congress that the employee reasonably believes is evidence of: Gross mismanagement of an agency contract or grant relating to covered funds; Gross waste of covered funds; A substantial and specific danger to public health or safety related to the implementation or use of covered funds; An abuse of authority related to the implementation or use of covered funds; or A violation of law, rule, or regulation related to an agency contract (including the competition for or negotiation of a contract) or grant, awarded or issued relating to covered funds. Protected disclosures also include duty speech, or disclosures made during the ordinary course of the employee s job duties. C. Prohibited Adverse Employment Actions Prohibited retaliation is very broadly defined under the McCaskill Amendment, which states that potential whistleblowers cannot be terminated, demoted, or otherwise discriminated against by covered employers as reprisal for the employee s protected disclosures. D. Proving an ARRA Retaliation Claim The burden of proof under the McCaskill Amendment is quite favorable towards employees, and employees need only demonstrate that their disclosure was a contributing factor to their reprisal. The Amendment specifically allows for the use of circumstantial evidence, including evidence that the official behind the reprisal knew about the employee s disclosure or evidence that the reprisal occurred within such a timeframe after the disclosure that would lead a reasonable person to conclude that the disclosure was a contributing factor in the reprisal. In contrast, the employer has a higher burden of proof to avoid liability and must demonstrate clear and convincing evidence that they would have taken the same alleged reprisal action even if the employee had not made the disclosure. E. Remedies Availabile to Successful Claimants If a potential whistleblower feels she has been retaliated against by her employer for making a disclosure protected under the McCaskill amendment, the employee must file a complaint with the appropriate inspector general. As written, the McCaskill amendment does not have a statute of limitations to file this complaint. Unless the inspector general determines that the complaint is frivolous, does not relate to covered funds, or another Federal or State judicial or administrative proceeding has previously been invoked to resolve such complaint, the inspector general will investigate the complaint and submit a report of the findings to the 18

19 employee, the employer, the head of the appropriate agency, and the Recovery Accountability and Transparency Board no later than 180 days after receiving the complaint. 1. Agency Relief No later than 30 days after receiving the report from the inspector general, the head of the appropriate agency must determine whether the employer has subjected the complainant to prohibited retaliation. If there is sufficient basis to conclude that the employee did indeed suffer an unlawful reprisal, the agency head can award relief to the complainant that includes: reinstatement to their position with previous seniority and employment benefits, compensatory damages and back pay, and attorneys fees and litigation costs. 2. Civil Action In the event that the agency head issues an order denying relief in whole or in part, or fails to issue a decision within 210 days of the filing of the complaint, the complainant is deemed to have exhausted all administrative remedies and may bring a de novo action against the employer in federal court. Either party can request a jury trial, a protection that is not available to whistleblowers in many other contexts. F. Non-Waivability of Rights The rights and remedies provided by the McCaskill Amendment cannot be waived by any agreement, policy, or condition of employment. With the exception of arbitration provisions in collective bargaining agreements, pre-dispute arbitration agreements are neither valid nor enforceable for disputes arising under the McCaskill Amendment. VI. THE IRS WHISTLEBLOWER INCENTIVE PROGRAM The Internal Revenue Service ( IRS ) has instituted a strong whistleblower-reward program to help ensure that wealthy individual and corporate taxpayers pay the amounts they owe. Under this program, a person who reports serious tax underpayments to the IRS can be eligible to receive a significant percentage of the amount the IRS recovers from the taxpayer. Common methods of illegal tax avoidance include underreporting of income, overstating of deductions, hiding of assets, false recordkeeping, keeping multiple sets of books, misusing trusts, stock fraud, or improperly shifting assets offshore to avoid tax. A. Overview of the IRS Whistleblower Program Federal law gives the whistleblower the right to an award of up to 30% of the total amount the IRS recovers as a result of information the whistleblower provides to the agency. See 26 U.S.C. 7623(b). In order to qualify for the program, the total debt to the IRS must exceed $2 million, including interest and penalties. Additionally, if the person who owes taxes is an individual (rather than a business), the taxpayer must have earned at least $200,000 in one of the years for which he or she owes taxes. People who participated in tax fraud who then report it 19

20 to the IRS may still be eligible for an award if they did not plan and initiate the fraud, and are not convicted in a criminal proceeding related to the underpayment. A whistleblower can report any underpayment of taxes regardless of whether the underpayment was intentional. However, only reports of underpayments of taxes of over $2 million are automatically eligible for the program. For lesser amounts, any reward is at the sole discretion of the IRS. B. Eligibility Requirements for the IRS Whistleblower Program A person reporting tax payment illegalities to the IRS may receive a share of the IRS s proceeds from prosecuting or settling the tax fraud if: They provide relevant information to the IRS whistleblower office using IRS Form 211; The fraud has not been previously reported; The IRS actually uses the information to prosecute or settle the tax fraud; and The person makes the report within three years of the filing of the incorrect tax return, or six years if the tax return understates income by at least 25%. Note, however, that there are no time limits on claims if a false tax return was filed with the intent to commit tax evasion. C. New Guidance from the IRS The information provided to the IRS must be very specific to qualify the whistleblower for an award. Abstract stories are usually not enough. In addition, the IRS is more likely to prosecute the tax fraud if an individual provides actual evidence in the form of documentation, and can show how the unlawful scheme works. In June 2010, the IRS released new Internal Revenue Manual provisions concerning IRS whistleblower claims. See The provisions were intended to elucidate the relationship between the specificity of a whistleblower s information and the reward he or she is eligible to receive if the IRS recovers funds. For example, if a whistleblower identifies a single issue i.e. a particular illegal practice or scheme that alerts the IRS to wrongdoing by a taxpayer, then the whistleblower is eligible to receive only a percentage of the IRS s recovery that arises from that particular issue, even if the IRS recovers additional funds based on other issues identified in the course of its investigation. This means that if a whistleblower reports that a business is underreporting income to the IRS, and the IRS discovers that the business is also taking improper deductions, then the whistleblower is likely entitled only to a share of the recovery resulting from the underreporting of income. This is distinct, however, from a situation in which a whistleblower identifies a single instance of a particular illegal practice, in which case she may receive a portion of the recovery resulting from other substantially similar instances of impropriety. Thus, for example, if a business illegally transfers a large amount of funds to a Swiss bank account to avoid taxation and a whistleblower reports that instance to the IRS, the whistleblower is certainly entitled to some 20