SEC Combats Corporate Retaliation Against Whistleblowers
September 20, 2024
Since the Dodd-Frank Act was enacted in the United States in 2010, the role of whistleblowers has proven crucial in helping authorities prevent fraud, bribery, and other legal violations. This is because the government lacks the personnel and resources to efficiently monitor the market on its own.
On the other hand, it is no surprise that the United States leads the world in having one of the most sophisticated and well-structured compliance systems. Unlike in other countries, serious misconduct within a company is often more likely to be exposed by whistleblowers from within. Therefore, it is not enough to merely have a code of ethics and a handful of policies if the company’s compliance is ineffective, and employees are not clearly informed about what constitutes proper conduct and the consequences of misconduct. Without strong compliance, a company risks facing serious issues with authorities, potentially damaging both its finances and reputation.
On September 9, 2024, the Securities and Exchange Commission (SEC) announced charges against seven companies for allegedly using agreements to alter employment contracts, severance packages, and other measures that violated anti-retaliation rules. These actions aimed to prevent whistleblowers from reporting potential misconduct to SEC. In contrast, one of the core principles of the Dodd-Frank Act’s whistleblower provisions are safeguards against retaliation by the company.
Thus, SEC has civilly penalized the following companies for a total of more than $3 million:
Company
Penalty Amount
1. Acadia Healthcare Company, Inc.
US$ 1,386,000.00
2. Brands Holding Corp.
US$ 399,750.00
3. AppFolio, Inc.
US$ 692,250.00
4. Idex Corporation
US$ 75,000.00
5. LSB Industries
US$ 156,000.00
6. Smart for Life, Inc.
US$ 19,500.00
7. TransUnion
US$ 312,000.00
Whistleblower Protection Rules
Anyone who reads the Dodd-Frank Act may be surprised by its length, which rivals that of large legal codes, such as Brazil’s civil code.
All provisions related to whistleblower protection are contained in Section 922 of the Act, which serves as a model for many countries that wish to implement whistleblower protections but have not yet established the necessary guarantees for informants to perform their role effectively, as in in Brazil and France. Thus, it is clear that, at least in these two countries, the concept of a whistleblower exists in law, but in practice, it’s ineffective: without proper state-backed incentives and protections, individuals are unlikely to risk their jobs to report wrongdoing.
In addition to Section 922, the SEC has issued Rule §240 21F-17(a), which prohibits anyone from taking actions that would prevent a whistleblower from directly contacting the SEC to report potential securities law violations.
Both of these provisions will be discussed in more detail in a future article.
The Role of the Whistleblower in Brazil
In Brazil, the concept of the whistleblower was codified into law through the anti-crime package introduced by former Minister Sérgio Moro. Law #13,964, enacted on December 24, 2019, established the following provisions:
Topic
Definition
Identity Protection
Whistleblowers have the right to have their identity
preserved, which will only be disclosed in cases of
significant public interest or when essential for the
investigation. Any disclosure of identity will occur only
after notifying the whistleblower and obtaining their
formal consent.
Whistleblower Protections
In addition to the protective measures provided under
Law #9,807 of July 13, 1999
(Threatened Victims and Witnesses Protection Act),
whistleblowers are protected against actions or omissions
made in retaliation, such as arbitrary dismissal,
unjustified changes in roles or attributions, sanctions,
financial or material losses, withdrawal of direct or
indirect benefits, or refusal to provide positive
references.
Who to Report
The federal government, states, Federal District,
municipalities, as well as their autonomous agencies,
foundations, public companies, and mixed-economy companies,
must maintain an ombudsman or oversight unit to allow
individuals to report crimes against public
administration, administrative offenses, or any acts or
omissions harmful to public interest
Consequences of Retaliation
Retaliatory actions or omissions against whistleblowers
constitute serious disciplinary offenses and can lead to
dismissal in the interest of public service. Whistleblowers
are entitled to double compensation for any material
losses caused by such retaliation, as well as
compensation for emotional distress.
