Whistleblower Developments is a periodic report covering significant cases, decisions, proposals, and legislation related to whistleblower statutes and how they may impact your business. Recent developments include:
- District Court Permits SOX Retaliation Claim Premised on Reporting Violations of SEC鈥檚 Rules on Internal Controls
- Long-Running SOX Whistleblower Case Ends with District Court Upholding Jury Verdict and Awarding $2.4 Million in Attorneys鈥 Fees
- Fifth Circuit Dismisses SOX Retaliation Claim for Lacking Sufficient Detail About Employee鈥檚 Internal Reports
- Circuit Courts of Appeals Deny Petitions for Review of SEC鈥檚 Award Denials
- SEC Issues $28 Million Award to Seven Whistleblowers
- SEC Issues Whistleblower Annual Report for FY 2023
District Court Permits SOX Retaliation Claim Premised on Reporting Violations of SEC鈥檚 Rules on Internal Controls
In Brinker v. Axos Bank, No. 22-cv-386-MMA-DDL, 2023 WL 7167851 (S.D. Cal. Oct. 31, 2023), the district court a motion to dismiss SOX retaliation claims. The district court had previously dismissed, without prejudice, plaintiff Brinker鈥檚 SOX retaliation claim to the extent it was premised on, among other things: (1) reporting violations of the SEC鈥檚 internal controls rules under 17 C.F.R. 搂搂 240.13a-14 and 240.13a-15, because she had not sufficiently pleaded she believed the rules had been violated; and (2) reporting a violation of the Foreign Corrupt Practices Act (FCPA), because the FCPA is not an SEC 鈥渞ule or regulation鈥 under SOX 搂 1514A. (Click this link for our summary of this prior opinion.) Brinker filed another complaint, and the court again dismissed her retaliation claim to the extent it is premised on reporting an FCPA violation. However, the court permitted her claim to go forward to the extent premised on reporting internal controls violations. Although the court did not detail the changes Brinker made to her complaint, the court listed a 鈥渉ost of issues鈥 Brinker alleged that sufficiently state a SOX retaliation claim based on reporting violations of the SEC鈥檚 internal controls rules.
Long-Running SOX Whistleblower Case Ends with District Court Upholding Jury Verdict and Awarding $2.4 Million in Attorneys鈥 Fees
In Erhart v. Bank of Internet (BofI) Federal Bank, No. 15-cv-02287-BAS-NLS (consolidated with 15-cv-02353-BAS-NLS), 2023 WL 6377971 (S.D. Cal. Sept. 28, 2023), the district court a jury verdict and awarded attorneys鈥 fees against BofI for BofI鈥檚 violation of SOX鈥檚 anti-retaliation provisions. As reported previously, the plaintiff, a former internal auditor, sued his former employer in the United States District Court for the Southern District of California, alleging BofI retaliated against him for reporting wrongdoing to his supervisors and the government.
After years of litigation, the jury found that BofI violated SOX鈥檚 anti-retaliation provision and awarded Erhart $1.5 million in damages. The district court denied the bank鈥檚 motion for judgment as a matter of law or for a new trial, finding support for the jury鈥檚 verdict. In response to the bank鈥檚 argument that no reasonable jury could conclude the plaintiff had reasonably believed the bank was violating any of the laws covered by SOX鈥檚 anti-retaliation provision, the court stressed that the plaintiff did not have to prove an actual violation. The court noted that the plaintiff was not a lawyer, and if the court were to demand securities law expertise from the plaintiff 鈥淪arbanes-Oxley鈥檚 anti-retaliation provisions will be gutted.鈥
The second decision, , tackled the plaintiff鈥檚 request for an enhanced fee award in excess of $7 million. The court noted that SOX provides that a prevailing plaintiff is entitled to recover 鈥渃ompensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.鈥 18 U.S.C. 搂 1514A(c)(2)(C). The court found that work regarding the plaintiff鈥檚 successful defamation claim was related to the SOX claim and could be included in the attorneys鈥 fees calculation. The court also found that work defending against the bank鈥檚 counterclaims for, among other things, misuse of confidential information should also be included in the attorneys鈥 fees calculation. The court, however, did not accept all of the plaintiff鈥檚 arguments. It excluded some of the claimed hours, reduced the hourly rates requested and, most importantly, rejected the application of a significant multiplier to the lodestar calculation. Ultimately, the court awarded $2.4 million in attorneys鈥 fees.
