Unquestionably, 2014 was a banner year for whistleblowers on many fronts. The U.S. Securities and Exchange Commission (“SEC”), under the penumbra of the relatively new Dodd-Frank Act, started to sharpen its focus on corporate whistleblowing, as evidenced by the record payout in September 2014 of more than $30 million to a whistleblower who had helped alert the SEC to what it described as an ongoing fraud. And not to be outdone, the U.S. Justice Department recovered nearly $6 billion from False Claims Act cases in fiscal year 2014. According to the Justice Department, this was the first time the government’s annual recovery exceeded $5 billion, and for the second consecutive year there were over 700 whistleblower lawsuits filed. These trends will likely continue going forward as both the SEC and the Justice Department have increased resources for fighting and ferreting fraud.
Here, then, are some predictions for 2015, as well as some various issues that no doubt will become topical in the next 12 months.
1. Record False Claims Act Cases and Recoveries Will Continue to Rise
In fiscal year 2014, the Justice Department announced in November 2014, the government collected nearly $6 billion in civil settlements and judgments under the False Claims Act. This was a record for the Justice Department, with a majority of the recoveries coming from healthcare (and specifically Medicare-related) fraud, as well as defense contractor fraud. Fiscal year 2015 should continue to be another banner year for False Claims Act cases and recoveries. After all, for the first quarter of fiscal year 2015 (which began in October 2014), the Justice Department had already announced 22 settlements.
The False Claims Act allows private litigants to bring suits on behalf of the federal government, and share in any eventual monetary recovery — sometimes as much as 30% of the total settlement the Justice Department recovers. This law has been a powerful tool for the government in the past, and given its recent successes under this law, recoveries under the False Claims Act in 2015 should see nothing but an upward trend.
2. Legal Protections and Confidentiality for Whistleblowers Will Increase
In November 2014, the Fifth Circuit issued a seminal decision in Halliburton v. Admin. Review Bd. on the scope of whistleblower protections, especially as it pertains to the identity of whistleblowers in the corporate setting. Specifically, the Fifth Circuit held that “outing” a whistleblower is a prohibited adverse action. In that case, Halliburton sought to overturn a U.S. Department of Labor Administrative Review Board finding that the company retaliated against a whistleblower by revealing his name in a document preservation notice. The upshot to employers (and defendants) is that they cannot “out” or include the identity of a whistleblower in a litigation hold letter or notice.
Confidentiality for whistleblowers, especially those who are still employed by the corporate-defendant, is an important issue. Not only is retaliation a real risk, but so are the prospects of being branded a “snitch” by peers. Both the Dodd-Frank Act and the Sarbanes-Oxley Act provide various protections for whistleblowers. In the coming year, courts like the Fifth Circuit in Halliburton will likely continue to define, reinforce and expand those protections.
3. Increased Scrutiny of Whistleblower Retaliation Techniques
The SEC has increasingly sent signals that it will be scrutinizing a company’s attempts to prevent employees from reporting fraud. A favorite technique is for a company to include language in an employment contract that forbids employees from reporting suspected wrongdoing to the government. The SEC has consistently frowned upon such tactics.
For example, last year in June 2014, the agency brought its first-ever whistleblower retaliation case against a hedge fund advisory firm. In that instance, the SEC charged hedge fund advisory firm Paradigm Capital Management Inc. with engaging in prohibited principal transactions and then retaliating against the former head trader who reported the activity to the SEC. After Paradigm found out the tipster had reported the allegations to the agency, it demoted him from head trader to compliance assistant, the SEC said. The SEC recovered $2.2 million from Paradigm as part of the settlement. As part of the settlement announcement, Andrew Ceresney, director of the SEC’s enforcement division, said in a statement that “[t]hose who might consider punishing whistleblowers should realize that such retaliation, in any form, is unacceptable.”
This increased scrutiny will no doubt continue in 2015. While whistleblowers may not have a guarantee that they will not be retaliated against for reporting fraud to the government, the SEC has made clear that companies will be punished for attempting to do so.
While those are the likely trends for 2015, here are some topical issues that remain unresolved, but will hopefully gain some clarity in the new year.
1. Questions Linger for Foreign Whistleblowers
The proliferation of foreign whistleblowers is expected, especially given the global nature of business and commerce. But whether these tipsters have the same protections as U.S. whistleblowers under the Dodd-Frank Act remains unclear in the wake of recent court rulings.
Foreign whistleblowers made up about 12% of the tipsters submitting information to the SEC in fiscal 2014, according to the agency. But whether the Dodd-Frank whistleblower provisions intended to protect U.S. tipsters from retaliation apply equally to these foreigners remain unclear. A federal appeals court in August held that these anti-retaliation provisions do not apply to a foreign whistleblower, a former Siemens China staffer. The ruling held that the provisions of the Dodd-Frank Act that prohibit retaliation against whistleblower employees do not apply to the former Siemens China staffer. The ruling cited a 2010 U.S. Supreme Court decision that says that legislation does not apply outside the U.S. unless there is evidence Congress indicated otherwise.
Following this case, the question that foreign whistleblowers are left with is this: “How far does the presumption of extraterritoriality extend vis-a-vis foreign whistleblowers under the Dodd-Frank Act, especially when the SEC has received tips from 83 foreign countries, with 70 originating in the United Kingdom, 69 from India and 32 from China?”
2. The Propriety of Employee Self-Help Discovery
One of the biggest issues facing both whistleblowers and corporate-defendants is the question of how far employees may go to collect information from an employer to support their allegations of fraud, or even to protect themselves from anticipated retaliation.
There are obvious competing interests at stake here. The company has an interest in protecting information that may oftentimes be considered proprietary or trade secrets, or data that impinges upon the rights of privacy of third parties (such as patient information or banking account information). On the other hand, a potential whistleblower has an equal (if not more of an) interest in collecting potentially incriminating information. This information often will be the means to either stopping or exposing fraud (past and ongoing), and also perhaps provide the whistleblower some prospect of protection against retaliation. The prospect of making use of an employer’s information as ammunition presents an obvious quandary from a whistleblower-side prospective. This is especially poignant if the means of collecting such data is found to be unreasonable, which may eventually expose the whistleblower to potential legal liability.
This issue has yet to be squarely addressed by the courts, and all parties involved will undoubtedly anxiously wait to see if 2015 emerges as the time when this issue is clarified by the courts.
These, then, are the predicted trends and remaining open areas in the whistleblowing arena. As 2014 has shown, while reporting fraud to the government is not without risks, doing so can create significant and notable results.