The lesson for firms in the securities industry? Keep your unforced error rate down. Update your policies and procedures regularly and make sure that you are not including things in severance agreements or client settlement agreements that the SEC has said are illegal. And if you receive a subpoena from the SEC – regardless of what the SEC is investigating – make sure to hire an attorney with substantial experience in defending SEC matters who can apprise you of all your risks before you respond.

One of the most obvious examples of an unforced error is when financial services firms repeatedly ignore the directive from the SEC that they cannot prohibit clients, employees, or anyone else from reporting securities laws violations to the SEC, state regulators, or self-regulatory organizations. Pursuant to Dodd-Frank Act’s whistleblower protections, the SEC prohibits registrants, brokerage firms, and investment advisors from including such “anti-whistleblowing” prohibitions in settlement agreements with disgruntled investors, as well as in employment agreements, separation agreements and settlement agreements with current or former employees. See https://www.sec.gov/enforcement-litigation/whistleblower-program/whistleblower-protections#anti-retaliation.  Specifically, pursuant to the Dodd-Frank Act, the SEC in 2011 adopted Securities Exchange Act Rule 21F-17(a), which provides:

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 … with respect to such communications.

Despite this Rule and the SEC’s well-publicized cases enforcing the Rule, firms continue to punish employees for reporting securities violations to governmental authorities. See /blog/supreme-court-protects-whistleblowers/. See also https://www.sec.gov/files/litigation/admin/2023/33-11196.pdf (settlement with Gaia, Inc. and its CFO for violations of Rule 21F in May 2023, including firing whistleblower purportedly for making “unfounded complaints”); SEC v. GPB Capital Holdings, LLC et al., No. 21-cv-583 (E.D.N.Y. filed February 4, 2021), https://www.sec.gov/enforcement-litigation/litigation-releases/lr-25909 (complaint filed against investment advisor and several related entities and individuals for, inter alia, firing and taking other adverse action against whistleblower; court later appointed a receiver over the companies).

And it’s not just retaliating against employee-whistleblowers that can get companies in trouble. Some firms still include anti-whistleblowing provisions in employment agreements or separation agreements with prospective and former employees. On September 9, 2024, the SEC announced settlements with seven public companies for using agreements that violated the rule prohibiting firms from impeding potential whistleblowers from reporting potential misconduct to the SEC. https://www.sec.gov/newsroom/press-releases/2024-118. In this most recent instance, the firms required employees to waive their rights to disclose information or file a complaint with a governmental or regulatory body, and to waive their rights to any possible whistleblower monetary awards in hundreds of employment agreements, separation agreements, retention agreements, and settlement agreements. While the SEC did not allege that the companies had taken actions to enforce the waivers, the SEC takes the position that these waivers, while unenforceable in a court of law, still discourage employees and ex-employees from engaging in entirely legal conduct. In total, the seven companies agreed to pay more than $3 million combined in civil penalties. This is an expensive unforced error.

Just a couple of weeks later, the SEC announced that Florida advisory firm GQG Partners LLC agreed to a cease-and-desist order and to pay $500,000 in civil penalties for requiring one former and a dozen prospective employees over three years to agree to non-disclosure agreements limiting their ability to voluntarily report potential illegality to the SEC. See https://www.sec.gov/newsroom/press-releases/2024-150. The agreements these employees/prospective employees signed permitted them to respond to requests for information from the SEC but not affirmatively reach out and contact the SEC. That too is illegal. 

Similarly, firms continue to include these anti-whistleblowing/confidentiality provisions in arbitration settlement agreements to discourage or impede settling investors from reporting violations. See, e.g., In the Matter of Nationwide Planning Associates, Inc., NPA Asset Management, LLC, and Blue Point Strategic Wealth Management, LLC, File No. 3-22056 (Sept. 4, 2024), https://www.sec.gov/files/litigation/admin/2024/34-100908.pdf (settlement with broker-dealer and investment advisor for confidentiality provisions barring clients settling claims for investment losses from reporting conduct to regulators); SEC v. Sanchez, et al., No. 24-cv-00939 (S.D. Tex.) (filed Mar. 14, 2024), https://www.sec.gov/files/litigation/complaints/2024/comp-pr2024-35.pdf (SEC alleged defendant told investors he would help them recover their investment losses “if they took back everything they said to the SEC”).

