Financial Fraud Law Report

Transcription

1 Financial Fraud Law Report An A.S. Pratt & Sons Publication May 2014 Editor s Note: Mary Jo White s SEC Steven A. Meyerowitz SEC Enforcement: Top 10 Developments Under Mary Jo White Thomas A. Zaccaro, Eleanor K. Mercado, and Neil J. Schumacher Halliburton Co. v. Erica P. John Fund, Inc.: Assessing Possible Modifications to Basic and The Fraud-On-The-Market Theory Jason M. Halper, Ryan J. Andreoli, and William J. Foley Six Steps to Prevent Disclosure of Internal Investigation Reports William A. Roberts, III, Mark B. Sweet, and Richard B. O Keeffe, Jr. Recent Developments in the Regulation of Bitcoin under State and Federal Securities Laws Scott H. Kimpel Reining in Overbroad Criminal Subpoenas Is Some Relief in Sight? Ben Barnett, Rebecca S. Kahan, and Nathaniel Hopkins Recent FCA Decision Has Important Implications for Contractor Disclosures to the Government Richard J. Vacura, Pablo A. Nichols, and Sara Bartel Marubeni Gets Hit Again for FCPA Violations: DOJ Says the Company Did Not Voluntarily Disclose the Conduct and Refused to Cooperate Paul T. Friedman, Stacey M. Sprenkel, and Tiffany A. Rowe U.K. Financial Conduct Authority Imposes Fine on Besso Limited Karolos Seeger, Bruce E. Yannett, Matthew H. Getz, Robin Lööf, and Robert Maddox Brazil s Anti-Corruption Clean Company Law Now In Effect André Marques Gilberto U.S. Supreme Court Extends Sarbanes-Oxley Whistleblower Protections to Employees of Mutual Fund Investment Advisers and Other Privately-Held Contractors to Public Companies Stephen T. Cohen and Alexander R. Bilus Dodd-Frank Wall Street Reform and Consumer Protection Act Update David A. Elliott, Kristen Peters Watson, E. Jordan Teague, and Seth Muse

2 Editor-in-chief Steven A. Meyerowitz President, Meyerowitz Communications Inc. Board of Editors Frank W. Abagnale Author, Lecturer, and Consultant Abagnale and Associates Stephen L. Ascher Jenner & Block LLP Thomas C. Bogle Dechert LLP David J. Cook Cook Collection Attorneys David A. Elliott Burr & Forman LLP William J. Kelleher III Corporate Counsel People s United Bank James M. Keneally Kelley Drye & Warren LLP H. David Kotz Director Berkeley Research Group, LLC Richard H. Kravitz Founding Director Center for Socially Responsible Accounting Frank C. Razzano Pepper Hamilton LLP Sareena Malik Sawhney Director Marks Paneth & Shron LLP Mara V.J. Senn Arnold & Porter LLP John R. Snyder Bingham McCutchen LLP Jennifer Taylor McDermott Will & Emery LLP Bruce E. Yannett Debevoise & Plimpton LLP The Financial Fraud Law Report is published 10 times per year by Matthew Bender & Company, Inc. Copyright 2014 Reed Elsevier Properties SA., used under license by Matthew Bender & Company, Inc. All rights reserved. No part of this journal may be reproduced in any form by microfilm, xerography, or otherwise or incorporated into any information retrieval system without the written permission of the copyright owner. For permission to photocopy or use material electronically from the Financial Fraud Law Report, please access com or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, CCC is a not-for-profit organization that provides licenses and registration for a variety of users. For subscription information and customer service, call Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, [email protected], (phone) / (fax). Material for publication is welcomed articles, decisions, or other items of interest. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to the Financial Fraud Law Report, LexisNexis Matthew Bender, 121 Chanlon Road, North Building, New Providence, NJ Direct inquiries for editorial department to catherine. [email protected]. ISBN:

