Designing a whistleblower policy to withstand retaliation claims

Corporations may need to reassess their retaliation policies now that the SEC has filed its first anti-retaliation enforcement action under Dodd-Frank. The SEC’s indication that it will aggressively pursue such cases and the Supreme Court’s recent decision broadening the scope of who is covered by whistleblower protection laws have potentially made retaliation claims a much more significant risk for many companies, and analysts suggest they pay close attention.

Companies were first put on notice to re-examine their retaliation polices in March, when the Supreme Court’s ruling in Lawson vs FMR LLC found that employees of private companies contracted by publicly traded firms are covered by the whistleblower protections of the Sarbanes-Oxley Act. The implications of that decision, combined with the SEC’s June enforcement action against Paradigm Capital Management for ‘engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC’, make it more prudent for companies to ensure they are protected against retaliation lawsuits and potential anti-retaliation enforcement actions from regulators.

The Lawson decision means corporations must monitor third- party contractors and suppliers (including private companies) to make sure any whistleblower complaints from employees of those firms are handled seriously and that no retaliatory actions are taken against the whistleblowers. Companies must ensure they offer proper training to managers and have systems in place to prevent retaliation.

The SEC’s decision to go after Paradigm is significant: it means the agency ‘is making good on its promise that it [will investigate] claims of retaliation under Dodd-Frank,’ says Mike Delikat, chair of Orrick Herrington & Sutcliffe’s global employment law practice. ‘As well as having to worry about private individuals bringing lawsuits for retaliation, companies now have the SEC knocking at their door asking about it.’

‘Dodd-Frank has brought whistleblowing and retaliation more to the forefront of a company’s internal investigation plans and general employment responses, and what used to be solved by a severance agreement and a payment and release can’t necessarily be resolved that way anymore,’ says Lisa Noller, vice chair of the government enforcement, compliance and white-collar defense practice at Foley & Lardner.

Mounting costs

Companies now face the prospect of paying fines and penalties from SEC retaliation actions, plus additional costs connected with co-operating with an investigation and mounting a legal defense if necessary, not to mention the incalculable cost of reputational damage caused by being in an SEC investigation. Hedge fund advisory firm Paradigm and its owner Candace King Weir settled the SEC charges against them for $2.2 million; Paradigm is not a publicly traded company, however, and some believe the penalties for public firms could be worse.

Randy Stephens, vice president of advisory services for NAVEX Global, also warns: ‘Don’t limit retaliation concerns to SEC issues. Many types of claims may also include protection against retaliation, including reports made to the IRS or the Occupational Safety and Health Administration.’ In fact, he adds, 41 percent of all charges filed with the Equal Employment Opportunity Commission in 2013 alleged retaliation.

While most companies have written policies that bar retaliation against employees who report corporate wrongdoing, having a written policy is not enough. What will help companies avoid retaliation lawsuits is how they effectively implement those policies. NAVEX Global offers guidance on how companies can protect themselves in this area (see Retaliation checklist, page 7), but each company handles retaliation claims differently, so there are various approaches that can be effective:

Use a multi-departmental approach when crafting anti-retaliation policies and whistleblower procedures.  Each company will handle retaliation claims differently, but the general counsel's office, HR department, and ethics and compliance function may all need to collaborate to develop a policy that will withstand the court and regulators. For example, the general counsel can anticipate what to do if claims go o trial; the HR function is bests suited to handle the employment law aspects of dealing with whistleblowers; and the ethics and compliance department can help with training and corporate culture issues connected to whistleblowers/retaliation.

Create a culture that works with whistleblowers and rewards those who report misconduct internally. 'One of the big challenges of Dodd-Frank is that the bounty provisions have the perverse incentive of encouraging people to report to the SEC,’ notes Delikat. He says attorneys are advising whistleblowers not to report internally as doing so might prejudice their position with the SEC as being the first to provide original information on wrongdoing that would put them in line for a big award.

To combat this, Noller says companies must demonstrate they are willing to work with whistleblowers and not against them. ‘The goal would be to have the whistleblowers report internally and [have the copmpany] reward them -- some companies provide gift cards to people who come forward,' she says. 'Ideally, your future whistleblowers will come forward and talk to the compliance officer or legal counsel instead of calling the SEC.'

Maintain positive confidential contact with whistleblowers who do not remain anonymous. Retaliation lawsuits can only be supported if the company takes actions that can be viewed as retaliatory. Experts urge firms to focus on determining whether issues of misconduct that are raised have merit, and then initiate the proper response.

If you know who the whistleblower is, says Deborah Meshulam, chair of the securities enforcement practice at DLA Piper, ‘someone who is outside of the chain of supervisory command of the whistleblower should meet with him/her in a confidential way to assure him/ her that retaliation will not be tolerated.’ In some cases, the audit committee chair or general counsel may fill this role.

Whistleblowers should be interviewed to find out all they know about the reported misconduct, and told that ‘if they believe something is happening that is retaliatory in nature, they should inform the contact person immediately about what is going on so the company can take appropriate steps’ to end the retaliation, Meshulam adds. She also advises companies to ‘designate a person who will periodically contact the whistleblower confidentially during the investigationj process in order tomake sure he/she is comfortable and no retaliation is occurring -- and be sure to document those contacts.

Whistleblowers must be kept informed throughout the investigation, and at its conclusion should be consulted to determine if there are any lingering issues. These measures will show the company is taking the allegations seriously while protecting it from a potential retaliation claim.