Second Circuit extends whistleblower protections to cover individuals who report wrongdoing internally before reporting to the SEC.

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On September 10, 2015, the U.S. Court of Appeals for the Second Circuit ruled  that the whistleblower protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”) protects those individuals who report wrongdoings internally, prior to making a report to the Securities and Exchange Commission (“the SEC”), from retaliation by their employers.

The lawsuit involved Daniel Berman, former Finance Director of Neo@Ogilvy North America, who claimed he was fired because he reported accounting irregularities, including delayed payments and improperly recognized revenues, to his superiors. Berman was terminated in April 2013, made a report to the SEC in October 2013, and filed a civil suit in the United States District Court for the Southern District of New York in January 2014.

The issue was whether the Act protected Berman from retaliation by his employer even though he did not make a report to the SEC prior to his termination. The district court declined to provide Berman protection, dismissing the case and holding that in order for the Act to apply, an individual must first report suspected wrongdoing to the SEC. The Second Circuit reversed and remanded the matter for further proceedings, holding that the Act is ambiguous as to the issue of protection in this case and deferring to the SEC’s interpretive rule, which provides protection to individuals in Berman’s situation.

The anti-retaliation provisions of the Act provide protection only to individuals who report information “to the Commission,” Previously, this provision applied only to those who reported wrongdoing to the SEC before any retaliation by their employer. However, the Court determined that when this provision is read in conjunction with the Sarbane Oxley Act of 2002, which provides protections for certain types of internally reported disclosures relating to accounting practices, parties in Berman’s situation would be protected despite failing to notify the SEC prior to retaliation.

The Court’s interpretation, which is in alignment with the SEC’s, will allow employees who report suspected wrongdoings to their employer to be protected from retaliation by their employer even if they have not made any report to the SEC. In making its decision, the Court acknowledged that many employees make preliminary internal reports because they are required to by contract, or because they consider preliminary internal reporting a safer and more effective avenue for change. Without widening the scope of protection from retaliation to include preliminary internal reporting, the Court determined that the purpose of the Act would be severely limited.

There is a split in courts across the country regarding this issue. Some courts have followed the Second Circuit’s approach, while others have ruled that the Act should be strictly construed. Strict construction, according to these courts, mandates that only parties who report wrongdoing to the SEC prior to retaliation should be protected. The split among circuits could make this issue ripe for Supreme Court review in the near future.

Francis P. Karam, Esq. P.C. currently represents one of the original whistleblowers to file a claim under the Dodd-Frank Act, and has extensive expertise in representing whistleblowers and other witnesses to corporate fraud. For more information, please contact our office.

Francis P. Karam Named one of “Legal Who’s Who of 2014″ by Corporate Responsibility Magazine

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Corporate Responsibility Magazine chose Frank Karam as one of the “best and brightest in the legal community” listed on the magazine’s Legal Who’s Who of 2014. Nominees where chosen from the three practice areas of securities, employment law, and environmental law. Many lawyers made the list for their participation in litigating major, high impact cases. The magazine also reached out to a panel of business people and asked them to nominate outstanding lawyers they have worked with. Franks Karam was chosen for his work in Confidential Witness defense in the case City of Pontiac General Employees’ Retirement System v. Lockheed Martin Corp.

For the full article see: http://www.thecro.com/files/LegalWho.pdf

SEC Protects Whistleblowers Against Restrictive Language in Confidentiality Agreements

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The Securities and Exchange Commission (“SEC”) continues to take strides to protect whistleblowers.[1] On April 1, 2015 the SEC announced its first enforcement action against a company for using “improperly restrictive language” in agreements. The SEC determined language in the agreements had the potential to stifle whistleblowing in violation of the whistleblower protection provisions of the Dodd-Frank Act regulations.

Technology and engineering firm KBR, Inc. required witnesses in certain investigations interviews to sign confidentiality statements. These confidentiality statements stated that the witness could face disciplinary action, including termination, if they discussed matters of the investigation with outside parties without prior approval from KBR’s legal department. The SEC found these terms were in violation of Rule 21F-17, which forbids companies from taking any action that could interfere with a whistleblower reporting possible violations to the SEC.

Although it appears that there were no specific occurrences of KBR preventing employees from reaching out to the SEC about specific securities laws violations, the SEC determined that the company’s provisions in the confidentiality statements had the potential to deter whistleblowing. Along with a $130,000 fine, KBR Inc. has agreed to amend its confidentiality statements, and to add language to clarify to employees that they are free to report possible violations of federal law or regulations to the SEC and other federal or government agencies without any prior approval.

Employers who use such agreements should be aware of how the Dodd-Frank Act is being enforced and how to draft confidentiality agreements and other employee contracts that are compliant with the SEC’s Rules. Language should reflect that employees are free to report securities violations to the SEC or other government agencies.

