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Employee Whistleblower Claims Under SOX and Dodd-Frank

Minimizing the Risk of Claims, Preparing for Litigation, and Preserving Arguments for Appeal

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TUESDAY, OCTOBER 9, 2012

Presenting a live 90-minute webinar with interactive Q&A

Margaret H. Campbell, Shareholder, Ogletree Deakins Nash Smoak & Stewart, Atlanta Mike Delikat, Partner, Orrick Herrington & Sutcliffe, New York Thad Guyer, Esq., T.M. Guyer and Ayers & Friends, Medford, Ore.

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Employee Whistleblower Claims Under SOX and Dodd-Frank

Minimizing the Risk of Claims, Preparing for Litigation, and Preserving Arguments for Appeal October 9, 2012

Margaret (Meg) Campbell, Shareholder Ogletree Deakins Nash Smoak & Stewart, Atlanta 404-881-1300 Meg.campbell@ogletreedeakins.com Mike Delikat, Partner Orrick Herrington & Sutcliffe, New York 212-506-5230 mdelikat@orrick.com Thad Guyer T.M. Guyer and Ayers & Friends, Medford, Oregon 888-866-4720 thad@GuyerAyers.com

6

The Regulatory Front

7

Dodd-Frank Wall Street Reform and Consumer Protection Act

• Enacted July 21, 2010, final regulations last

summer, in response to financial crisis.

• Whistleblowers who provide the SEC with original

information about violations of securities laws will be awarded a share of between 10% and 30% of monetary sanctions ultimately imposed by the Commission that exceed $1 million.

8

Internal Reporting is Discouraged Under Dodd-Frank

• Whistleblowers are not required to first report

violations internally before reporting to the SEC despite the existence of policies requiring internal reporting.

• Companies may not take “any action to impede

an individual from communicating directly with the SEC about a potential securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.”

9

Whistleblower Tips by Allegation Type

Source: U.S. Securities and Exchange Commission Annual Report on the Dodd-Frank Whistleblower Program Fiscal Year 2011 Published November 2011

Whistleblower Tips Received by Geographic Location – Overseas 8/12/2011 – 9/30/2011

Source: U.S. Securities and Exchange Commission Annual Report on the Dodd-Frank Whistleblower Program Fiscal Year 2011 Published November 2011

11

Bounty Rules in Practice

• Anecdotal evidence indicates whistleblower complaints and

internal investigations are on the rise, and some whistleblowers are bypassing company whistleblower reporting systems and heading straight to the SEC.

• However, the SEC inadvertently disclosed the identity of a

whistleblower during an investigation of Pipeline Trading Systems LLC, when an SEC lawyer showed an executive who was being questioned a notebook from the whistleblower, which could deter reports to the SEC.

• SEC pays first financial bounty award under Dodd-Frank in

August

12

Recent Developments With Respect To Bounty Provisions

• SEC may or may not choose to inform companies that

investigations are the result of whistleblower tips.

• Quality of tips has improved since passage of Dodd-Frank.
• SEC expects about half of tips to lead to formal money

claims.

• In addition to SEC’s recent bounty award, IRS awarded a

whistleblower $104 million this month under its bounty program.

13

SEC Updates

• Sean McKessy, Chief of the SEC’s Office of the Whistleblower, said

that his office has received approximately 2,000 calls to the SEC’s whistleblower hotline since May 2011. The office has posted a list

• f over 300 successful enforcement actions on the site for which

bounty awards may be claimed.

Sean McKessy, Chief Jane Norberg, Deputy Chief

14

SEC Updates

McKessy also said in response to criticism that the new rules would cause whistleblowers to sidestep companies’ internal SOX reporting processes, that based on his own review of the whistleblower complaints to date, a majority of whistleblowers indicated on the SEC’s whistleblower reporting form that they had also reported the issue to their employer.

15

SEC’s Whistleblower Award Chest is Fully Funded $452,000,000

16

Notwithstanding Uptick In Whistleblower Activity, Most Employees Remain Unaware Of The SEC Bounty Program*

• 83% of Americans would report wrongdoing with

protections and incentives such as those offered by the SEC Whistleblower Program, but

• Only 28% are aware of the SEC bounty program.
• Tremendous potential for further growth in

whistleblower reports as publicity of program increases.

*Source: Labaton Sucharow LLP 2nd Annual Ethics & Action Survey, Sept. 2012

17

Best Practices For Surviving The Perfect Storm

Recent survey found*:

• 54% of Americans believe they have personally
• bserved or have first-hand knowledge of wrongdoing

in the workplace.

• 24% of Americans would fear retaliation if they

reported wrongdoing in the workplace.

• 20% believe that any report of wrongdoing would be

handled inappropriately by their employer.