Perhaps some firms believe that because these types of anti-whistleblowing provisions are unenforceable makes them harmless. See In re JDS Uniphase Corp. Sec. Litig., 238 F. Supp. 2d 1127, 1136 (N.D. Cal. 2002) (party cannot enforce agreement against former or current employees to prevent them from providing information about party’s allegedly illegal activities); FTC v. AMG Services, Inc., 2:12-cv -00536-GMN-VCF, 2013 U.S. Dist. LEXIS 206720, at *7 (D. Nev. Aug. 20, 2013) (collecting cases) (confidentiality agreements are unenforceable to prohibit former employees from willingly cooperating with government investigations); Woodson v. Runyon, Civ. Action No. 13-4098, 2013 U.S. Dist. LEXIS 96833, at *14 (D.N.J. July 11, 2013) (“While a confidentiality agreement can be used to safeguard such matters as trade secrets, the ‘whistleblower-type information about allegedly unlawful acts’ does not fall into that category”). That is far from true. The SEC has been clear that it will bring actions against firms for including these provisions in agreements, regardless of whether the provisions are enforceable. As a result, it makes sense for firms to review all templates that in-house and outside counsel are using for settlement agreements, employment agreements, and separation/severance agreements to eliminate any restriction on anyone reporting any potential violation of securities laws or rules to the SEC as well as to state securities regulators and self-regulatory organizations like FINRA.

In addition to the penalties that these firms paid to the SEC, it is likely that the firms incurred substantial attorney’s fees during the SEC’s investigations. These are unforced errors that a review of existing templates for agreements could eliminate.

If you are facing an SEC or other governmental agency investigation, it is essential that you talk to an attorney with substantial experience representing individuals and firms in securities investigations before responding to the government.

Bragança Law LLC || February 10, 2024

In a unanimous opinion announced just Thursday of this past week, the United States Supreme Court rejected the attempt of securities industry players to remove a key protection for SEC whistleblowers. In the case Murray v. UBS, the Supreme Court reversed an opinion of the Second Circuit Court of Appeals, which we criticized on this website in June 2023 (https://www.secdefenseattorney.com/blog/new-risks-for-whistleblowers/), that had the potential to make it much easier for employers to retaliate against employees who reported employer wrongdoing to a regulator.

As we have explained in another post (https://www.secdefenseattorney.com/blog/what-should-a-potential-whistleblower-know-before-blowing-the-whistle/ ), the risks to current employees of becoming a whistleblower are substantial, including facing a very real risk of retaliation if they are not careful. If the Second Circuit ruling had been allowed to stand, it would have been virtually impossible for someone to blow the whistle on their current employer without facing financial ruin.

Who is a Whistleblower?

A whistleblower is an individual who exposes unlawful actions occurring in either the public or private sector by reporting them to the SEC or another government agency. To become a whistleblower, you must have specific credible information, based on independent knowledge or analysis, about violations of the federal securities laws that is not publicly available. To learn more about whistleblowing, check out our earlier posts. (https://www.secdefenseattorney.com/blog/new-risks-for-whistleblowers/ and https://www.secdefenseattorney.com/blog/what-should-a-potential-whistleblower-know-before-blowing-the-whistle/).

The SEC Office of the Whistleblower was established under the Dodd-Frank Act of 2010, which relied in part on the Sarbanes-Oxley Act of 2002 (”SOX”) to provide some protection for whistleblowers. Awards are limited to cases in which the SEC collects at least $1 million and the awards range between 10% and 30% of the amount collected. Any awards, however, are almost completely at the SEC’s discretion. In November 2023, the SEC announced that enforcement actions involving whistleblowers had resulted in financial remedies exceeding $6 billion since 2011, and that whisteblowers had been awarded more than $1 billion. (https://www.sec.gov/page/whistleblower-100million).

Retaliation claim in Murray v. UBS

In Murray v. UBS, the plaintiff Murray filed retaliation claims against his former employer, UBS. Murray was an independent analyst at UBS who reported efforts by his superiors to change the results of his reports to support UBS’s trading strategies, essentially sacrificing the best interests of investors to benefit UBS’s clients. Murray had previously received stellar performance reviews, but internal UBS emails revealed that Murray’s superiors decided to either fire him or move him to a different department where his reports could be altered without violating any SEC regulation. At trial, UBS claimed that Murray was not terminated for his reports, but rather as part of widespread layoffs because of the bank’s poor economic performance.

