8 House Representatives Push for Stronger SEC Whistleblower
Protection

On October 27, 2014, eight Members of the U.S. House of
Representatives sent a letter to Securities and Exchange
Commission (SEC) Chairwoman Mary Jo White in support of
increased SEC whistleblower protection.  The letter, written
on the letterhead of The House Committee on Financial
Services, details some of the SEC whistleblower program’s
successes, including its giving out over $50 million in SEC
whistleblower awards since the program began.

It then goes on to state that it has come to the attention of
Congress that some companies have been retaliating against SEC
whistleblowers and/or trying to use provisions in
confidentiality agreements to prevent SEC whistleblowers from
reporting frauds to the Commission.

While acknowledging that there may be legitimate reasons for
confidentiality agreements, the letter is emphatic that
“…such agreements should be structured as narrowly as
possible.  Employees should also be clearly informed that
these agreements in no way restrict their right to voluntarily
report securities law violations to the Commission.”

The letter then goes on to state that “The use of
confidentiality agreements, attestations, and other employment
arrangements that do not abide by these principles appears to
be in direct contravention to the SEC Rule 21F-17…”  Rule
21F-17(a) states in relevant part that “No person may take any
action to impede an individual from communicating directly
with the Commission staff about a possible securities law
violation, including enforcing, or threatening to enforce, a
confidentiality agreement…”

The SEC

In its 2011 comments implementing the SEC whistleblower rules,
the Commission explained that “Rule 21F-17(a) is necessary and
appropriate because … efforts to impede an individual’s
direct communication with Commission staff about a possible
securities law violation would conflict with the statutory
purpose of encouraging individuals to report to the
Commission.”  Implementation of the Whistleblower Provisions
of Section 21F of the Securities Exchange Act of 1934, p. 201
(Release No. 34-64645, File No. 57-33-10) (effective date Aug.
12, 2011) (the “Implementing Release”).

The Courts

In a footnote to those comments, the Commission cited two
cases as examples of  federal courts that have taken a similar
position:  In re JDS Uniphase Corp. Sec. Litig., 238 F.Supp.2d
1127, 1137 (N.D. Cal. 2002) (“To the extent that agreements
preclude former employees from assisting in investigations of
wrongdoing that have nothing to do with trade secrets or other
confidential business information, they conflict with public
policy in favor of allowing current employees to assist in
securities fraud investigations”), and Chambers v. Capital
Cities/ABC, 159 F.R.D. 441, 444 (S.D.N.Y. 1995) (“it is
against public policy for parties to agree not to reveal …
facts relating to alleged or potential violations of law”). 
Implementing Release, p. 201 n. 408.

FINRA

In this blog approximately
two weeks ago
(October 14, 2014), I noted that FINRA recently issued
Regulatory Notice 14-40, which states that during a FINRA
arbitration proceeding, settlement agreements, discovery
stipulations, and other confidentiality agreements cannot
“prohibit or restrict a customer or any other person from
communicating with the Securities and Exchange Commission
(SEC) … regarding a possible securities law violation.”   The
SEC had staked out its position on this back in 2011: 
“confidentiality agreements or protective orders entered in
SRO arbitration or adjudicatory proceedings may not be used to
prevent a party from reporting to us possible securities law
violations that he or she discovers during the proceedings …
given that SRO’s are charged with helping us enforce the
federal securities laws, it would be an odd result if one
party in an SRO proceeding could use a protective order to
prevent another party from reporting a possible securities law
violation to us.”  Implementing Release, p. 201 n. 407.

It therefore seems that Congress, the courts, the SEC, and
FINRA are all in agreement on this issue.

The SEC’s 1st Anti-Retaliation Enforcement Action

The SEC brought its first enforcement proceeding against a
company for retaliating against an SEC whistleblower in June
of this  year.  In the Matter of Paradigm Capital Management,
Securities Exchange Act Release No. 72393, Investment Advisers
Act Release No. 3857, Admin. Proceeding File No. 3-15930 (June
16, 2014).  In an SEC press release about that action, the
Chief of the SEC’s Office of the Whistleblower was quoted as
stating “We will continue to exercise our anti-retaliation
authority in these and other types of situations where a
whistleblower is wrongfully targeted for doing the right thing
and reporting a possible securities law violation.”  SEC Press
Release 2014-118 (June 16, 2014).

The Call-To-Action

What is therefore perhaps the most noteworthy thing about the
House Representatives’ letter to the Commission, coming four
months after the Paradigm Capital case, is its concluding
call-to-action: “We urge the Commission to send a strong
message to industry, including by bringing enforcement actions
if necessary, that such [impeding and retaliatory] acts will
not be tolerated.”

A copy of the House Representatives’ letter to Ms. White can
be found
here.

* * *

About the Pickholz Law Offices LLC

The Pickholz Law Offices LLC is a law firm that focuses on
representing clients involved with investigations conducted by
the U.S. Securities and Exchange Commission, FINRA, and other
securities regulators.

The Pickholz Law Offices has represented employees, officers,
and others in SEC whistleblower cases involving financial
institutions and public companies listed in the Fortune Top
10, Top 20, Top 50, Top 100, Top 500, and the Forbes Global
2000. We were the first law firm ever to win an SEC
whistleblower award for a client on appeal to the full
Commission in Washington. Inside Counsel magazine named this
achievement one of the five key events of the SEC
whistleblower program. Examples of the
Firm’s SEC whistleblower cases are available here.

In addition to representing SEC whistleblowers, since 1995 the
Firm’s founder, Jason R. Pickholz, has also represented many
clients in securities enforcement investigations conducted by
the SEC, FINRA, the U.S. Department of Justice and US
Attorney’s Offices, State authorities, and more. Examples of
some of the many
securities enforcement cases that Mr. Pickholz has been
involved with are available here.

You can see what actual clients have had to say about The
Pickholz Law Offices by going to the
Client Reviews page on our website or by clicking here.

How to Contact the Pickholz Law Offices LLC

If you would like to speak with a securities lawyer or SEC
whistleblower attorney, please feel free to call Jason R.
Pickholz at 347-746-1222.

The Pickholz Law Offices remains open and will be fully
operational through teleworking while we all grapple with this
terrible pandemic. We hope that all of our clients,
colleagues, friends, and their families remain safe and
healthy. Our thoughts and prayers go out to everyone who has
been affected by COVID-19.