Whistleblower Reward
When the information provided by a whistleblower leads to
the recovery of proceeds from a crime against public
administration, the whistleblower may receive a reward of up
to 5% of the recovered amount.
As shown above, several deficiencies discourage whistleblowers in Brazil from coming forward. The following table illustrates these issues:
Topic
Deficiency
Identity Protection
Revealing the identity of a whistleblower is a
significant error. Although lawmakers have attempted to
require formal consent, in a high-pressure environment,
authorities can coerce whistleblowers into agreeing under
threat. Once their identity is exposed, ensuring their
safety becomes nearly impossible.
Who to Report
The lack of a centralized agency and reliance on various
ombudsman offices poses a serious issue, as these offices
are not equipped to offer sufficient protections to
whistleblowers.
Consequences of Retaliation
While lawmakers have classified retaliation against
whistleblowers as a serious offense, leading to dismissal
for the public good, this primarily applies to public
service employees. However, retaliation is more likely to
come from the private company where the whistleblower
works. By focusing only on the public sector, the state
misses the opportunity to expand oversight to the private
sector without needing additional resources or personnel.
Whistleblower Reward
Limiting whistleblowing to crimes against public
administration significantly weakens the potential to
improve market integrity. Furthermore, offering only 5%
of the recovered amount is insufficient to justify the
risks involved in making a report; although rewarding
whistleblowers is not common practice in Brazil. However,
there is still time to change and enhance this system.
Since the Dodd-Frank Act was enacted in the United States in 2010, the role of whistleblowers has proven crucial in helping authorities prevent fraud, bribery, and other legal violations. This is because the government lacks the personnel and resources to efficiently monitor the market on its own.
On the other hand, it is no surprise that the United States leads the world in having one of the most sophisticated and well-structured compliance systems. Unlike in other countries, serious misconduct within a company is often more likely to be exposed by whistleblowers from within. Therefore, it is not enough to merely have a code of ethics and a handful of policies if the company’s compliance is ineffective, and employees are not clearly informed about what constitutes proper conduct and the consequences of misconduct. Without strong compliance, a company risks facing serious issues with authorities, potentially damaging both its finances and reputation.
On September 9, 2024, the Securities and Exchange Commission (SEC) announced charges against seven companies for allegedly using agreements to alter employment contracts, severance packages, and other measures that violated anti-retaliation rules. These actions aimed to prevent whistleblowers from reporting potential misconduct to SEC. In contrast, one of the core principles of the Dodd-Frank Act’s whistleblower provisions are safeguards against retaliation by the company.
Thus, SEC has civilly penalized the following companies for a total of more than $3 million:
Company
Penalty Amount
1. Acadia Healthcare Company, Inc.
US$ 1,386,000.00
2. Brands Holding Corp.
US$ 399,750.00
3. AppFolio, Inc.
US$ 692,250.00
4. Idex Corporation
US$ 75,000.00
5. LSB Industries
US$ 156,000.00
6. Smart for Life, Inc.
US$ 19,500.00
7. TransUnion
US$ 312,000.00
Whistleblower Protection Rules
Anyone who reads the Dodd-Frank Act may be surprised by its length, which rivals that of large legal codes, such as Brazil’s civil code.
All provisions related to whistleblower protection are contained in Section 922 of the Act, which serves as a model for many countries that wish to implement whistleblower protections but have not yet established the necessary guarantees for informants to perform their role effectively, as in in Brazil and France. Thus, it is clear that, at least in these two countries, the concept of a whistleblower exists in law, but in practice, it’s ineffective: without proper state-backed incentives and protections, individuals are unlikely to risk their jobs to report wrongdoing.
In addition to Section 922, the SEC has issued Rule §240 21F-17(a), which prohibits anyone from taking actions that would prevent a whistleblower from directly contacting the SEC to report potential securities law violations.
Both of these provisions will be discussed in more detail in a future article.