Source: Labaton Sucharow LLP 2nd Annual Ethics & Action Survey, Sept. 2012

18

Dodd-Frank’s Whistleblower Anti-Retaliation Provisions

• In addition to bounty provisions, SEC and CFTC provisions

prohibit retaliation and create private causes of action for whistleblowers.

• Although the plain language of both provisions appear to limit

protection to those who make reports directly to the SEC/CFTC, employees are filing retaliation claims based on internal whistleblowing, with some success.

• SOX: whistleblower protections expanded under Dodd-Frank.
• Section 1057 of Dodd-Frank created a new, lesser known, cause
• f action for whistleblowers in the consumer financial services

industry.

SOX Case Law Developments

20

Obama Administration’s New ARB

• Paul Igasaki: Former Commissioner of the EEOC
• Joanne Royce: Former General Counsel of the

Government Accountability Project, a firm representing whistleblowers

• Luis Corchado: Former civil rights attorney
• Lisa Wilson: Former civil rights attorney
• E. Cooper Brown: Former administrative judge and law firm

partner

21

Sylvester v. Parexel International LLC 2007-SOX-39, 2007-SOX-42 (ARB May 25, 2011)

• First major SOX case by new ARB.
• Erodes employer-friendly precedents under SOX.
• “SOX claims are rarely suited for Rule 12 dismissals.”
• Complainants do not need to demonstrate that their

complaints “definitively and specifically” related to a SOX- enumerated violation.

• SOX complaints do not need to relate to shareholder fraud.
• Complainants do not need to plead, prove or approximate

the elements of fraud to prove a reasonable belief of a SOX- enumerated violations.

22

Menendez v. Halliburton, Inc. 2007-SOX-5 (ARB Sept. 13, 2011)

• “Adverse action” is broader under SOX than Burlington Northern

standard.

• Includes any unfavorable employment action that is “more than

trivial,” and is not limited to “economic or employment related items.”

• Halliburton violated SOX by “breaching confidentiality” with respect

to a non-anonymous complaint Menendez made to the Audit Committee.

• Revelation of Menendez’s identity in a litigation hold memo was in

violation of SOX Section 301’s “right to confidentiality,” which is a term and condition of employment.

• “Nothing in Section 806 requires a showing of retaliatory intent.”

23

Vannoy v. Celanese Corp. 2008-SOX-64 (ARB Sept. 28, 2011)

• Reports to Celanese and IRS about expense reimbursement could

constitute protected activity.

• To the extent Vannoy took employee data (1600 employee SSNs) as part
• f his efforts to facilitate his complaint to the IRS, SOX is intended to

protect all “lawful” conduct to disclose misconduct. Police did not bring charges against Vannoy for misappropriating the SSNs, indicating to the ARB that conduct must have been lawful.

• “There is a clear tension between a company’s legitimate business policies

protecting confidential information and the whistleblower bounty programs created by Congress to encourage whistleblowers to disclose confidential company information in furtherance of enforcement of tax and securities laws.” “Vannoy’s allegations must be viewed in light of these significant enforcement interests.”

24

JDS Uniphase Cases

• In re JDS Uniphase Corp. Sec. Litig., 238 F. Supp. 2d 1127 (N.D. Cal.

2002): Court partially invalidated employee confidentiality agreements to allow former employees to testify for plaintiffs: “[SOX] demonstrates the public policy in favor of allowing even current employees assist in securities fraud investigations. It certainly does not establish a public policy in favor

• f allowing employers to muzzle their employees with overbroad

confidentiality agreements.”

• JDS Uniphase v. Jennings, 473 F. Supp. 2d 697 (E.D. Va. 2007):

Court rejected attempt to support SOX claim with proprietary employer documents retained in violation of confidentiality agreement: “Succinctly put, Sarbanes-Oxley is not a license to steal documents and break contracts.”

25

Prioleau v. Sikorsky Aircraft Corp., 2010-SOX-3 (ARB Nov. 9, 2011)

• Prioleau submitted a report stating that the company’s automatic

email deletion policy might conflict with requirements to preserve emails in response to litigation hold notices. He suggested that a procedure be put in place to resolve the conflict.

• He was not aware of any actual conflict that had occurred, but

claimed in his SOX complaint that emails could be deleted during a shareholder litigation leading to “fraud” and that it was an “internal control” issue.

• ARB held that Prioleau raised an issue of fact as to whether he

engaged in protected activity and remanded the case for a hearing.

26

Egan v. TradingScreen, Inc., 2011 WL 1672066 (S.D.N.Y. May 4, 2011)

• First district court case to interpret the anti-retaliation

provisions of section 922 of Dodd-Frank.

