In February 2018, SCOTUS handed down its decision in Digital Realty v. Somers, holding that the Dodd-Frank whistleblower anti-retaliation protections apply only if the whistleblower blows the whistle all the way to the SEC; internal reporting to the company alone would not suffice. As Justice Gorsuch remarked during oral argument, the Justices were largely “stuck on the plain language” of the statute.  However, by requiring SEC reporting as a predicate, it was widely thought that the decision might have a somewhat perverse impact:  while the win by Digital would limit the liability of companies under Dodd-Frank for retaliation against whistleblowers who did not report to the SEC, the holding that whistleblowers were not protected unless they reported to the SEC could well discourage internal reporting by driving all securities-law whistleblowers directly to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor. (See this PubCo post.)That, however, turns out to not necessarily be the case. In a recent decision by the SEC’s Claims Review Staff, a whistleblower who first anonymously advised the company about significant wrongdoing was awarded $4.5 million after the company, acting on the whistleblower’s tip, conducted an internal investigation and subsequently reported the whistleblower’s allegations to the SEC and another agency. The whistleblower also submitted the same information to the SEC within 120 days of reporting it to the company.  According to the press release, as “a result of the self-report by the company, the SEC opened its own investigation into the alleged misconduct. Ultimately, when the company completed its internal investigation, the results were reported to the SEC and the other agency.”  In effect, the whistleblower was credited with the results of the company’s internal investigation.

The SEC observed that this “is the first time a claimant is being awarded under this provision of the whistleblower rules, which was designed to incentivize internal reporting by whistleblowers who also report to the SEC within 120 days.”  The alternative provision at issue is Rule 21F-4(c)(3), which “provides that original information will be deemed to have led to the successful enforcement of a judicial or administrative action if:

“You reported original information through an entity’s internal whistleblower, legal, or compliance procedures for reporting allegations of possible violations of law before or at the same time you reported them to the Commission; the entity later provided your information to the Commission, or provided results of an audit or investigation initiated in whole or in part in response to information you reported to the entity; and the information the entity provided to the Commission satisfies either paragraph (c)(1) or (c)(2) of this section. Under this paragraph (c)(3), you must also submit the same information to the Commission in accordance with the procedures set forth in §240.21F-9 within 120 days of providing it to the entity.”

Paragraphs (c)(1) and (c)(2) generally provide that original information submitted by a whistleblower will be considered to have led to the successful enforcement of a judicial or administrative action “where the claimant’s original information either caused the staff to open an investigation that resulted in an enforcement action based on the reported conduct, or the claimant’s submission during an ongoing investigation significantly contributed to the success of the resulting enforcement action.”  Even though “the staffs never communicated with Claimant or Claimant’s counsel,” the company’s action in reporting to the SEC about the tip it had received and providing the results of its internal investigation initiated in response to the tip were considered to have satisfied the requirements of paragraph (c)(1) “because the Company’s findings were a principal motivating factor in the decisions of our staff and the staff of the Other Agency to open their respective investigations, and the resulting Covered Action and Related Action were based in part on the conduct alleged by Claimant.”

Posted by Cydney Posner