            District Court Jury Finds in Favor of Murray

The district court in Murray instructed the jury that to find that UBS terminated Murray “because of” his whistleblowing, it need only conclude that the whistleblowing was a “contributing factor” in his dismissal. UBS would then have the burden of disproving that its actions constituted retaliation. Indeed, this “burden-shifting” approach was settled law at the time. The jury sided with Murray reaching a verdict that UBS must pay $2.6 million in damages and attorney’s fees.

            UBS’s Appeal – Verdict is Reversed

UBS appealed, however, and the Second Circuit reversed the judgment in favor of Murray. The Second Circuit rejected what had previously seemed to be settled law, holding that it is not sufficient for an employee to merely demonstrate that their whistleblowing was a “contributing factor” to their employer’s actions. The employee must also prove the negative, i.e., that there was no non-retaliatory motive for the employer’s actions. Murray appealed the reversal to the Supreme Court, and on February 8, 2024, the Supreme Court reversed again, holding that the district court had applied the correct standard.

            U.S. Supreme Court Finds in Favor of Murray

In the unanimous opinion, written by Justice Sotomayor, the Court made short work of UBS’s argument that SOX required whistleblowers to demonstrate that the only motive for their termination (or other negative action taken against them) was to retaliate for their whistleblowing. Relying on the plain language of the statute, analogies to other employment statutes, and Congress’s clear intent, the Court held that once a whistleblower demonstrates that their protected activity (i.e., whistleblowing) was a “contributing factor” in the unfavorable personnel action, the burden shifts to the employer to prove that it would have taken the same action but for the protected activity. This is likely to result in the jury verdict being reinstated, but the case went back to the Second Circuit to apply the correct standard in reviewing the district court verdict.

How do you protect yourself?

It is essential that you talk to an attorney with substantial experience representing whistleblowers. To maximize the chances of getting an award and not getting fired, whistleblowers should contact such an attorney before submitting any tips to the SEC or reporting suspected misconduct to their employer or any government agency.

Update March 15, 2025: Second Circuit Renews its Rejection of Whistleblower’s Claim

Almost exactly a year after it was unanimously reversed by the Supreme Court as to the burden in proving retaliatory intent, the Second Circuit Court of Appeals held firm, finding a new reason to again reject a jury verdict in favor of the whistleblower. Stymied by the Supreme Court’s rejection of its earlier deviation from settled law, the Second Circuit took a different tack rejecting a different jury instruction – this time as holding that the instructions as to the term “contributing factor” were potentially ambiguous. The majority opinion is almost comical – as emphasized in a forceful dissent – essentially reading 6 words in isolation from the evidence presented and the other 5700 words in the jury instructions, but it’s extremely unlikely the Supreme Court will take the case once again.

So now Murray, who was fired by UBS in December 2011, will have to decide whether to move forward with his case. At this time, Murray is apparently considering filing a motion for rehearing by the full Second Circuit Court of Appeals, but such motions are rarely successful. Assuming the case goes back to the district court, and even assuming the district court expedites the scheduling of a new trial, it is extremely unlikely that would happen until at least next year.

In May 2023, the Securities and Exchange Commission announced a record $279 million award to a whistleblower for providing “invaluable assistance” in a successful SEC enforcement action. Other than the fact that it was making the award, the SEC has not provided many details as to the circumstances surrounding this award. The SEC has only said the assistance involved multiple targets.¹

The SEC uses these large awards as an incentive to encourage people to report potential misconduct through its whistleblower program. While this latest award dwarfs the previous largest whistleblower award ($114 million in October 2020), large awards are still quite uncommon.

There are significant reasons for potential whistleblowers to hesitate, however, before talking to the SEC. For a discussion of the potential pros and cons of becoming a whistleblower, and advice on how to find the proper attorney to help you navigate the process, see our recent post (/blog/what-should-a-potential-whistleblower-know-before-blowing-the-whistle/). In that post, we lay out the risks of becoming a whistleblower and the potential benefits.

The risks to current employees of becoming a whistleblower are substantial. If a current employee is not careful in reporting employer misconduct, they risk retaliation from their employer which can be financially ruinous. A recent case may increase that risk to current employees.

What is a whistleblower?

A whistleblower is an individual who exposes unlawful actions occurring in either the public or private sector by reporting them to the SEC or another government agency. A whistleblower can be a current employee, a former employee, or someone completely outside the company. What you need to have as a whistleblower is specific credible information about violations of the federal securities laws that is not publicly available. The tip has to be based on your independent knowledge or independent analysis. In some cases, the analysis of outside individuals has been so valuable to the SEC in identifying fraud that the SEC has awarded a whistleblower award, even though the analysis was of publicly-available information.

