VOLUME 3 NUMBER 9 OCTOBER PLEADING RICO CLAIMS AGAINST FLY-BY-NIGHT NO-FAULT FRAUD RINGS Max Gershenoff 783

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1 Financial Fraud Law Report VOLUME 3 NUMBER 9 OCTOBER 2011 HEADNOTE: THINKING ABOUT FINANCIAL FRAUD Steven A. Meyerowitz 781 PLEADING RICO CLAIMS AGAINST FLY-BY-NIGHT NO-FAULT FRAUD RINGS Max Gershenoff 783 FALSE CLAIMS ACT INVESTIGATIONS: TIME FOR A NEW APPROACH? John T. Bentivoglio, Jennifer L. Bragg, Michael K. Loucks, and Gregory M. Luce 801 DO FCPA REMEDIES FOLLOW FCPA WRONGS? DISGORGEMENT IN INTERNAL CONTROLS AND BOOKS AND RECORDS CASES Paul R. Berger, Steven S. Michaels, and Amanda M. Ulrich 812 COSTS RELATING TO REGULATORY INVESTIGATIONS, DERIVATIVE LAWSUITS, AND INDEPENDENT CONSULTANT S INVESTIGATIONS ARE COVERED UNDER CONTRACTS FOR DIRECTORS AND OFFICERS LIABILITY INSURANCE Michael S. Levine and Erika L. Smith 820 FIRST TRIAL IN CATCH 22 FOREIGN CORRUPT PRACTICES ACT PROSECUTION ENDS IN HUNG JURY ON ALL COUNTS Iris E. Bennett, Jessie K. Liu, Sean J. Hartigan, and Julia K. Martinez 826 SEC S FIRST USE OF A NON-PROSECUTION AGREEMENT SHOWS POTENTIAL BENEFITS FOR RESPONDENTS BUT ALSO DEMONSTRATES POTENTIAL PITFALLS Bruce A. Hiler and Thomas A. Kuczajda 831 THE DODD-FRANK ACT S NEW WHISTLEBLOWER AND BOUNTY PROVISIONS Joseph P. Sirbak, II 840 THE U.K. BRIBERY ACT TODAY James Maton and Antonio Suarez-Martinez 846 THE U.K. PROCEEDS OF CRIME ACT AND THE SFO S LATEST BRIBERY-RELATED SETTLEMENT Karolos Seeger and Matthew Getz 863 DC AND SEVENTH CIRCUITS SPLIT FROM SECOND CIRCUIT: ALLOW FOR CORPORATE LIABILITY UNDER ALIEN TORT STATUTE Sander Bak 871

2 EDITOR-IN-CHIEF Steven A. Meyerowitz President, Meyerowitz Communications Inc. BOARD OF EDITORS Frank W. Abagnale Author, Lecturer, and Consultant Abagnale and Associates Stephen L. Ascher Jenner & Block LLP Thomas C. Bogle Dechert LLP David J. Cook Cook Collection Attorneys Robert E. Eggmann Lathrop & Gage LLP Jeffrey T. Harfenist Managing Director, Disputes & Investigations Navigant Consulting (PI) LLC James M. Keneally Kelley Drye & Warren LLP Frank C. Razzano Pepper Hamilton LLP Bethany N. Schols Member of the Firm Dykema Gossett PLLC Bruce E. Yannett Debevoise & Plimpton LLP The FINANCIAL FRAUD LAW REPORT is published 10 times per year by A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC , Copyright 2011 THOMPSON MEDIA GROUP LLC. All rights reserved. No part of this journal may be reproduced in any form by microfilm, xerography, or otherwise or incorporated into any information retrieval system without the written permission of the copyright owner. For permission to photocopy or use material electronically from the Financial Fraud Law Report, please access or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, CCC is a not-for-profit organization that provides licenses and registration for a variety of users. For subscription information and customer service, call Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, smeyerow@optonline.net, (phone) / (fax). Material for publication is welcomed articles, decisions, or other items of interest. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to the Financial Fraud Law Report, A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC ISSN

