by Stephen M. Kohn, Alyce Petit, Kate Reeves, and Geoff Schweller
Left to Right: Stephen M. Kohn, Alyce Petit, Kate Reeves and Geoff Schweller (photos courtesy of authors)
Corporate whistleblowers who report through internal compliance channels face higher rates of retaliation than those who report externally to the government, according to research published in a working paper on the Social Science Research Network (SSRN).
An analysis of 8-years worth of Dodd-Frank Act and Sarbanes-Oxley Act (SOX) whistleblower retaliation cases found that over 90% of the cases involved internal whistleblowers.
These findings are of particular importance in light of Congressional efforts to amend the Dodd-Frank Act to extend anti-retaliation protections for internal whistleblowers. They also validate the importance of regulations by the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) that explicitly do not require whistleblowers to make internal reports prior to qualifying for a reward under the Dodd-Frank.
Background
The Dodd-Frank Act and SOX have anti-retaliation protections for whistleblowers who engage in protected activities under these two laws. The laws overlap as they are both primarily designed to protect employees in public companies who report violations of securities and related laws. These two laws are the major “Wall Street” whistleblower protection laws, and employees can be covered under both laws for similar types of disclosures.
The SOX statute directly protects whistleblowers who report either internally or externally to a wide range of government entities and the U.S. Congress. Until the Supreme Court’s 2018 decision in Digital Realty Trust, Inc. v. Somers, the SEC and most federal courts also believed that Dodd-Frank fully protected internal whistleblowers.
In Digital, however, the Supreme Court ruled that to be a “whistleblower” protected under the Dodd-Frank Act, an individual must make their disclosure directly to the SEC. This ruling in effect stripped internal whistleblowers of Dodd-Frank’s robust anti-retaliation protections.
Before the Court’s decision, whistleblower advocates, members of Congress and the SEC all filed amicus curiae briefs arguing that removing protections for internal whistleblowers would both expose whistleblowers to retaliation and undermine corporate compliance programs.
Since the Digital ruling, whistleblower advocates and members of Congress have been calling for new legislation to restore Dodd-Frank protections for internal whistleblowers.
Research Findings
Our paper compiled eight years worth (2010-2018) of reported decisions in Dodd-Frank and SOX whistleblower cases. Regardless of whether the employee-whistleblower relied on the protections offered under SOX or Dodd-Frank (or both), the publicly available reported cases were reviewed to determine what “protected” conduct an employee alleged that he or she engaged in as a precondition for legal protection. The facts set forth in each decision were reviewed to determine whether the employee was retaliated against based solely on reporting internally, based solely on going to a government agency or was retaliated against based on both behaviors.
We created two subsets of cases. Criteria for inclusion in the first set was simply that the reporting behavior was made clear in the public record. This set included 102 cases. The second subset was limited to cases where there was a merits-determination that the whistleblower was subject to illegal retaliation covered under SOX or Dodd-Frank. This set was made up of 19 retaliation cases.
An examination of the reporting behaviors in the larger subset of 102 cases found that 91% of the cases featured whistleblowers retaliated against solely for blowing the whistle internally. 5% of the cases involved a whistleblower who was retaliated against solely for blowing the whistle externally to the government and 4% involved whistleblowers retaliated against for dually reporting internally and externally.
An examination of the smaller subset of the 19 “meritorious” cases likewise found that 18 of the cases (95%) featured internal whistleblowers while 1 case featured a whistleblower who was retaliated against for reporting both internally and externally. None of the cases featured exclusively external whistleblowers.
The data is clear that a vast majority of corporate whistleblower retaliation cases stem from employees reporting internally as opposed to externally through government channels.
Reforms to Internal Whistleblower Protections
The overwhelming representation of internal whistleblowers in retaliation cases presents to policy makers a clear picture of the extreme risks faced by employees who try to do the right thing by reporting wrongdoing to their corporate employers. This risk is unnecessarily high and the data presented in this paper provides empirical support for Congress to amend Dodd-Frank and other whistleblower laws which exclude internal whistleblowers from anti-retaliation provisions.
Introduced in March 2023 by a bipartisan group of Senators, the SEC Whistleblower Reform Act of 2023 would restore Dodd-Frank anti-retaliation protections to internal whistleblowers by clarifying that individuals who make protected disclosures to supervisors or compliance officials at their employer are considered “whistleblowers” under the law.
This is a necessary reform. Dodd-Frank’s anti-retaliation provisions were passed in recognition that the threat of retaliation greatly undermined the effectiveness of whistleblower programs.
The data supports the position that the current Dodd-Frank protections leave the whistleblowers most likely to face retaliation out in the cold. Reextending anti-retaliation protections to internal whistleblowers not only protects the most vulnerable whistleblowers but helps bolster internal compliance programs, for under the current state of protections employees are understandably wary of reporting internally.
In addition to reforming the Dodd-Frank Act, the data supports calls for reforming other whistleblower laws which do not adequately protect internal whistleblowers. For example, under the anti-money laundering whistleblower laws, employees at FDIC insured financial institutions can be terminated, at-will based on internal whistleblowing.
Beyond supporting reform efforts, these research findings validate certain regulations and statutes on corporate whistleblower eligibility and reporting channels. Given the dangers of reporting internally, the data supports the SEC and CFTC’s decisions to implement rules which do not require whistleblowers to report internally in order to qualify for whistleblower awards. Furthermore, the data validates the decision made by Congress to permit anonymous and confidential reporting under the Dodd-Frank, the Bank Secrecy Act, and anti-money laundering whistleblower laws as the anonymity provisions of Dodd-Frank seems to have helped lessen retaliation against external whistleblowers.
Stephen M. Kohn is a Founding Partner at Kohn, Kohn & Colapinto, an Adjunct Professor at Northeastern University School of Law, and Chairman of the Board of Directors at the National Whistleblower Center. Alyce Petit is a Kate Reeves is a Public Interest Law Clerk and Geoff Schweller is the Public Relations and Communications Coordinator at Kohn, Kohn & Colapinto. This blog post is a summary of the paper published by the authors on the Social Science Research Network (SSRN) with the same name.
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