What are the potential challenges a whistleblower can face?

The Dodd-Frank Act of 2010 created the whistleblower award system, and provided that, depending on the relevant employee’s terms of employment, an employer could require that any claim of retaliation be decided in private arbitration, rather than a court of law. In those cases, an employee who thinks they were terminated or unfairly disciplined because of whistleblowing may have bring their retaliation claim via arbitration. Many employees in the financial services industry may be forced to bring retaliation claims in FINRA arbitration. In addition to the Dodd-Frank Act, the Sarbanes-Oxley Act of 2002 (”SOX”) also provides some protection for whistleblowers. Those SOX provisions may allow individuals to have their day in court even when they are subject to arbitration clauses.

Murray v. UBS, a case in the United States District Court for the Southern District of New York, presented just such a mixed result. Murray filed retaliation claims against his former employer in court. His employer, UBS, sought to have those claims heard in FINRA arbitration. The court reached a split decision. The court held that Murray’s Dodd-Frank claims had to be determined in arbitration, but it allowed Murray to pursue his separate SOX claims in court. This reveals how complex the law is concerning protections for whistleblowers.

The facts of Murray’s case are instructive. Murray was an independent analyst at UBS who reported efforts by his superiors to change the results of his reports to support UBS’s trading strategies. He essentially claimed that UBS was sacrificing the best interests of investors to benefit UBS’s clients. Murray had previously received stellar performance reviews, but internal UBS emails revealed that Murray’s superiors decided to either fire him or move him to a different department where his reports could be altered without violating any SEC regulations. At trial, UBS claimed that Murray was terminated as part of widespread layoffs based on the bank’s poor economic performance and not for his reports.

The district court in Murray instructed the jury that to find that UBS terminated Murray “because of” his whistleblowing, it need only conclude that the whistleblowing was a “contributing factor” in his dismissal. In that case, UBS would have the burden of disproving that its actions constituted retaliation. Indeed, this “burden-shifting” approach was settled law at the time. The jury sided with Murray, and the court ordered that UBS must pay $2.6 million in damages and attorney’s fees.

So what changed?

UBS appealed the jury verdict and the Second Circuit Court of Appeals reversed the judgment in favor of Murray. The Second Circuit rejected the settled law, and held that it is insufficient for an employee to merely demonstrate that their whistleblowing was a “contributing factor” to their employer’s actions. The Second Circuit held that an employee must also prove the negative, i.e., that there was no non-retaliatory motive for the employer’s actions. Murray appealed the reversal to the Supreme Court, and on May 1, 2023, the Court agreed to hear the case in its fall term.

Amicus briefs in support of Murray have been submitted by the consumer advocacy group Public Citizen and by the unlikely pair of Senators Grassley (R-Iowa) and Wyden (D-Oregon) of the Senate Whistleblower Protection Caucus. Both briefs highlight how the Second Circuit’s interpretation of SOX conflicts with the lower standard for proving retaliation that Congress intended to have apply when it enacted SOX. As the primary authors of the antiretaliation provisions of SOX, Senators Grassley and Wyden stated that the Second Circuit’s interpretation was not consistent with the purpose of SOX’s anti-retaliation provisions that lower the bar for employee-whistleblowers to prove retaliation.

How do you protect yourself?

Talking to an attorney experienced in dealing with the SEC or other regulatory agency BEFORE submitting a tip to the SEC is essential. For a potential whistleblower, this maximizes their options and ensures they can take full advantage of the antiretaliation protections of Dodd-Frank and SOX, particularly with the law currently in flux.

Your attorney should have substantial experience in securities law and representing whistleblowers. To maximize the chances of getting an award and not getting fired, whistleblowers should contact an attorney specializing in such claims before submitting any tips to the SEC or reporting suspected misconduct to their employer.

^{1 See https://www.sec.gov/rules/other/2023/34-97438.pdf. Although there has been some media speculation regarding the SEC investigation meriting this award, it will likely remain a mystery unless the whistleblower comes forward because the SEC scrupulously protects the anonymity of its whistleblowers.}

Who is a Whistleblower?

A whistleblower is someone who reports illegal activity in either the public or private sector to the Securities and Exchange Commission – the SEC – or other government agency. Before you report a violation of the law, consult an SEC whistleblower attorney to ensure that you have the maximum legal protection against any type of retaliation.