Employees who have signed such agreements should be aware of language that may be in violation of the Dodd-Frank Act or SEC Rules. Employees should also be aware that regardless of language in such agreements, they can and should contact the SEC or other government agencies regarding possible securities violations without the fear of retaliation by their employer.

Francis P. Karam, Esq. P.C. currently represents one of the original whistleblowers to file a claim under the Dodd-Frank Act, and has extensive expertise in representing whistleblowers and other witnesses to corporate fraud. For more information, please contact our office.

[1] When an employee notifies the government of a wrongdoing by their employer, they are a whistleblower.

Employee versus Independent Contractor

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Are You an Employee or An Independent Contractor?

 

According to the IRS website, a Form SS-8 is filed to request a determination of the status of a worker under the common law for purposes of employment taxes and tax withholding. The IRS states that the common law rule is that a worker is an employee if the business has the right to control what will be done and how it will be done.

 

“Under the [New York Labor Law], the critical inquiry in determining whether an employment relationship exists pertains to the degree of control exercised by the purported employer over the results produced or the means used to achieve the results. Relevant factors include whether the worker (1) worked at his own convenience, (2) was free to engage in other employment, (3) received fringe benefits, (4) was on the employer’s payroll and (5) was on a fixed schedule. A plaintiff’s tax status, while probative, is not determinative. Plaintiffs’ tax filings are plainly relevant to the independent contractor versus employee inquiries . . . but they do not preempt the inquiries altogether. Also relevant is the manner in which an individual is compensated: salary- and hourly-based wages are generally indicative of an employee relationship, while commission-based wages weigh in favor of an independent contractor relationship.” Griffith v. Fordham Fin. Mgmt., 2015 U.S. Dist. LEXIS 30869, 6-7 (S.D.N.Y. Mar. 12, 2015) (internal citations and quotations omitted)

 

According to the Employer’s Supplemental Tax Guide, published by the IRS, an examination of the relationship between the worker and the business determines how the worker is classified. All information providing evidence of the degree of control and independence must be considered.

 

The IRS breaks evidence down into three categories: Behavioral Control, Financial Control, and the Type of Relationship of the parties.

 

  • Behavioral Control: Facts showing whether the business has the right to direct/control how the worker does the task they were hired to do. The key consideration is whether the business retains the right to control the details of a worker’s performance or has given up that right.
    • Examples include instructions given to the worker about when and where to work, what equipment to use, who to hire for assistance, where to buy supplies, what order or sequence to follow
    • Generally, employees are trained to do tasks a certain way, and independent contractors use their own methods
  • Financial Control: Facts showing whether the business controls the business aspects of the worker’s job
    • Examples:
      • Extent to which the worker has unreimbursed business expenses – independent contractors usually do
      • Extent of the worker’s investment – a significant investment is not necessary for independent contractor status
      • Extent to which the worker is able to seek out alternate business opportunities and make their services available to the relevant market – independent contractors are generally able to advertise and work for other employers in the relevant market
      • How the worker is paid – employee is guaranteed a regular wage amount, an independent contractor is often paid a flat fee or on a time/materials basis. Commission supplements on regular wages do not automatically make a worker an independent contractor
      • Extent to which worker can realize a profit or loss – Independent contractor can make a profit or loss
  • Type of Relationship: Facts showing the type of relationship include any written contracts describing the relationship the parties intend to create, whether or not the worker gets employee-type benefits from the business, permanency of the relationship (an indefinite engagement is generally evidence of an employee relationship), extent to which services performed by the worker are a key aspect of the regular business of the company

 

If you are an employer facing a Complaint made to the IRS by a worker regarding their working status, or a worker who is being categorized wrongfully by your employer, contact Francis P. Karam, Esq. PC today at (212)489-3900.

New York Attorney General Proposes Financial Frauds Whistleblower Act

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The Securities and Exchange Commission has reportedly launched an investigation seeking to determine whether several companies are attempting to suppress corporate whistleblowers. The SEC recently sent letters to several undisclosed companies requesting years of nondisclosure agreements, employment contracts and other documents as part of this investigation, according to Reuters.

The 2010 Dodd-Frank Act gave the SEC the power to provide monetary awards, retaliatory protection, and confidentiality protection to individuals who voluntarily provide original information which leads to successful enforcement actions resulting in monetary sanctions over $1,000,000 – or whistleblowers. The Act further prohibits retaliation by employers against an employee who reports possible wrongdoing.

There has been a push for programs similar to the SEC’s to be enacted, and New York may become the first state to comprehensively do so. On February 26, New York Attorney General Eric T. Schneiderman announced that legislation seeking to protect whistleblowers that report illegal activity in banking, insurance, and financial services industries will be introduced in Albany. The Financial Frauds Whistleblower Act calls for a compensation system similar to that employed by the SEC – any whistleblower whose tip leads to more than $1 million in penalties or settlement proceeds would receive a reward. It would also provide confidentiality and retaliation protection to whistleblowers.