3 U.S. Supreme Court Extends Sarbanes- Oxley Whistleblower Protections to Employees of Mutual Fund Investment Advisers and Other Privately-Held Contractors to Public Companies Stephen T. Cohen and Alexander R. Bilus The authors explore a recent decision by the U.S. Supreme Court that extended whistleblower protections to employees of a privately-held investment adviser because the adviser served as a contractor to mutual funds. The U.S. Supreme Court has held that employees of a privately-held mutual fund investment adviser are protected under a whistleblower provision enacted as part of the Sarbanes-Oxley Act of 2002 ( SOX ). 1 Although the SOX whistleblower provision explicitly protects employees of publicly traded companies, the Supreme Court s ruling extended the protections afforded under the provision to employees of a privately-held investment adviser because the adviser served as a contractor to mutual funds. As Justice Sotomayor s dissenting opinion recognized, this decision threatens to subject private companies to a costly new front of employment litigation. Stephen T. Cohen, an attorney in the Washington, D.C., office of Dechert LLP, focuses his practice on the asset management industry. Alexander R. Bilus, an attorney in the firm s Philadelphia office, focuses his practice on securities litigation and white collar litigation. The authors can be reached at stephen.cohen@ dechert.com and [email protected], respectively. Catherine Botticelli, Jack W. Murphy and Aaron D. Withrow assisted in the preparation of this article. 458 Published by Matthew Bender & Company, Inc. in the May 2014 issue of Financial Fraud Law Report. Copyright 2014 Reed Elsevier Properties SA.

4 U.S. Supreme Court Extends Sarbanes-Oxley Whistleblower Protections This article discusses: the SOX whistleblower provision; the Supreme Court s decision; and the steps that privately-held contractors and subcontractors of public companies should consider in light of the decision in Lawson. Private companies should pay particular attention to this statute because it applies to a broader scope of conduct than is covered by the whistleblowing protections created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). 2 Background on SOX Whistleblower Protections Section 806 of SOX (codified in Section 1514A of Title 18 of the U.S. Code) protects a whistleblower who provides information or assistance to federal authorities or to his or her supervisor regarding fraudulent conduct. Under Section 1514A, no public company or any contractor of such company may retaliate against an employee who blows the whistle on fraud, and any whistleblower who suffers retaliation can file a complaint seeking reinstatement with back pay, attorney fees, and litigation costs. In particular, Section 1514A reads in relevant part: WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUB- LICALLY TRADED COMPANIES. No [public] company or any officer, employee, contractor, subcontractor, or agent of such company may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee because of [whistleblowing or other protected activity]. Supreme Court s Decision In Lawson, the Supreme Court addressed whether Section 1514A shields only those employed by the public company itself, or whether it also shields employees of privately-held contractors and subcontractors. The Court con- 459

5 Financial Fraud Law Report cluded that Section 1514A s whistleblower protection includes employees of a public company s private contractors and sub-contractors. 3 The Court based its decision on the statute s text and its purpose to ward off another Enron debacle, pointing out that if Section 1514A did not protect employees of private companies, [t]here would be a huge hole... Contractors employees would be disarmed; they would be vulnerable to retaliation by their employers for blowing the whistle on a scheme to defraud the public company s investors, even a scheme engineered entirely by the contractor. In her dissenting opinion, Justice Sotomayor stated that [t]he Court s interpretation gives [Section] 1514A a stunning reach. As interpreted today, the Sarbanes-Oxley Act authorizes a babysitter to bring a federal case against his employer a parent who happens to work at the local Walmart (a public company) if the parent stops employing the babysitter after he expresses concern that the parent s teenage son may have participated in an Internet purchase fraud. Steps to Consider in Light of the Court s Decision Given the Court s decision in Lawson, privately-held investment advisers of, and privately-held contractors to, mutual funds and other public companies should consider taking steps to become familiar with Section 1514A and ensure that they have the necessary controls and policies in place to prevent and remedy potential violations of the law. The following are the key features of Section 1514A. The statute creates a cause of action for employees who allege they were discharged or discriminated against because of their whistleblowing. A person who alleges discharge or other discrimination in violation of the statute may seek relief by filing a complaint with the Secretary of Labor, or, if the Secretary has not issued a final decision within 180 days of filing, by bringing an action in federal district court. A party to an action brought in district court is entitled to a trial by jury. 460

