There are many complex questions surrounding employee protections when reporting fraud within their companies. To help educate our users, we spoke with an attorney who is experienced in dealing with these issues.
We were fortunate to speak with Michael Filoromo. Michael is a partner with the whistleblower and employment law firm Katz, Marshall & Banks, LLP, in Philadelphia. He has helped achieve successful outcomes for numerous clients under the Sarbanes-Oxley corporate whistleblower protections, the False Claims Act and the anti-discrimination and retaliation protections of Title VII of the Civil Rights Act and corresponding state laws. He regularly represents whistleblowers in the pharmaceutical, healthcare, nuclear, railroad and aviation industries. Mr. Filoromo is the secretary of the Eastern Pennsylvania chapter of the National Employment Lawyers Association. He can be reached at firstname.lastname@example.org.
CP: In some of our previous discussions around the False Claims Act, you mentioned that there are a number of new laws in the banking and financial arena that protect whistleblowers. What are some of those laws?
Michael: A lot of the protections have come into existence in the last 15 years or so. In the wake of the Enron, Worldcom, and Arthur Anderson scandals, Congress enacted the Sarbanes Oxley Act (SOX) in 2002. SOX was one of the most comprehensive regulatory schemes enacted in quite some time. It allowed for government oversight of a host of accounting and compliance practices and sought to increase transparency, particularly within publicly traded companies.
Just six years after SOX was passed, the housing market, along with the financial markets that increasingly relied on mortgage-backed securities, also collapsed. In response, the Dodd-Frank Act was passed in 2010. Dodd-Frank added a whole new scheme of regulations designed to deal with consumer financial products and minimize the harm to investors of risky investing practices, lax internal oversight, and under-capitalization, among other things.
The SOX and Dodd-Frank regulatory schemes also reflect a recognition that employees who knew about illegal and/or potentially harmful practices were afraid to come forward for fear of retaliation. For example, prior to the enactment of SOX, there was nothing in federal law that specifically stated that if you report fraud at a publicly traded company, you have legal protection if your company responds by firing you. SOX – and later Dodd-Frank – therefore included whistleblower anti-retaliation provisions.
There are several financial whistleblower anti-retaliation statutes. They are similar in their goals but they cover different underlying illegal conduct. For example SOX focuses on mail, wire, accounting fraud, and fraud against shareholders. Dodd-Frank focuses on violations of securities laws, and one portion of Dodd-Frank, known as the Consumer Financial Protection Act, focuses on financial products, such as mortgages, loans, and credit cards. There is often an intersection of these laws, for example, in the case of an employee of a publicly traded bank that lends money to consumers and sells other financial products. Multiple whistleblower protections may come into play based on the same conduct.
There has often been bipartisan support for whistleblower protections, even when the major political parties have disagreed about the level of regulation that is appropriate. Many people realize that there are important risks that cannot be ignored, namely the tremendous damage to the U.S. and global economies that can happen if widespread fraud and illegal business practices go unchecked. There is no dispute that insiders are best-positioned to learn about such misconduct, and that they are on the front lines of efforts to stop it.
CP: We've all seen discussion about rolling back Dodd-Frank. Do you think that whistleblower protections will be weakened with that?
Michael: It is difficult to predict how dramatic any rollback will be. Dodd-Frank is a massive regulatory scheme, and I would be surprised if the incoming administration and Congress did not retain at least some components of it. There are aspects of the law that are common-sense responses to the problems that led to the Great Recession. The common wisdom is that Republicans are “anti-regulation” and Democrats are “pro-regulation,” but it’s not that simple. It really depends on what kinds of regulations are at issue, whom or what the regulations impact, and whether the party’s agenda is advanced by the existence or nonexistence of a particular regulation.
The things that could change most rapidly over the next few years are within those areas under executive branch control. Executive agencies have a lot of latitude in enacting regulations and issuing guidance, and they are responsible for the implementation and enforcement of a variety of statutes, including most whistleblower statutes. OSHA and the broader DOL administer a lot of the whistleblower anti-retaliation statutes, including the consumer financial whistleblower protections and SOX. The SEC, meanwhile, administers a whistleblower incentive program created by Dodd-Frank. The SEC also issued the implementing regulations for Dodd-Frank and enforces numerous components of the law, including whistleblower protections. Under the Obama administration, the SEC has taken a fairly broad, pro-whistleblower view. That could change, but major changes do not happen overnight.
CP: What are some of the protections provided by the newer laws?
Michael: SOX focuses on six categories of illegal conduct: mail fraud, wire fraud, bank fraud, securities or commodities fraud, any rule or regulation of the SEC, and any provision of Federal law that is related to fraud against shareholders. The law protects employees who report such conduct internally or externally.
An example of fraud on shareholders might be an intentional misrepresentation of revenue in a quarterly report. But SOX also applies to misconduct that is not as directly related to the fact that the company is subject to SEC reporting requirements. This may be something like representing to customers something false about a product. The communication of such information by phone or email can constitute wire fraud, which implicates SOX.
When an employee opposes illegal conduct or makes a report internally or externally about conduct that involves one of the categories of illegal conduct listed in SOX, that person has engaged in “protected activity” within the meaning of SOX. If the company takes some kind of action against the employee like demotion or termination, then the employee potentially has a legal remedy under SOX.
SOX is one of the whistleblower retaliation laws administered by OSHA. Under SOX, an employee has 180 days after a retaliatory action to file a charge with OSHA, and OSHA enforces the deadline strictly. An employee therefore cannot wait to seek legal counsel and act. A successful SOX claim entitles an employee to various “make-whole” remedies, including back pay, reinstatement (or front pay), compensatory damages for reputational and emotional harm, and attorneys’ fees and costs.
