Articles Posted in Whistleblower Issues

It takes a lot of courage to report illegal or fraudulent misconduct by one’s own employer.  This is because being a whistleblower carries significant risks.  Whistleblowers not only risk their current employment, but possible ongoing retaliation that can harm their industry reputation and ability to find work with employers in the future.  Reporting wrongdoing can also invite significant emotional hardship and threats to one’s personal safety.  So why would anybody want to be a whistleblower?

For most with a moral compass, often doing the right thing is reward enough.  But there are an increasing number of laws, which now provide additional incentives – both in terms of anonymity and financial remuneration.  Depending on where one lives in the United States, there are various state whistleblower laws that could apply.  Federal laws tend to provide the most financial incentive, and in particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which was signed into law in 2010, as a measure to address the 2008 collapse of the financial services market.

Dodd-Frank was a notable expansion on pre-existing federal whistleblower laws for several reasons.  The earlier Sarbanes-Oxley Act of 2002 (SOX), which was a measure in its own right to address the failings that led to the 2001 financial crisis, provides civil protections to employees (including officers or subcontractors) of a publicly traded company against any kind of retaliation by the employer.  While SOX has led to multi-million-dollar financial verdicts for the whistleblower, Dodd-Frank expanded eligibility of who could become a whistleblower, from employees under SOX, to anybody.  Section 78u-6(a)(6) of Dodd-Frank defines a whistleblower as follows:

Can I Sue My Brokerage Firm for Filing a False Form U5?

Financial firms that deal in securities do carry legal liability for filing a Form U5 with false information, and financial advisors can indeed sue their former firms for filing an inaccurate Form U5.

Whenever a brokerage firm terminates the employment of a broker or financial advisor, the firm must file a Form U5 – the Uniform Termination Notice for Securities Industry Registration – with the Financial Industry Regulatory Authority (FINRA) within thirty days of termination.  The Form U5 is differentiated from the Form U4 – the Uniform Application for Securities Industry Registration or Transfer – which is filed upon a broker’s registration with a firm, whereas the Form U5 is filed upon the broker’s termination. The Form U5 requires a firm to provide accurate answers to various questions, including the reason for a broker’s termination.

whistle-257897-mBlackRock has been charged by the SEC with removing whistleblower incentives in their separation agreements with employees, per the SEC. According to the Commission, BlackRock’s charges stemmed from allegations that the company forced employees to waive their ability to obtain whistleblower awards.

Provisions such as those in Dodd-Frank provide for monetary compensation to those who provide information to the SEC concerning securities law violations, provided certain criteria are met. Whistleblowers may also file anonymously.

Per the SEC, over 1,000 employees signed such agreements, in which the employee was forced to waive the right to monetary recovery as a condition for receiving separation payments from the company.

The Securities and Exchange Commission (SEC) announced on February 16, 2016 a settlement with Massachusetts-based PTC, Inc. involving alleged violations of the Foreign Corrupt Practices Act (FCPA).  In total, PTC was reported to agree to pay approximately $28 million, including nearly $12 million in disgorgement and more than $14 million in a non-prosecution agreement with the United States Department of Justice in a parallel action.

According to the SEC Order, PTC’s China-based subsidiaries made payments to China officials in an effort to win business, including:

  • Provided improper travel, gifts, and entertainment totaling nearly $1.5 million to Chinese government officials who were employed by state-owned entities that were PTC customers.

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According to an article by Rob Lenihan of Thomson Reuters, published in August 2014, Sean McKessey, head of the SEC’s whistleblower program, was quoted by the Wall Street Journal as saying that the numbers [of whistleblower complaints] will soon grow and “we’re getting close to the sweet spot.” Malecki Law had reported on this Wall Street Journal article and examined the state of Dodd-Frank Whistleblower program, as it existed then, in this blog post. A year into it, let’s examine where we are at with the growing numbers.

During the 2014 fiscal year, the number of whistleblower tips and complaints received by the Commission grew 10.1 % from the year before to 3,620. The Dodd- Frank Whistleblower program, which promises cash rewards for those whose tips lead to a successful investigation by the SEC, has witnessed many milestones in past four years. In a recent development, SEC paid a handsome $3 million to a company insider in July 2015, who helped crack a complex fraud case.

According to Andrew Ceresney, Director of the SEC’s Division of Enforcement. “Insiders may hold the key to helping our investigators unlock intricate fraudulent schemes,” and “by providing significant financial incentives for people to come forward, the SEC’s whistleblower program continues to be profoundly effective in helping us protect investors and hold wrongdoers accountable.” The SEC’s whistleblower program has already paid more than $50 million to 18 whistleblowers, since its inception in 2011, including $30 million in awards in 2014, more than doubling the $14 million rewards it paid in 2013. Let’s hope the trend continues!

