The SEC Uses Its Muscle To Prevent Retaliation Against Whistleblowers

The SEC, which administers the financial frauds whistleblower program created under the 2010 Dodd-Frank Act, has always been willing to put its might to work against companies that try to chill whistleblowers who report financial fraud. In 2015, for example, the SEC settled whistleblower allegations against Paradigm Capital Management and awarded the whistleblower a substantial sum to recognize the extent to which he suffered retaliation on the job for his courageous decision to report fraud. The SEC noted that it hoped that its action “encourages potential whistleblowers to come forward in light of our demonstrated commitment to protect them against retaliatory conduct.” To read more about this story, follow this link: https://www.sec.gov/news/pressrelease/2015-75.html. The SEC has consistently taken the view that because the whistleblower retaliation provisions are part of the Exchange Act, the SEC has enforcement authority for violations by employers who retaliate against employees for making reports of fraud under the law.

The SEC recently stepped up its game, extending its concerns not only to specific acts of retaliation, but to policies that might chill whistleblowers from reporting fraud. In August of 2015, the SEC announced that it had settled an enforcement action against Health Net, Inc., a California based health insurance provider who used its severance negotiations with departing employees to obtain agreements that they could not financially benefit from reporting fraud by receiving a whistleblower award. Characterizing those financial incentives to blow the whistle as “integral” to the SEC whistleblower program, the SEC assessed a $340,000 penalty on the company for its actions. A link to this story is at https://www.sec.gov/news/pressrelease/2016-164.html.

The SEC’s action is heartening, and should be applauded within the ranks of the whistleblower community. It raises questions, however, about why other federal agencies have not been more proactive in resisting and preventing retaliation. While it is true that, for example, the federal False Claims Act is not embedded within the Medicare Act, there are likely mechanisms that the United States Department of Health and Human Services could use through its regulatory power to make clear that retaliation will not be tolerated against whistleblowers who report fraud in the Medicare program. Similarly, government contracting agencies could include such provisions in contracts or regulations, and then aggressively enforce the rules against violators.

Instead, federal agencies other than the SEC, including the United States Department of Justice which has ultimate enforcement authority within the federal government for the False Claims Act, has been largely silent. Those agencies have refused to speak out decisively even against severance agreements, such as those at the heart of the Health Net case, that seek to chill fraud reporting by stripping former employees of the right to collect whistleblower awards or that aggressively assert confidentiality for documents that might reveal fraud. It may be time for DOJ to revisit that strategy – or for a legislative fix to place enforcement power for the FCA anti-retaliation provision squarely within the Department of Justice, or, in the case of the Medicare program, squarely within the Department of Health and Human Services.

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