You are not required to be an employee of the company to submit a tip about that company.

The SEC relies on whistleblowers to detect violations of federal securities laws. Whistleblowers often help the SEC find fraud and other crimes sooner than the agency would have discovered itself, and can provide valuable information in a useful format.

What are a Whistleblower’s Rights?

After the recession of 2007-2009, Congress passed and President Obama signed into law a set of federal statutes that provide substantial incentives for whistleblowers to share information on illegal activity that may have an impact on the offer, purchase or sale of securities. Securities include financial instruments such as stocks, bonds, warrants, notes and options for private or public companies.

A tip to the SEC can be original, pertinent information about insider trading, foreign bribery, fraud in offerings, accounting fraud, market manipulation, Ponzi or pyramid schemes, false statements in financial filings, and more. It does not matter if the illegal activity has or has not personally affected you. In some cases, a tip can be valuable information that substantially assists the SEC in an ongoing investigation. But you must have independent knowledge or do independent analysis for it to qualify as a whistleblowing tip.

Can Whistleblowers Be Compensated?

If a whistleblower reports valuable non-public details about illegal activity to the SEC, and if that report results in a recovery of more than $1 million, the whistleblower may receive from 10 – 30% of whatever is recovered.

In 2022, more than 100 whistleblowers received approximately $229 million. One whistleblower was awarded $32 million for a single tip. In that year, however, the SEC received more than 12,300 whistleblower tips. So most tips do not result in whistleblower awards. Even when a tip does result in an enforcement action, the SEC retains the discretion to determine the amount of the award. This underscores the need for help from an experienced SEC whistleblower attorney before submitting your tip.

When Should Someone Blow the Whistle?

Many whistleblower laws include deadlines, so you should contact a whistleblower attorney and report illegal activity as quickly as possible after you become aware of the illegal activity. Moreover, if you are seeking a monetary reward, the amount of time between your awareness of illegal activity and your reporting will play a part in determining your award amount.

A whistleblower attorney will examine your claim, take the appropriate action on your behalf, and explain your prospects for compensation. The amount you may receive depends on how valuable the SEC staff considers your information to be.

What Else Should Potential Whistleblowers Know?

Choosing to blow the whistle on a possible securities law violator is a serious decision, and whistleblowers often need to get advice that what they have witnessed or learned is in fact illegal. You should seek an attorney’s advice to determine what actions are legal and illegal. It is not a good idea to file lots of tips with the SEC.

It is also not a good idea to file unjustified claims for whistleblower awards. The SEC will permanently bar a person from the Whistleblower Program if they submit three or more frivolous claims for awards that lack a colorable connection between the tip and the actions for which the whistleblower is seeking an award.

The SEC Office of the Whistleblower takes very seriously the confidentiality of the information submitted as tips and the identity of those submitting tips. But, the best way to keep your identity confidential is to anonymously submit a whistleblower tip through an attorney. That is the only way to submit an anonymous tip.

How are Whistleblower Awards Determined?

The SEC considers a number of factors when it determines the compensation amount that a whistleblower may receive. That amount is determined by the unique circumstances and details of each case. The SEC may boost a whistleblower award based on:

•  the importance of a whistleblower’s information
•  the extent of a whistleblower’s assistance
•  the extent of a whistleblower’s contribution to a successful prosecution
•  whether the whistleblower participated in a company’s internal compliance or reporting system

However, a whistleblower’s award may be decreased if the whistleblower:

•  has participated personally in the illegal activity
•  has unreasonably delayed the reporting of the illegal activity
•  has made any false statements that impeded the investigation of the illegal activity

The most common reason for reducing awards is delay so it is important to contact a whistleblower attorney as quickly as possible.

How Do You Choose the Right Attorney?

A potential whistleblower should select an attorney who knows the Securities and Exchange Commission well and who has abundant experience representing clients in SEC-related matters. Such an attorney will help you present a comprehensive and well-researched tip to the SEC.

Your whistleblower attorney should have substantial experience in securities law, accounting fraud, and other types of securities fraud. You will be in the best possible position if your whistleblower attorney is already known to – and has established credibility with – the SEC, or if your whistleblower attorney has actual experience working for or with the Securities and Exchange Commission.

In order to give yourself the best chance of receiving a whistleblower award before you blow the whistle on a possible securities law violator, or if you need to learn more about a securities whistleblower’s legal rights and options, contact an SEC whistleblower attorney before submitting a tip to the SEC.