In only three years, the Dodd-Frank whistleblower program, which promises cash rewards for those whose tips lead to a successful investigation by the SEC, has yielded more than 6,500 tips according to a recent article in the Wall Street Journal. Though traditionally thought of as insiders, tipsters do not just come from only inside the companies targeted. Rather, whistleblowers are coming forward from all walks of life, including investors and retirees, in addition to insiders and the family of insiders according to the article. businessman-with-the-notebook-1-1362246-m.jpg

The rate at which individuals are submitting tips also seems to be rising. As a firm that represents whistleblowers, Malecki Law has also seen a growth in calls from prospective whistleblowers seeking legal counsel to file a tip with the SEC. Just recently Jenice Malecki, Esq. was interviewed by Rob Lenihan of Thomson Reuters: “‘I can tell you that whistleblowers as potential clients have increased over the last year — substantially,’ Malecki said. ‘There’s definitely an increase, and everybody who is somehow involved in the securities industry either as a customer or otherwise feels like they have some information they could tip on.'”

Although some individuals may have initially been reluctant to come forward for fear of retaliation, a recent push to protect the rights of whistleblowers has helped to alleviate many of those concerns. Such a positive development coupled with the mechanisms in place that allows whistleblowers to report securities laws violations anonymously has allowed tipsters to come forward without unnecessary fear of retribution.

Keith Edwards, a former J.P. Morgan employee is due to receive a nearly $64 million payment from the U.S. government for the tips he provided as a whistleblower. Mr. Edwards provided information that led to a payment by J.P. Morgan to the government in the amount of $614 million stemming from insurance on home loans.

whistle-257897-m.jpgAllegedly, J.P. Morgan had been falsifying certifications for Federal Housing Administration and Department of Veterans Affairs loans, going back as far as 2002. As a result, the agencies reportedly suffered substantial losses.

It was reported that the $614 million was paid by J.P. Morgan to settle the charges levied against it as a result of Mr. Edwards’ tips. In settling, J.P. Morgan reportedly admitted to approving thousands of FHA and hundreds of VA loans that did not pass normal underwriting requirements.

clooney.jpgApparently, you do not need to be George Clooney to enjoy whistleblower protections.

Employees of private contractors and subcontractors who provide services to publicly traded companies including mutual funds are protected by the whistleblower provisions of Sarbanes-Oxley Act of 2002 (“Act”), the United States Supreme Court held in its decision dated March 4, 2014. See 18 U.S.C. § 1514A; Lawson v. FMR LLC, — S. Ct. —, 2014 WL 813701, *7, 2014 U.S. LEXIS 1783 (2014). The majority decision, written by Justice Ginsburg, relied on the language of the Act, applying “their ordinary meaning.” Lawson, *7.

The case involved two employees who formerly worked for “privately held companies that provide advisory and management services to” Fidelity funds. Id. at *6. One of the employees worked for Fidelity Brokerage Services, LLC, a subsidiary of the Respondents, for 14 years. Id. This employee alleged that she suffered a series of adverse employment actions, eventually being constructively discharged, after raising concerns about certain cost accounting methodologies that may have overstated expenses associated with operating the mutual funds. Id. The second employee worked for Fidelity Management & Research Co. and later by a different subsidiary, FMR, Co., Inc. for eight years, and alleged he was fired after raising concerns about inaccuracies in a draft SEC registration statement concerning certain Fidelity funds. Id.

Jenice Malecki of Malecki Law will be appearing on Fox Business News at 12pm today, speaking with Dennis Kneale about whether or not banks, such as JP Morgan, should be getting amnesty from regulators.

In the fallout from the financial crisis, banks, such as JP Morgan have seen their legal fees related to defending complaints from both customers and the SEC, along with other regulators, rise substantially. JP Morgan shocked many in the marketplace when it recently revealed that its “litigation reserve” was $23 billion, and that it had paid out roughly $8 billion in recent settlements and judgments.

In light of this revelation, some have called for amnesty to be provided to large banks, in an effort to relieve them of these substantial legal burdens and jumpstart the markets by freeing up large reserves of capital.

The SEC announced on October 1, 2013 that it awarded a whistleblower over $14 million for original information that led to the recovery of “substantial investor funds.” The whistleblower program was established after the enactment of the Dodd-Frank Act, which rewards individuals who provide original information that leads to sanctions exceeding $1 million. The SEC has the authority to award from 10 to 30 percent of the money collected in a case.

One of the most important things about information provided by a whistleblower is that such information is “original.” This means that the information must be derived from the whistleblower’s original knowledge or analysis, that it is not known by the SEC from some other source, and that it is not derived solely from a publicly available source, including allegations made in a different judicial setting.

The size of the current award appears to indicate two things: first, the quality of information and extent of cooperation provided by the whistleblower to the SEC, whose identity remains confidential; and second, the SEC’s eagerness to grow and benefit from the whistleblower program. Without disclosing the size of the award, in its Order, the SEC noted that the size of the award was based on the significance of the information provided by the whistleblower and the assistance the whistleblower provided to the SEC in the action, in part. The SEC, under its new Chairperson Mary Jo White, has shown a desire to become more aggressive in pursuing individuals and to get companies to admit to wrongdoing. It is no surprise then, that the SEC appears to be providing increasingly larger awards to whistleblowers, to provide individuals the incentive to waive red flags about wrongdoing at a time when the SEC may be able to recover and/or safeguard investor funds.