On September 12, 2017, Governance Watch and Cleary Gottlieb Steen & Hamilton LLP hosted a panel discussion on “Recent Whistleblower Issues.” Participants in the panel discussion included Matthew Solomon, a partner at Cleary Gottlieb and former Chief Litigation Counsel at the SEC’s Division of Enforcement; Emily Pasquinelli, Deputy Chief of the SEC’s Office of the Whistleblower; David Huntley, Chief Compliance Officer of AT&T; and Steven Durham, a Partner at Labaton Sucharow LLP who specializes in plaintiffs-side whistleblower representations. The panelists discussed issues critical to U.S. public companies and foreign private issuers relating to federal whistleblower programs. Below are the key takeaways from the discussion.
Mr. Solomon discussed current issues faced by companies that have received an inquiry from the SEC ostensibly based on information from a whistleblower and how he advises clients in these situations. Mr. Solomon emphasized that it is crucial to ensure nothing is done that could be perceived as retaliatory conduct. It is essential that the company make no efforts to identify the whistleblower. If the whistleblower is known, that person should be treated exactly as they would any other employee. A company can certainly speak with a suspected whistleblower as part of an internal investigation as it would any other relevant employee, but it is important they are not subjected to any additional scrutiny or questioned regarding the potential whistleblowing.
Mr. Solomon also explained that, as a result of the growing SEC whistleblower program, the calculus for whether a company should self-report has shifted somewhat. While there has always been a premium on self-reporting, when a company is aware of a potential whistleblower, under certain circumstances, the presence of a whistleblower can accelerate the process. If the SEC has received information from a whistleblower and is looking into potential wrongdoing and the company does its own internal review, there may be a benefit to proactively reaching out to the SEC to discuss the findings of that review.
Ms. Pasquinelli discussed the continued growth of the SEC whistleblower program and recent awards to whistleblowers and enforcement actions alleging retaliation. Ms. Pasquinelli also confirmed that the SEC continues to be focused on restrictive language in employment agreements that could potentially discourage an employee from reporting to the SEC or other government regulators in violation of Rule 21F-17.
The panelists then discussed challenges in enacting an effective whistleblower program at a large multi-national company. Based on his experience as the CCO of AT&T, Mr. Huntley explained the key to having an effective whistleblower program is creating a culture where employees are encouraged to report potential wrongdoing without fear of retaliation. Having a robust reporting policy is not enough if employees do not believe a company is genuinely welcome to reporting and will not punish those who raise concerns regarding potential wrongdoing. Mr. Solomon also explained that, for large multi-national companies, reporting to the SEC could also result in conflict of law issues, including privacy issues that may make anonymous whistleblowing potentially problematic from a foreign law standpoint, thereby presenting challenges for companies who operate in multiple jurisdictions.
The panelists then discussed important issues of attorney-client privilege that come into play when there is a potential whistleblower reporting to the SEC. First, the panelists discussed the recent jury verdict in the Bio-Rad whistleblower trial. Earlier this year, a federal jury in California found that Bio-Rad Laboratories, Inc. had violated the federal whistleblower provisions by unlawfully firing Sanford Wadler, its former general counsel, and awarded Wadler approximately $15 million in damages in a suit filed by Wadler under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, and California state law, asserting that he was wrongfully terminated in retaliation for investigating and reporting to senior management potential violations of the FCPA in China. The court in that case permitted the admission of privileged information and turned away Bio-Rad’s attempt to maintain a broad claim of privilege, noting that it would effectively allow a company to retaliate against a corporate counsel whistleblower while precluding the use of critical evidence in a retaliation lawsuit under the guise of privilege.
Mr. Durham explained that, based on his experience, it is rare that whistleblowers’ claims rely on privileged information, but, when there is privileged information involved, he will encourage clients to be upfront with the SEC regarding the potential privilege issues. Ms. Pasquinelli explained, from SEC’s point of view, they do not want to receive privileged information and discourage whistleblowers from sharing potentially privileged information. Ms. Pasquinelli further explained that, under the SEC’s whistleblower rules, privileged information does not constitute “original” information as required by the whistleblower provisions of Dodd-Frank and thus cannot serve as the basis for a whistleblower award. Ms. Pasquinelli then described the process for evaluating potentially privileged information using a filter team that reviews the documents for privilege.
The panelists also briefly discussed the international reach of the SEC’s whistleblower program. According to Ms. Pasquinelli, it is neither impossible nor unprecedented for the recipient of a whistleblower award to be located outside the United States. With regard to the anti-retaliation provisions of Dodd-Frank, while the statute does not state whether and to what extent anti-retaliation provisions apply outside this country, the SEC nonetheless encourages people to report potential violations of law to the SEC even if located abroad and will aim to award and protect these whistleblowers to the extent permitted by law.
Finally, the panelists briefly discussed the Somers v. Digital Realty Trust case that will be heard by the Supreme Court this term. This case addresses whether Dodd-Frank’s anti-retaliation provisions apply when a whistleblower has only reported internally. The panelists discussed the effects this case could have on their practice. Mr. Dunham noted that, while corporate interests initially advocated to Congress for a mandatory internal reporting requirement in Dodd-Frank, they are now advocating against applying Dodd-Frank’s anti-retaliation protections internally which would ultimately incentivize external reporting over internal reporting. Mr. Dunham then explained that, generally speaking, he encourages clients to report through internal channels before going to the SEC, but, should the court hold that Dodd-Frank’s anti-retaliation provisions do not apply in such cases, it will likely change the calculus, making him more likely to encourage clients to report to the SEC earlier on.
For more information on the event, please visit the Cleary website, here.