Client Alert: Whistleblower Advocates Celebrate Signing of The Dodd-Frank Act

Jul 28, 2010

Last week President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) (the "Dodd-Frank Act"), which enacts sweeping reform to the regulation of the United States financial industry. The Act also drastically changes the landscape of whistleblower litigation.

The Consumer Financial Protection Act of 2010: Broad Protection And Employee-Friendly Burden-Shifting Framework

Embedded in the Dodd-Frank Act is the Consumer Financial Protection Act of 2010 (CFPA) which contains whistleblower protections for employees of institutions that extend credit; service or broker loans; provide real estate settlement services including property appraisals; or provide financial advice to consumers including credit counseling. Employees are protected for engaging in the following types of activities: (1) internal or external disclosures reporting a violation of the Dodd-Frank Act supported by reasonable belief; (2) bringing or participating in a proceeding to enforce the CFPA or any other Federal consumer financial law; or (3) objecting to or refusing to participate in any activity the employee reasonably believes to be a violation of any law under the jurisdiction of the Bureau of Consumer Financial Protection. The Act also extends whistleblower protections to internal auditors and investigators who, to date, have been excluded from protection for acts within the normal scope of their duties and responsibilities.

CFPA whistleblower complaints must be filed with the Department of Labor within 180 days after the date of an alleged act of unlawful retaliation. If, as a result of investigation, the Secretary finds facts sufficient to establish a prima facie case of retaliation, the Secretary is authorized to order preliminary make-whole relief including reinstatement and back pay, even if the employer requests a de novo hearing before an Administrative Law Judge. At the hearing stage, the complainant must prove his case by a preponderance of the evidence before the burden of proof shifts to the employer. If the Department of Labor fails to enter a final order within 120 days after the conclusion of the hearing, the claimant may seek de novo review in district court and, upon request, is entitled to trial before a jury.

Financial Incentives for Whistleblowing

Under the Dodd-Frank Act's amendments to the Securities Exchange Act (SEA) and the Commodity Exchange Act (CEA), if an individual provides original information to either the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC) that results in monetary sanctions exceeding $1 million, that individual will be rewarded 10 to 30 percent of the amount recouped. The amount of the award is determined by the respective Commission according to a number of factors including the significance of the information provided, the degree of assistance the whistleblower gave and additional factors the Commission may establish by rule or regulation.

Amendments to SOX, the SEA and the CEA

The Dodd-Frank Act, Section 922, creates a new private right of action under the SEA for employees who provide information to the SEC; initiate or participate in any investigation or judicial or administrative action of the SEC; or make disclosures as otherwise required under a variety of Federal laws including the Sarbanes-Oxley Act (SOX) and believe they were retaliated against as a result. Section 748 similarly amends the CEA to include a new private right of action. Under these amendments the SEC is required to establish a separate office within it to administer and enforce the new causes of action for whistleblowers. All claims brought under these new causes of action are exempt from mandatory arbitration clauses. The Dodd-Frank Act also expands SOX whistleblower protection to employees of the wholly owned subsidiaries of public companies – without the need to demonstrate the existence of a substantial nexus with the parent's business operations.

The Act allows an aggrieved employee to bring an action under SOX, the SEA, or the CEA directly in federal court where the employee may seek reinstatement, single or double back pay with interest, litigation costs, expert witness fees, and reasonable attorneys' fees. An employee may bring a SOX or SEA action in district court at any time within three years of learning of the alleged adverse employment action and within six years of the occurrence of that action and is entitled to a jury trial on his SEA claims. The statute of limitations for a CEA claim is two years from the occurrence of the adverse employment act. Although the Dodd-Frank Act affords an employee who files his SOX complaint before the Department of Labor the right to a jury trial, the ability to bring their action directly in federal court allows aggrieved employees to completely bypass the Department of Labor's SOX administrative complaint process, which otherwise is subject to a 180-day statute of limitations (up from the 90-day period provided under prior law).

Amendments to The False Claims Act

Section 1079B broadens the False Claims Act's anti-retaliation provision; an employee is now protected if he engages in lawful actions in furtherance of a qui tam suit or attempts to stop the fraud itself. This Section also clarifies that the statute of limitations for actions brought under section 3730(h) of the False Claims Act is three years thereby explicitly overruling Graham County Soil & Water Conservation Dist. v. U.S. ex rel. Wilson, 545 U.S. 409 (2005), in which the Supreme Court held that the most closely analogous state statute of limitations applied.

Recommended Actions

Because the Dodd-Frank Act substantially expands the risk of whistleblower lawsuits against public companies and creates new liability for employers in the securities and financial services industries and the wholly owned subsidiaries of public companies, it is more important to review existing corporate whistleblower compliance plans and for previously exempt employers to adopt appropriate policies and procedures. In general, every covered entity should have a plan in place that incorporates the following elements:

  • A written Business Ethics Code that includes:
    • A firm commitment to ethical business and employment practices;
    • A statement that violations of any federal, state or local law in the course of performance will not be tolerated, subject to severe disciplinary penalties up to and including discharge;
    • A non-exhaustive list of the types of conduct that would violate the policy; and
    • Unambiguous protection from discipline or discrimination for reporting violations in good faith.
  • A requirement that employees and agents execute a written acknowledgement that they have received a copy of the Code, understand its requirements, and agree to abide by it or be subject to termination.
  • Whistleblower training for employees and supervisors.
  • Encouragement of open communication of employee concerns regarding perceived violations of the Code of Conduct.
  • Written procedures for receiving, investigating, and resolving complaints relating to fraud, non-disclosure or retaliation promptly and responsibly, with proper documentation.
  • Properly funded internal inspector-general functions for receipt and investigation of whistleblower complaints responsible for creating and maintaining a complete and transparent paper trail.
  • Required investigation of all arguably retaliatory job changes prior to any responsive action to determine that the action is:
    • Properly documented;
    • Consistent with company policy and past practice;
    • Reasonable under all facts and circumstances;
    • Free of unlawful animus; and
    • Demonstrable that the company would have taken the action regardless of knowledge of protected activity (based on comparator evidence).

Keller and Heckman's Whistleblower Defense Team offers advice and assistance in compliance programming, supervisor training, internal investigations and documentation, analysis of employee claims and personnel actions, government investigations, and litigation defense. Contact Mary E. Pivec, pivec@khlaw.com or Amy Blackwood, blackwood@khlaw.com for information regarding these services.