• Held that reports under SOX are covered by Dodd-Frank.
• Held that reports outside counsel may constitute “providing

information” to the SEC if counsel then reports to the SEC.

27

Arbitration of SOX Cases in the Wake of Dodd-Frank

• Prior to passage of Dodd-Frank in 2010, it was well-settled that SOX claims

were arbitrable.

• Dodd-Frank amended SOX: “No predispute arbitration agreement shall be

valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.”

• Pezza v. Investors Capital Corp, 767 F. Supp. 2d 225 (D. Mass. 2011):

held amendment applies retroactively and rejected employer’s motion to compel arbitration of claim that arose before passage of Dodd-Frank.

• Henderson v. Masco Framing Corp., 2011 WL 3022535 (D. Nev. July 22,

2011) and Taylor v. Fannie Mae, ---F. Supp. 2d ----, 2012 WL 928170 (D.D.C. Mar. 20, 2012) each held that amendment does not apply retroactively and compelled arbitration of SOX claims based on agreements signed before the passage of Dodd-Frank.

• Based on Henderson and Taylor, can argue that SOX claims are arbitrable

where employees signed agreements before July 2010.

28

Arbitration of Dodd-Frank Retaliation Claims

• Dodd-Frank’s anti-retaliation provision (Section 21F of the

Securities Exchange Act of 1934) does not contain the same language invalidating predispute arbitration agreements.

• The comments to the SEC’s regulations, however, indicate

that “employers may not require employees to waive or limit their anti-retaliation rights.”

• In Ruhe v. Masimo Corp., 2011 WL 4442790 (C.D. Cal.
• Sept. 16, 2011), the first district court to address the issue

compelled arbitration of a whistleblower retaliation claim under Section 21F.

29

Leading Company Best Practices: Getting Ahead of Dodd-Frank

• Review existing reporting and disclosure policies

as well as policies against retaliation and continue to encourage internal reporting, and incorporate those obligations in other documents such as deferred compensation arrangements.

• Publicize the existence of a value of internal

reporting in communications from the CEO or

• ther senior management.
• Don’t just “talk the talk,” “walk the walk.”

30

Best Practices

• Provide other opportunities for reporting that do

not involve filing a regular complaint.

• Improve procedures and processes for receiving

tips, and promptly and thoroughly investigating them.

• Encourage managers to be sensitive to employee

comments that might later be considered to have been complaints, to ensure that complaints are handled properly.

31

Drafting Releases of Whistleblower Claims

• Dodd-Frank amended SOX to provide that rights and

remedies “may not be waived by any agreement, policy form, or condition of employment, including by a pre-dispute arbitration agreement.”

• Dodd-Frank’s CFTC bounty provision contains the same

language.

• The SEC bounty provision does not contain this language,

but the statute makes clear that employers may not inhibit employees from reporting concerns to the SEC.

• Release should include “all state and federal whistleblower

claims to the maximum extent permitted by law.”

32

Attorney Best Practices for Weathering Perfect Storm of Whistleblower Activity: Preserving the Privilege and Work Product Protections in Internal Investigations

• Attorneys must be substantively involved or deputize others
• Privilege and scope considerations should be driven by risk-

assessment and end game

• Address documentation of factual findings and legal conclusions

at front end

• Interview notes and memoranda
• Written report versus oral report plus raw documents
• Common waiver pitfalls in follow-on litigation
• Waiver issues re disclosures to independent auditors and

regulators

33

Investigation Do’s and Don’ts from an Employment Perspective:

1. DO set the right tone at the top. 2. DO assure whistleblowers that retaliation for good faith reporting

• f concerns will not be tolerated by the company, and if the

whistleblower has any concerns in that regard, then they should speak to a specific contact person or persons designated by the company. 3. DO ensure that an independent representative from Human Resources and/or Legal reviews any employment decision that may negatively impact a whistleblower before it is implemented, to ensure that it is not motivated, in whole or part, by possible retaliation.

34

Investigation Do’s and Don’ts from an Employment Law Perspective:

• 4. DO NOT attempt to identify an anonymous whistleblower or “guess” who

the whistleblower is unless there is a strong justification for doing

• so. Knowledge of the whistleblower’s identity could lead to potential

exposure in a whistleblower retaliation lawsuit.

• 5. DO NOT identify a whistleblower in a litigation hold document unless

absolutely necessary.

• 6. DO NOT guarantee complete confidentiality to employees if that promise

cannot be kept.

• 7. DO NOT guarantee job security to a whistleblower. Although an

investigator should assure a whistleblower that retaliation for good faith reporting of concerns will absolutely not be tolerated, an investigator should not say anything that could be construed as a promise that a whistleblower or participant in an investigation will not be terminated, demoted, etc.