3 The Dodd-Frank Act s New Whistleblower and Bounty Provisions JOSEPH P. SIRBAK, II This article summarizes some major provisions of the whistleblower protections included in the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Securities and Exchange Commission s Final Rules implementing Dodd-Frank s widely-reported bounty program. Like many major regulatory enactments in recent years, the Dodd- Frank Wall Street Reform and Consumer Protection Act ( Dodd- Frank ) contains a series of whistleblower provisions designed to encourage the reporting of prescribed conduct. The whistleblower protections included in the Consumer Protection Act provisions of Dodd-Frank ( CPA ) became effective on July 21, Moreover, the Securities and Exchange Commission s Final Rules implementing Dodd-Frank s widelyreported bounty program became effective August 12, BOUNTY PROGRAM The Dodd-Frank whistleblower provision that has garnered the most attention is Section 922, which creates a bounty program. Under the bounty program, individuals voluntarily providing information to the Securities and Exchange Commission ( SEC ) relating to a violation of the securities laws may be eligible for monetary rewards of between 10 Joseph P. Sirbak, II is counsel at Buchanan Ingersoll & Rooney PC, focusing his practice on a variety of labor and employment matters involving both public and private employers. He may be contacted at joseph.sirbak@bipc.com. 840 Published by A.S. Pratt in the October 2011 issue of the Financial Fraud Law Report Copyright 2011 THOMPSON MEDIA GROUP LLC

4 THE DODD-FRANK ACT S NEW WHISTLEBLOWER AND BOUNTY PROVISIONS percent and 30 percent of the monetary sanctions the SEC collects in a subsequent judicial or administrative action, provided the action results in monetary sanctions of $1 million or more. The amount of the bounty is determined by the SEC after taking into consideration the significance of the information the whistleblower provided, the degree of assistance provided in the action, the programmatic interest of the SEC in deterring violations of the securities laws and other factors set forth in the SEC s Final Rules. Awards may be diminished based on a whistleblower s culpability, reporting delay or interference with internal compliance systems. The following individuals are not eligible for a bounty: Agents of appropriate regulatory agencies, including the Department of Justice, a self-regulatory organization, such as the Public Company Accounting Oversight Board, or a law enforcement organization; Whistleblowers convicted of a criminal violation related to the action; Whistleblowers who knowingly offer false statements or documentation; and In certain circumstances, whistleblowers who gain the information through the performance of an audit. Any determinations by the SEC under this bounty program, except the amount of the award if within the 10 percent to 30 percent range specified in the statute, may be appealed to the appropriate U.S. Court of Appeals. The SEC s Final Rules governing the bounty program became effective August 12, 2011, at which time prospective whistleblowers must submit information through the SEC s Tips, Complaints and Referrals online portal or form. However, any reports made between Dodd-Frank s date of enactment, July 22, 2010, and August 12, 2011, regardless of form, were eligible for the bounty program. Contrary to the recommendations of many commentators, the SEC s Final Rules do not require whistleblowers to first submit an internal complaint before turning to the SEC. The Final Rules do, however, provide a limited incentive for whistleblowers to report their complaints internally by allowing whistleblowers to recover a reward for internal complaints 841

5 FINANCIAL FRAUD LAW REPORT that result in a covered action and by taking into consideration a whistleblower s internal reporting when determining the amount of an award. Section 922(h) of Dodd-Frank prohibits any discrimination or retaliation against whistleblowers who provide information to the SEC under the bounty program, testify or assist in an investigation or judicial or administrative action, or make other disclosures to the SEC protected by the Sarbanes-Oxley Act ( SOX ), the Securities and Exchange Act of 2002, or any other law, rule or regulation subject to the jurisdiction of the SEC. Significantly, under the SEC s Final Rules, an employee may claim whistleblower status based only on a reasonable belief that information provided relates to a possible securities law violation. Under Section 922(h) of Dodd-Frank, whistleblowers alleging unlawful discrimination or retaliation may, within six years (or within three years of learning of facts material to the right of action), bring a private cause of action in the appropriate U.S. District Court, without the need to first exhaust administrative remedies. Alternatively, in its Final Rules, the SEC recognizes its own right to bring an enforcement action for alleged whistleblower retaliation. In any such action, a prevailing whistleblower plaintiff may be awarded reinstatement, double backpay and litigation costs, including attorneys fees. Dodd-Frank also created a whistleblower incentive and protection program for reporting information to the Commodity Futures Trading Commission. This remedy closely tracks Section 922 of Dodd-Frank. CPA WHISTLEBLOWER CAUSE OF ACTION In Dodd-Frank, Congress also created an entirely new cause of action to protect employees against retaliation for the following: Providing information to the Consumer Financial Protection Bureau ( CFPB ) or any other government authority or law enforcement agency relating to a violation of the Consumer Protection Act provisions of Dodd-Frank or of any other rule or order of the CFPB; Testifying in a proceeding under the CPA or under other provision of law within the jurisdiction of the CFPB; 842