While the Financial Frauds Whistleblower Act would be the first program of its kind to apply to the financial industry in New York, the state already has a similar incentive-based program for citizens who report abuses of taxpayer funded state expenditures. Since the New York State False Claims Act program was introduced in 2010, financial recoveries in cases brought based on information from whistleblowers have paid out 80% more than cases originating from other investigations within the Taxpayer Protection Bureau.

Mr. Karam currently represents one of the original whistleblowers to file a claim under the Dodd-Frank Act, and has extensive expertise in representing whistleblowers and other witnesses to corporate fraud. For more information, please contact our office.

To see the Attorney General’s February 26 Press Release, click here.

SEC Releases Annual Whistleblower Report

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In November, the Securities and Exchange Commission published its annual report to Congress on the Dodd-Frank Whistleblower Program for the 2014 fiscal year. The report outlines several important milestones that occurred in 2014. Since the inception of the whistleblower program in 2011, a total of 14 individuals have received awards for. Nine of these awards were authorized in 2014 – more than all of the other years combined. The award amounts also increased in 2014; the Report cites to one individual who received a $30 million award for information provided. The SEC was also able to provide previous whistleblowers with additional payments as additional amounts were recovered in actions they helped bring to fruition.

The Dodd-Frank Act directed the SEC to provide monetary awards, retaliatory protection, and confidentiality protection to individuals who voluntarily provide original information which leads to successful enforcement actions resulting in monetary sanctions over $1,000,000 – or whistleblowers. Awards to whistleblowers must be made in an amount of 10%-30% of the monetary sanctions collected through the action. The Act further prohibits retaliation by employers against an employee who reports possible wrongdoing based on a reasonable belief that a securities violation has occurred, is occurring, or is about to occur.

Just this year, the SEC charged a company for its retaliatory actions for the first time. An employee reported information to the SEC regarding prohibited trading activities. Upon learning of the report, the employer demoted the employee and tasked him with investigating the report he had made, without giving him access to any of the information necessary to do so. The employer agreed to settle the claims of retaliation for $2.2 million. This case is important not only because it is the first time the SEC has pursued sanctions based on retaliation, but also because it illustrates an employee does not have to be terminated to have a viable retaliation claim.

Mr. Karam currently represents one of the original whistleblowers to file a claim under the Dodd-Frank Act, and has extensive expertise in representing whistleblowers and other witnesses to corporate fraud. For more information, please contact our office.

To see the SEC’s full report, click here.

 

The “Who Decides” Question in Class Arbitration

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The availability of class arbitration has become a heavily litigated topic. Courts and arbitrators alike have grappled with the “who decides” question. Namely – should a court or an arbitrator determine whether an issue is appropriate to proceed in arbitration as a class? This question will only surface if the contract at issue is silent or ambiguous as to class arbitration. Some contracts contain class arbitration waivers. Despite the availability of class action waivers, many parties continue to enter into contracts that are silent or ambiguous as to class arbitration.

The “who decides” question turns on whether class arbitration is a gateway or procedural matter. Gateway matters are substantive, for example whether parties have a valid arbitration agreement, and are reserved for the court. Procedural matters address how an arbitration will proceed, and should be decided by the arbitrator. In its plurality opinion in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), the Supreme Court held that the question of class arbitrability was a procedural matter for an arbitrator to decide. Notably, courts commenting on Green Tree have referred to it as not controlling because it is a plurality; however, in his concurrence Justice Stevens notes that in the absence of his concurrence, “there would be no controlling judgment of the Court.” Id. at 455.

In Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), the Supreme Court held that class arbitration could not be inferred from silence in a contract, but did not answer the “who decides” question due to a stipulation by the parties that there was no agreement as to class arbitration. In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court outlined the differences between class and bilateral arbitration, but once more declined to hold who should decide. In Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013), the Supreme Court approved class arbitration based upon an arbitrator’s finding of an implicit intent to allow class arbitration where a broad arbitration clause existed and the parties never expressly excluded class arbitration. However, the Court still has not squarely address the “who decides” issue.

In the absence of a clear holding by the Supreme Court, federal courts across the country have taken conflicting positions on the class arbitrability question. In a recent New Jersey case, Opalinski v. Robert Half Int’l, Inc., ___ F.3d ___, 2014 WL 3733685 (Jul. 30, 2014), an appellate court held that the question was for the district court. Earlier this year in New York, the Second Circuit held in In re A2P SMS Antitrust Litig., 2014 U.S. Dist. LEXIS 74062 (S.D.N.Y. May 29, 2014) that class arbitrability was a question for the arbitrator, not the court. The Second Circuit reasoned that class arbitrability is “an issue that simply pertains to the conduct of proceedings that are properly before the arbitrator.” Id. at 32.

Until the Supreme Court definitively answers the “who decides” question, federal courts will continue to interpret it in differing ways. The best way to avoid unpredictable results in litigation regarding class arbitration is to explicitly address the matter in a contract.