SEC Brings 1st Stand-Alone Action for Retaliation Against an SEC Whistleblower
On Thursday, the Securities and Exchange Commission (“SEC”) imposed sanctions on International Game Technology (“IGT”) for retaliating against and firing an employee who blew the whistle on alleged accounting and financial statement frauds at IGT. This is the second time that the SEC has brought an action against a public company for retaliating against an SEC whistleblower. In 2014, the SEC brought an action against a company for both violating the Investment Advisers Act of 1940 and also for retaliating against a whistleblower. (I discussed that case, titled In the Matter of Paradigm Capital Management and Candace King Weir, in one of my earlier posts, which you can find here.)
The recent case against IGT is noteworthy because it marks the first time that the SEC has brought a stand-alone action against a public company based solely upon the company’s retaliation against an SEC whistleblower. Among other things, the SEC whistleblower had always received positive performance evaluations from IGT, had never been disciplined for his job performance, had been promoted to the position of a director of a division, and had received bonuses and grants that were at or near the highest awarded for employees in his branch of the company. The whistleblower raised concerns about IGT’s accounting methodology and financial statements both directly to his supervisors and through an IGT internal hotline for reporting grievances.
With the assistance of outside counsel, IGT conducted an internal investigation into the allegations. After the internal investigation began, the whistleblower submitted a complaint to the SEC, and a few weeks later informed IGT that he had done so.
While the internal investigation was going on, IGT removed the whistleblower from a project related to its merger with another company. IGT also instructed the whistleblower not to attend an annual global gaming industry convention that was attended by major vendors and suppliers, which the whistleblower had attended in prior years.
Apparently the result of the internal investigation was that IGT disagreed with the whistleblower. Thereafter, IGT fired the whistleblower.
Section 21F(h) of the Securities Exchange Act of 1934 “prohibits an employer from discharging, demoting, suspending, threatening, harassing, directly or indirectly, or in any other manner discriminating against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower in, among other things, providing information regarding potential violations of the securities laws to his employer or to the Commission”. The SEC found that IGT’s conduct violated Section 21F(h), ordered IGT to cease and desist from committing or causing any future violations of Section 21F(h), and required IGT to pay a civil penalty of $500,000. (Order, p. 5.)
In addition to being the first stand-alone action brought by the SEC for retaliating against an SEC whistleblower, the IGT case is significant for another reason: the Order does not state whether the SEC agreed or disagreed with the whistleblower’s allegations against IGT. For purposes of the Order, the merits of the whistleblower’s complaint appear to have been irrelevant. The Order is based solely on the fact that the SEC whistleblower believed his allegations at the time when he made them, and was retaliated against and fired for having raised them. In the future the SEC may or may not bring a case against IGT for the accounting and financial statement frauds, but the merits of those claims seems to have had no relevance to the SEC’s present case against IGT, which was based entirely on IGT’s retaliating against the whistleblower.
The new Chief of the SEC’s Office of the Whistleblower was quoted as stating “Bringing retaliation cases, including this first stand-alone retaliation case, illustrates the high priority we place on ensuring a safe environment for whistleblowers” and “We will continue to exercise our anti-retaliation authority when companies take reprisals for whistleblowing efforts.”
This IGT case is the latest in a string of SEC cases vigorously pursuing public companies and financial institutions that retaliate against SEC whistleblowers. As I wrote about last week, in the past two months, the SEC has brought three cases against companies for using severance or separation agreements that sought to inhibit or prevent their former employees from reporting to the SEC. Last year, the SEC brought a case against a company for using confidentiality agreements that prohibited its employees from discussing the substance of internal interviews without advance clearance from the company’s law department, and the year before that the SEC brought its case against Paradigm Capital Management that I mentioned above. Given the comments by the Chief of the Office of the Whistleblower, this trend is likely to continue.
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