Fifth Circuit Dismisses SOX Retaliation Claim for Lacking Sufficient Detail About Employee鈥檚 Internal Reports
In Seybold v. Charter Communications, Inc., No. 23-10104, 2023 WL 7381438 (5th Cir. Nov. 7, 2023), the Fifth Circuit Court of Appeals the district court鈥檚 judgment dismissing plaintiff Seybold鈥檚 SOX retaliation claim. Seybold claimed he was terminated for reporting his employer鈥檚 unlawful corporate behavior, including overreporting the number of accounts, setting unattainable sales standards, and making inaccurate commission calculations. Seybold鈥檚 allegedly protected activity was filing four reports to his supervisors. In dismissing the claim, the district court noted several issues, including whether either Seybold or Charter knew that Seybold was engaging in protected activity at the time and whether Seybold pled with sufficient particularity the content of his reports. The Fifth Circuit affirmed that Seybold did not sufficiently show the content of his reports 鈥 and thus could not show that his actions constituted protected activity under SOX 鈥 or that Charter believed the reporting to be protected activity. As the Fifth Circuit stated: 鈥淪eybold did not demonstrate that he actually blew the whistle.鈥
Circuit Courts of Appeals Deny Petitions for Review of SEC鈥檚 Award Denials
In Rao v. S.E.C., No. 23-1072, 2023 WL 8432468 (D.C. Cir. Dec. 5, 2023), the D.C. Circuit Court of Appeals a whistleblower鈥檚 petition for review of the SEC鈥檚 decision denying his award claim because the whistleblower鈥檚 information did not assist or contribute to the covered action. The whistleblower argued that the SEC should produce a 鈥渧oice file鈥 of a telephonic conversation he had with the SEC in 2016, but the Court found no basis that the whistleblower was entitled to this recording or that the recording was even part of the record at the time the SEC denied the whistleblower鈥檚 award application.
In Everhart v. S.E.C., No. 22-2049, 2023 WL 6937294 (9th Cir. Oct. 20, 2023), the Ninth Circuit Court of Appeals three whistleblowers鈥 petitions for review of the SEC鈥檚 decision denying their award claim. At oral argument, the evidence supported, and the whistleblowers did not challenge, the SEC鈥檚 finding that the whistleblowers鈥 tip did not cause or contribute to the investigation. In their briefs, the whistleblowers argued that under 15 U.S.C. 搂 78u-6(b)(1), the question is not whether the tip actually caused the SEC to open an investigation but that the tip should have caused the SEC to do so. The whistleblowers ultimately disclaimed that theory, and the Tenth Circuit ruled that the information must actually cause or contribute to the investigation.
SEC Issues $28 Million Award to Seven Whistleblowers
On December 22, 2023, the SEC announced an of more than $28 million (combined) to seven whistleblowers whose information and assistance led to a successful SEC enforcement action. The seven whistleblowers consisted of a single claimant and two sets of joint claimants. The single claimant and one of the joint groups voluntarily provided detailed and highly significant information early in the investigation that, among other things, saved the SEC time and resources and resulted in millions of dollars being returned to harmed investors. These claimants also attempted internal reports to company management and suffered hardships as a result. The other joint group of claimants received a smaller award because they provided information late in the investigation and much of this information was already known.
SEC Issues Whistleblower Annual Report for FY 2023
On November 14, 2023, the SEC released its for Fiscal Year (FY) 2023. The SEC鈥檚 Whistleblower Program broke yet more records this past year. In FY 2023, the SEC awarded nearly $600 million in awards, the highest annual total ever, to 68 whistleblowers (up from FY 2022鈥檚 $229 million and greater than FY 2021鈥檚 $564 million). The SEC also received more than 18,000 tips, up from FY 2022鈥檚 previous record of 12,300. In total, the SEC has now paid more than $1.9 billion in awards to 397 individual whistleblowers since the program鈥檚 inception.
In the report, the SEC summarized several noteworthy claims and awards, including a $279 million award in May, a claim in which a whistleblower made persistent efforts to remedy the reported misconduct, and several claims involving multiple whistleblowers providing complementary information.
The SEC also emphasized its actions concerning violations of anti-retaliation rules. The SEC summarized several actions in which companies violated Rule 21F-17 for including language that impeded potential whistleblowing activities in separation agreements. These actions, some of which involved violations of additional anti-retaliation rules, resulted in significant civil penalties, including: $10 million penalty to D.E. Shaw & Co., L.P.; $35 million penalty to Activision Blizzard, Inc.; $375,000 to CBRE, Inc.; and $225,000 to Monolith Resources, LLC.