Corporate Whistleblower Developments Mark Oakes Partner Fulbright & Jaworski LLP June 10, 2014

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1 Corporate Whistleblower Developments Mark Oakes Partner Fulbright & Jaworski LLP June 10, 2014

2 Mark Oakes Partner Securities Litigation, Investigations, and SEC Enforcement Norton Rose Fulbright T:

3 Sarbanes-Oxley Whistleblower Refresher Prohibits retaliation against employees in response to protected whistleblowing activity. Enacted after Enron to address corporate code of silence that discouraged employees from reporting fraudulent behavior. Prevailing employee entitled to all relief necessary to make the employee whole, including reinstatement, back pay with interest, and compensation for litigation costs.

4 Dodd-Frank Whistleblower Refresher Dodd-Frank enacted July 21, 2010 and whistleblower rules adopted May 25, 2011 (effective August 12, 2011). Created a corporate whistleblower rewards program frequently referred to as a bounty program. 4

5 Dodd-Frank Bounties Overview 10-30% of amount recovered if SEC recovers more than $1 million (aggregated from all related proceedings) SEC has discretion within the 10-30% range Plus Factors: Significance of the information provided Degree of assistance provided Interest of the SEC in deterring violations by encouraging whistleblowers Whether whistleblower made use of internal compliance systems Negative Factors Culpability of whistleblower (but only conviction disqualifies) Unreasonable delay in making report Interference with internal compliance systems 5

6 Tip of the Iceberg Philosophy Whistleblower gets credit for entirety of investigation, even if they only knew about part of it. If Whistleblower reports violation A and company investigation also uncovers violations B, C, and D, then whistleblower gets credit for instigating entire investigation. Tip of the iceberg theory encourages whistleblowers to recruit other employees to provide further information, as whistleblower gets credit for entire scope of SEC relief. 6

7 Requirements to Obtain Bounty Information provided voluntarily Information relates to a possible violation of the federal securities laws Does not need to be probable, material, or even likely Information is original Broadly defined as information based on independent knowledge or independent analysis Information leads to successful enforcement action Monetary sanctions imposed in excess of $1 million 7

8 Individuals Not Eligible Certain individuals are excluded as whistleblowers, but with potential exceptions: Officers, directors, trustees, partners Compliance or internal audit Those retained to investigate possible violations Auditors But: Even these individuals can qualify if: [R]easonable basis to believe that disclosure of the information... is necessary to prevent... conduct that is likely to cause substantial injury to the financial interest or property of the entity or investors ; OR [R]easonable basis to believe... engaging in conduct that will impede an investigation of the misconduct ; OR 120 days has passed since the individual reported the activity internally to supervisor, audit committee, chief legal or compliance officers 8

9 Lawyer Eligibility Lawyers generally excluded. Information protected by the attorney-client privilege is not original information eligible for whistleblower claim. If an attorney would be precluded from receiving an award, a nonattorney who learns this information through a confidential attorneyclient communication would be similarly disqualified. 9

10 Lawyer Eligibility (Cont d) Limited exceptions to bar on lawyer disclosures: When disclosure is permitted under 17 C.F.R (d), which allows lawyers to report information to SEC to: Prevent company from committing a material violation that is likely to cause substantial financial injury to issuer or investors Prevent company from committing or suborning perjury in an SEC proceeding or defrauding the SEC during the proceeding Rectify consequences of material securities violation that may cause substantial financial injury to company or investors When disclosure is permitted under state ethics rules 10

11 Bounties So Far $46k + $150k (August 2012 and April 2014) $125k (August 2013) $14 million (October 2013) $150k (October 2013) 11

12 Asadi v. GE Energy LLC Employee alleged that he reported potential FCPA violation to his supervisor and ombudsman, which purportedly resulted in retaliation. Employee reported internally but not to the SEC. Employee brought Dodd-Frank whistleblower claim. The Fifth Circuit held that an employee that asserts only internal complaints is not a whistleblower. District courts in other jurisdictions have ruled both ways on this issue. The SEC recently filed an amicus brief in a pending Second Circuit case advocating the contrary position. This issue will be considered by the Second Circuit on June

13 Asadi v. GE Energy LLC (Cont d) Tension between: Wanting to limit the number of employees potentially eligible for whistleblower protection (and bounties) under Dodd-Frank; and discouraging employees from reporting issues internally/ encouraging employees to report externally 13

14 Lawson v. FMR LLC Two employees of mutual fund advisers sued former employers under Sarbanes-Oxley whistleblower provision. One employee alleged she was constructively discharged for raising concerns about certain cost accounting methodologies. Another employee alleged he was fired for raising concerns about inaccuracies in a registration statement. The plaintiffs were employed by privately-held investment advisers that provided services to public mutual funds. While the mutual funds serviced by the investment advisers are public entities, the investment advisers are privately held. 14

15 Lawson v FMR LLC (cont d) Issue: whether Sarbanes-Oxley whistleblower protection extends only to employees of public companies, or whether it also extends to employees of contractors and subcontractors to public companies. No [public] company..., or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity]. The Supreme Court held that the whistleblower provisions extend to employees of non-public contractors and subcontractors. 15

16 Lawson v FMR LLC - Consequences Lack of clarity concerning SOX protections afforded to private-company employees (e.g., mail and wire fraud unrelated to any work performed for a public company). Provides a viable cause of action for private company employees who may not be eligible for the Dodd-Frank bounty program by failing to report allegations externally to the SEC. Still requires that the private company be a contractor or subcontractor of a public company. 16

18 Disclaimer Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ( the Norton Rose Fulbright members ) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients. References to Norton Rose Fulbright, the law firm, and legal practice are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together Norton Rose Fulbright entity/entities ). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright. 18

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