The Role of the Whistleblower in Brazil
In Brazil, the concept of the whistleblower was codified into law through the anti-crime package introduced by former Minister Sérgio Moro. Law #13,964, enacted on December 24, 2019, established the following provisions:
Topic
Definition
Identity Protection
Whistleblowers have the right to have their identity
preserved, which will only be disclosed in cases of
significant public interest or when essential for the
investigation. Any disclosure of identity will occur only
after notifying the whistleblower and obtaining their
formal consent.
Whistleblower Protections
In addition to the protective measures provided under
Law #9,807 of July 13, 1999
(Threatened Victims and Witnesses Protection Act),
whistleblowers are protected against actions or omissions
made in retaliation, such as arbitrary dismissal,
unjustified changes in roles or attributions, sanctions,
financial or material losses, withdrawal of direct or
indirect benefits, or refusal to provide positive
references.
Who to Report
The federal government, states, Federal District,
municipalities, as well as their autonomous agencies,
foundations, public companies, and mixed-economy companies,
must maintain an ombudsman or oversight unit to allow
individuals to report crimes against public
administration, administrative offenses, or any acts or
omissions harmful to public interest
Consequences of Retaliation
Retaliatory actions or omissions against whistleblowers
constitute serious disciplinary offenses and can lead to
dismissal in the interest of public service. Whistleblowers
are entitled to double compensation for any material
losses caused by such retaliation, as well as
compensation for emotional distress.
Whistleblower Reward
When the information provided by a whistleblower leads to
the recovery of proceeds from a crime against public
administration, the whistleblower may receive a reward of up
to 5% of the recovered amount.
As shown above, several deficiencies discourage whistleblowers in Brazil from coming forward. The following table illustrates these issues:
Topic
Deficiency
Identity Protection
Revealing the identity of a whistleblower is a
significant error. Although lawmakers have attempted to
require formal consent, in a high-pressure environment,
authorities can coerce whistleblowers into agreeing under
threat. Once their identity is exposed, ensuring their
safety becomes nearly impossible.
Who to Report
The lack of a centralized agency and reliance on various
ombudsman offices poses a serious issue, as these offices
are not equipped to offer sufficient protections to
whistleblowers.
Consequences of Retaliation
While lawmakers have classified retaliation against
whistleblowers as a serious offense, leading to dismissal
for the public good, this primarily applies to public
service employees. However, retaliation is more likely to
come from the private company where the whistleblower
works. By focusing only on the public sector, the state
misses the opportunity to expand oversight to the private
sector without needing additional resources or personnel.
Whistleblower Reward
Limiting whistleblowing to crimes against public
administration significantly weakens the potential to
improve market integrity. Furthermore, offering only 5%
of the recovered amount is insufficient to justify the
risks involved in making a report; although rewarding
whistleblowers is not common practice in Brazil. However,
there is still time to change and enhance this system.
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Licks’ Blog provides regular and insightful updates on Brazil’s political and economic landscape. The posts are authored by our Government Affairs & International Relations group, which is composed of experienced professionals from different backgrounds with multiple policy perspectives.
Licks Attorneys is a top tier Brazilian law firm, speciallized in Intellectual Property and recognized for its success handling large and strategic projects in the country.
ABOUT US
Licks Attorneys Compliance’s Blog provides regular and insightful updates about Ethic and Compliance. The posts are authored by Alexandre Dalmasso, our partner. Licks Attorneys is a top tier Brazilian law firm, specialized in Intellectual Property and recognized for its success handling large and strategic projects in the country.
QUEM SOMOS
O blog Licks Attorneys Compliance fornece atualizações regulares e esclarecedoras sobre Ética e Compliance. As postagens são de autoria de Alexandre Dalmasso, sócio do escritório. O Licks Attorneys é um escritório de advocacia brasileiro renomado, especializado em Propriedade Intelectual e reconhecido por seu sucesso em lidar com grandes e estratégicos cases no país.
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