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Thursday
Oct062016

SEC brings its first stand-alone whistleblower retaliation action

The SEC last week brought its first enforcement action based solely on retaliation against a whistleblower. Casino-gaming company International Gaming Technology (IGT) agreed to pay a $500,000 penalty to settle the SEC's enforcement action.

In 2011, the SEC adopted a rule under the Dodd-Frank Act authorizing the agency to bring enforcement actions based on retaliation against whistleblowers who report potential securities violations to the agency.

The SEC brought its first enforcement action under the new rule in 2014. It charged hedge fund Paradigm Capital Management with both prohibited principal transactions and retaliating against the whistleblower who reported the securities violations to the SEC. Paradigm paid the SEC just under $2.2 million to settle the case.

After Paradigm, the SEC had not brought another enforcement action charging unlawful retaliation until last week's IGT settlement. With the IGT action, however, the SEC broke new ground.

Unlike the Paradigm case, the SEC charged IGT exclusively with unlawful retaliation and not with violations of other securities laws. According to the SEC’s complaint, the agency found that IGT fired an executive whistleblower because he reported to senior management and the SEC that the company’s financial statements might be distorted.

To resolve the claim, IGT agreed to pay a civil penalty of $500,000.

The IGT action ends any debate about how seriously the SEC takes its authority to protect whistleblowers.

The IGT penalty was significantly higher than the penalty portion of the Paradigm settlement ($300,000), despite charges against Paradigm of additional security violations. This demonstrates that the SEC considers whistleblower retaliation itself to constitute a serious violation of the nation’s securities laws.

Reiterating this point, Andrew Ceresney, Director of the SEC’s Division of Enforcement, said last week: “Bringing retaliation cases including this first stand-alone retaliation case, illustrates the high priority we place on ensuring a safe environment for whistleblowers.”

The IGT whistleblower also filed a charge asserting unlawful retaliation in violation of the Sarbanes-Oxley Act (SOX) with the U.S. Occupational Safety and Health Administration (OSHA). That complaint is still pending before OSHA and may eventually end up in federal court.

SOX prohibits publicly traded companies from retaliating against employees for reporting, among other misconduct, securities violations. Under SOX, a whistleblower who has been retaliated against must first file a charge with OSHA, the agency charged with investigating the allegations and ordering relief, which can include preliminary reinstatement, if it finds a violation.

After 180 days, however, if a final decision in the case has not been issued, a whistleblower can file a civil action in federal court.

The IGT whistleblower also has a retaliation claim under Dodd-Frank, which also protects employees who report potential securities violations to the SEC. Whistleblowers can file their Dodd-Frank claims directly in federal court.

Under both SOX and Dodd-Frank, the whistleblower can recover damages to compensate him for the economic, reputational, and emotional harm he has suffered because of the retaliation, as well as attorneys’ fees and costs. Dodd-Frank also provides for double back pay, twice the amount available under SOX.

The landmark IGT action give companies an even stronger reason not to retaliate against whistleblowers who report securities violations. Not only do whistleblowers have civil remedies to compensate them for the harm they have endured, but companies that retaliate may face an expensive SEC investigation and a stiff penalty.
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Alexis Ronickher, pictured above, is a partner with Katz, Marshall & Banks, LLP, a boutique D.C.-based whistleblower and employment law firm.  She and Lisa J. Banks represented the IGT whistleblower throughout the SEC investigation and continue to represent him before OSHA and with all matters related to his employment claim.

Reader Comments (2)

What percentage of this "civil penalty" does the whistleblower get?

According to IGT's financial statements their FY2015 revenue was about $4.7 billion. Is a fine of $0.5 million (or 0.01% of revenues) really that "stiff?"
October 7, 2016 | Unregistered CommenterNJO
I agree, given the facts as they are, the penalty seems low. More is needed to reward the individual, the fine needs to be higher, and the officers needed to be personally be held accountable - salary and bonus for the year as part of their individual fines.
October 9, 2016 | Unregistered Commenterst
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