6 U.S. Supreme Court Extends Sarbanes-Oxley Whistleblower Protections The statute protects employees who blow the whistle on a wide range of conduct. The scope of conduct covered under Section 1514A is substantially broader than the conduct covered under the whistleblowing protections under Dodd-Frank. Section 1514A covers employees who provide information or assistance regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities or commodities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders. Although a primary focus of the statute is on investor fraud, the statute sweeps in a broad range of other fraudulent conduct because violations of the federal mail and wire fraud statutes can reach almost any type of fraud. On the other hand, the Dodd-Frank whistleblower provisions protect individuals who blow the whistle on only violations of the securities laws. The statute applies to employees of contractors and subcontractors of public companies, not just employees of public companies themselves. The statute provides that no company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (the Exchange Act ) or that is required to file reports under Section 15(d) of the Exchange Act, or any officer, employee, contractor, or subcontractor of such company, may retaliate against whistleblowing employees. Prior to the Supreme Court s decision in Lawson, it was unclear whether Section 1514A covered employees of private companies that perform work for public companies. Lawson has resolved this issue by holding that the statute does protect such private company employees. The statute applies to whistleblowing regarding fraudulent conduct that occurred at a private company. Based on the Supreme Court s decision, the statute is not limited to whistleblowing regarding fraudulent conduct that happened at a public company. Rather, the statute also covers misconduct at a privately-held company, as long as that company is a contractor or subcontractor of a public company. 461

7 Financial Fraud Law Report The statute covers whistleblowing to a federal regulatory or law enforcement agency, a member or committee of Congress, or any person with supervisory authority over the employee. Thus, an employee who expresses concerns internally to his or her supervisor regarding conduct he or she reasonably believes is fraudulent or that violates SEC rules is covered by Section 1514A. This is a key difference from the Dodd-Frank whistleblowing protections, which expressly only cover individuals who provide information or assistance to the Securities and Exchange Commission, although some district courts have concluded that Dodd-Frank s protections extend to individuals protected under SOX regardless of whether the disclosures were made to the SEC itself. 4 The statute entitles whistleblowers who suffer retaliation to all relief necessary to make the employee whole. Section 1514A expressly provides that relief shall include reinstatement with the same seniority status that the employee would have had but for the discrimination, back pay with interest, and compensation for any special damages, including litigation costs, expert witness fees, and reasonable attorney fees. The statute forbids waiver or arbitration. The rights and remedies provided for by Section 1514A may not be waived by any agreement, and no pre-dispute arbitration agreement shall be valid or enforceable if the agreement requires arbitration of a dispute arising under the statute. Conclusion As the above discussion shows, Section 1514A now exposes privatelyheld investment advisers of, and other privately-held contractors to, mutual funds and other public companies to a broad swath of potential claims. Although many such companies may already have policies and procedures in place to address the whistleblower protections afforded under Dodd-Frank, 462

8 U.S. Supreme Court Extends Sarbanes-Oxley Whistleblower Protections companies may wish to update those policies and procedures to encompass the broader scope of Section 1514A in light of the Lawson decision. Furthermore, companies that may not previously have considered themselves covered by Dodd-Frank or SOX should evaluate whether they are now covered and need to implement new policies or tailor their existing policies to address these concerns. Accordingly, privately-held investment advisers and any other private companies that perform work for public companies should contact their attorneys for advice on how to implement policies and controls to address Section 1514A and minimize the risks created by the Supreme Court s ruling. Notes 1 Lawson v. FMR LLC, No (March 4, 2014) (Lawson). Dechert LLP submitted a brief in Lawson on behalf of the Investment Company Institute as amicus curiae. 2 See 15 U.S.C. 78u-6. 3 The opinion of the Court was joined by four justices. Justices Scalia and Thomas also concurred in principal part and in the judgment. Justices Sotomayor, Kennedy and Alito filed a dissenting opinion. 4 See 15 U.S.C. 78u-6; but see Ellington v. Giacoumakis, No , 2013 WL , at *3 (D. Mass. Oct. 16, 2013); Murray v. UBS Sec., LLC, No , 2013 WL , at *4 (S.D.N.Y. May 21, 2013). 463