New York Attorney General Proposes State Equivalent of Dodd-Frank Whistleblower Program

On February 26, 2015, New York Attorney General Eric Schneiderman announced plans to introduce state legislation to protect and reward employees who report information about illegal activity in the banking, insurance, and financial services industries.

Schneiderman’s proposal, titled the Financial Frauds Whistleblower Act, would create a state-level equivalent of the federal Dodd-Frank Wall Street and Consumer Protection Act. The Dodd-Frank Act provides financial incentives and anti-retaliation protections to whistleblowers who report fraud in the financial services industry.

While a number of states have whistleblower programs modeled after the federal False Claims Act, the Financial Frauds Whistleblower Act would be the first state-level equivalent of the Dodd-Frank Act, which created the whistleblower programs at U.S. Securities and Exchange Commission and U.S. Commodity Futures Trading Commission.

Schneiderman’s proposal would also address the limitations on awards imposed by federal law. Under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), rewards to whistleblowers who report financial crime are capped at $1.6 million.

The Financial Frauds Whistleblower Act would compensate whistleblowers whose information leads to action by the state’s banking and insurance regulator, the New York Department of Financial Services—providing the potential for large awards.

The legislation has yet to pass the New York State legislature.

FINRA Warns Firms Not to Bar Employee Whistleblowing

The Financial Industry Regulatory Authority — a self-policing arm of the securities industry — reminded its member firms not to ask their employees to sign confidentiality agreements that forbid reporting possible wrongdoing to FINRA itself, or to industry regulators such as the U.S. Securities and Exchange Commission.

FINRA may discipline firms that add such provisions to agreements with their employees, it said in a new regulatory notice. FINRA also said that any language that bars employees from sharing certain documents outside their firm can’t stop employees from giving the same documents to regulators.

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SEC Gives $300K to Whistleblower Working in Audit/Compliance

The U.S. Securities and Exchange Commission said it awarded more than $300,000 to a whistleblower who first reported wrongdoing internally — but then went to the feds after being ignored for four months.

The SEC typically doesn’t reveal details about the people who receive awards under the Dodd-Frank Act, since the law grants confidentiality to whistleblowers, but the agency said this was its first-ever payout to a person who worked in a company’s audit or compliance areas.

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SEC Brings First Action on Whistleblower Retaliation

The U.S. Securities and Exchange Commission (SEC) said it filed — and promptly settled, for $2.2 milllion — its first-ever charges against a company for retaliating against a whistleblower who reported wrongdoing under the Dodd-Frank Act.

The SEC charged Paradigm Capital Management Inc., a hedge fund advisory firm, with engaging in prohibited principal transactions and then removing a head trader from his regular responsibilities after he reported the conflict of interest to the SEC.

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Supreme Court Says SOX Can Fit Almost Anyone

NOTE: A version of this post first appeared on Law360.com.  The author, R. Scott Oswald, was counsel of record on an amicus curiae brief filed in this case.

Supreme CourtIn deciding Lawson v. FMR LLC, the first whistleblower case they have heard under the Sarbanes-Oxley Act (SOX), the justices of the U.S. Supreme Court agreed that the law’s ambiguous anti-retaliation provision offered two alternatives, both somewhat unappealing:

  • Either it doesn’t protect a large class of whistleblowers — in many cases, the people most likely to discover financial wrongdoing;
  • Or it protects virtually anyone hired by a publicly traded company or by its employees, either directly or indirectly, and forbids reprisal for a huge range of fraud reports.

Led by Justice Ruth Bader Ginsburg, a 6-3 majority unflinchingly chose the broader interpretation, instantly giving SOX “a stunning reach,” in the words of a dumbfounded dissent by Justice Sonia Sotomayor.

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