The Dodd-Frank SEC anti-retaliation provision generally focuses on violations of federal securities laws. It overlaps with SOX in terms of covered misconduct, although courts disagree as to whether an employee must have reported to the SEC or can have reported only internally (as with SOX). Unlike with SOX, an employee can file directly in court under Dodd-Frank and has three years to do so. The remedies under Dodd-Frank can be greater than under SOX because a successful claimant can receive double back pay. So if the person has been out of work for six months and wins on a Dodd-Frank claim, they can recover a year’s worth of compensation.
The Consumer Financial Protection Act whistleblower provision operates a lot like SOX. It is an OSHA-administered law with a 180-day statute of limitations. The remedies are identical to those available under SOX.
CP: So to trigger the protections you have to push back against the activity such as report it internally or an outside agency? In other words, you couldn't have been fired, maybe after having participated in the activity, then file a claim after the fact?
Michael: That's right. A good illustration of this is the recent Wells Fargo scandal in which over 5,000 people were fired for creating fake customer accounts. The misconduct was supposedly the result of a high-pressure environment that created strong incentives for employees to inflate their individual sales.
In such situations, people with their livelihoods on the line are faced with the choice to do something potentially illegal or risk their jobs. A lot of times people understandably don't want to speak up or push back against these things because they know it won't be received well. The problem from a legal perspective is that even if you are following instructions or an unofficial policy – and even if you do not know the seriousness or illegality of your conduct – you don't have a remedy under the law for following orders.
Whistleblower laws are designed to protect those who do come forward. Arguably, it is wrong to terminate someone for following the boss’s instructions, which essentially punishes obedient employees. For purposes of whistleblower anti-retaliation laws, however, you have to have done something to push back or report the illegal activities.
In the case of Wells Fargo, there are a number of ongoing lawsuits by former employees who were terminated before the recent purge when these sales quotas were in effect. These employees allege that they were fired because they were pushing back against unattainable sales goals and the resulting misconduct. They have a much better chance of succeeding on a whistleblower claim than the individuals who were part of the mass firing.
CP: How about a case where an employee did not push back and they were fired. So they couldn't go after the company for back pay or reinstatement. However, if they had information about management or higher ups directing the activity would they be able to come forward, present that information to the government and be eligible for some monetary reward?
Michael: That’s certainly possible. We haven’t talked in detail about the whistleblower incentive programs that have rolled out in recent years. The SEC program is the biggest and most active of these programs. Anyone with information of fraud can come forward and report it to the SEC, and can qualify for an award if submitted through the proper channels. While you can file a tip yourself, it is a good idea to work with an attorney to put together a detailed presentation that will allow the SEC to determine whether to take action.
If the SEC recovers more than a million dollars in an enforcement action or settlement that relates to the tip you submitted, you may be eligible for an award. The SEC posts covered actions on its website. If you believe your tip contributed to the SEC’s recovery, you have 90 days to submit a claim for an award. The claim, like the original tip and any supplemental submission, needs to be detailed and should describe the ways the person assisted with the investigation. If you submit a one- or two-page tip that points the SEC in the right direction, but you do not aid the investigation in any significant way beyond that, you likely will not receive as large an award as you would if you provided more detailed information and worked with the SEC along the way. Additionally, the level of someone’s participation or complicity in an illegal scheme can reduce the level of any award they receive, although simply going along with the scheme is obviously less serious than orchestrating it.
A lot of times when we work with an SEC tipster, the SEC and other agencies will interview the individual multiple times, and we will provide supplements and ongoing help. Such assistance can aid the investigation and conserve government resources, both of which are factors that may increase an individual’s award.
In addition to the SEC program, the IRS and the Commodities Futures Trading Commission (CFTC) have programs as well. The CFTC program follows rules and procedures similar to those of the SEC program. It has become better known and more active recently, and it has issued several awards. The program is important to guard against a variety of abuses that can have a significant impact on investors. Spoofing, for example, occurs when someone places a large order to buy or sell a stock, intending to cancel that order after it moves the market in a particular direction that is advantageous to the person placing the phony order.
CP: What specifically do whistleblowers need to do to gain protections under one of these laws? I know you have mentioned that they need to push back in some way. How do whistleblowers document that they have pushed back?
Michael: In many employment cases, there is no written documentation, and a claim turns on the credibility of opposing parties’ testimony. For example, someone might speak up in a meeting and oppose some kind of accounting fraud. The next day, the employee is fired. That person may have a great retaliation claim, but it may be the employee’s word against the employer’s word – and the word of witnesses whose livelihood depends on the defendant.
A more easily provable case is one in which the employee states in writing that he or she believes a particular practice is wrong. Case law says you don't have to use any “magic words.” You don't have to say, “I believe this is wire fraud pursuant to 18 U.S.C. § 1343 because the company misrepresented something via wire transmission, specifically email.” But the more specific you are about the conduct and your belief that it is illegal (as opposed to merely a bad business idea), the clearer it is that you have engaged in protected activity. Then, as with any employment case, you must show that whatever adverse action you suffered was a result of having spoken up.
An important thing for employees to realize is that these protections of what level the employee is within the company. You don’t have to be the chief compliance officer or someone high in the finance department. If you know about illegal conduct, oppose it, and suffer some adverse action, you may have a whistleblower retaliation claim.
CP: Thank you for speaking with us, Michael. I think our users will find this quite useful.