6 THE DODD-FRANK ACT S NEW WHISTLEBLOWER AND BOUNTY PROVISIONS Instituting a proceeding under any federal consumer protection law; and Objecting to or refusing to participate in an action that the employee reasonably believes to be in violation of any law, rule, or order within the jurisdiction of the CFPB. Significantly, whistleblower protections under the CPA may not be waived by any agreement, policy or condition of employment, including a predispute arbitration agreement, with a limited exception for certain collectively bargained arbitration provisions. The CPA whistleblower protections enacted in Dodd-Frank became effective on the designated transfer date, July 21, 2011, and will fall under the original jurisdiction of OSHA. Like 20 other federal statutes, covering such industries as the airline, rail, trucking, nuclear, food, environmental and securities industries, the CPA whistleblower protections are administered by OSHA, whose Office of Whistleblower Protection Program is charged with investigating federal whistleblower complaints completely unrelated to OSHA s core mission of promoting workplace safety. Each of the whistleblower statutes under OSHA s jurisdiction contain similar procedural requirements, are administered by the same OSHA investigators and Administrative Law Judges, and involve an identical burden shifting analysis particular to this evolving body of federal administrative jurisprudence. An employee must file a CPA whistleblower complaint with OSHA within 180 days following the alleged retaliation. OSHA will assign the case to a whistleblower investigator, who will conduct a prompt and thorough investigation, including requesting a written statement of position from the employer and interviewing witnesses. If, following the OSHA investigator s recommendation, the Secretary of Labor finds that a violation has occurred, the Secretary may order reinstatement, backpay or other compensatory damages, and all costs and expenses of bringing the complaint, including attorney s fees. In many cases, the Secretary also will issue a press release contemporaneous with its finding that the whistleblower complaint was meritorious. Either party may file objections to the Secretary s determination and request a de novo hearing before a Department of Labor Administrative Law 843

7 FINANCIAL FRAUD LAW REPORT Judge. Following a decision by the ALJ, either on summary judgment or after trial, either party may file an appeal to the Department of Labor s Administrative Review Board. Appeals from a final order of the Department of Labor may be taken to the appropriate U.S. Court of Appeals. The administrative process before the Department of Labor is designed to move very quickly, with the initial investigation before OSHA, administrative trial before the ALJ and appeal to the Administrative Review Board all occurring within 210 days, although in practice administrative handling often extends beyond 210 days. However, if the Department of Labor does not issue a final order within 210 days after the initial complaint, the complainant may bring a de novo action in the appropriate U.S. District Court with a right to a jury trial. AMENDMENT TO SOX WHISTLEBLOWER PROTECTIONS Dodd-Frank also amended the existing administrative whistleblower protections under SOX, codified at 18 U.S.C. 1514A, including: The statute of limitations for bringing a whistleblower action was extended from 90 days after the violation occurred to 180 days after the employee became aware of the violation. Employees were guaranteed the right to a trial by jury in any SOX whistleblower action heard in U.S. District Court. The rights provided under 18 U.S.C. 1514A cannot be waived through any agreement, policy, or condition of employment (including a pre-dispute arbitration agreement). Pre-dispute arbitration agreements were specifically declared invalid if the agreement requires arbitration of a dispute arising under the SOX whistleblower statute. The SOX whistleblower statute was also amended to clarify that it covered employees of subsidiaries of publicly traded companies, if the financial information for such companies is included in the consolidated financial statements of their parents. 844

8 THE DODD-FRANK ACT S NEW WHISTLEBLOWER AND BOUNTY PROVISIONS CONCLUSION Employees now have a strong financial incentive to report non-compliance and new statutory protections against alleged retaliation. More than ever, it is important for all public companies, and particularly those offering consumer financial products, to internally identify and root out potential compliance deficiencies. Likewise, given the abbreviated statutory deadlines and significant administrative remedies, employers must prevent retaliation against whistleblowers, anticipate potential whistleblower complaints in response to legitimate personnel decisions, and rapidly develop a thorough defense strategy whenever a whistleblower complaint is filed. 845