On June 16, 2014, the Securities and Exchange Commission (the “SEC”) announced a $2.2 million settlement against an investment adviser that engaged in prohibited principal transactions and then retaliated against the employee who reported this misconduct to the SEC. This was the first time the SEC had filed a case under its new authority to bring anti-retaliation enforcement actions.
Section 21F of the Exchange Act
Section 21F of the Securities Exchange Act of 1934 (the “Exchange Act”), added as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”), allows the SEC to reward whistleblowers who voluntarily provide information on possible violations of the federal securities laws that have occurred, are ongoing, or are about to occur. The information provided must lead to a successful SEC action that results in an order of monetary sanctions that exceed $1 million.
Section 21F(h) of the Exchange Act prohibits an employer from discharging, demoting, suspending, threatening, harassing, directly or indirectly, or in any other manner discriminating against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower in, among other things, providing information to the SEC.
According to the SEC’s order instituting a settled administrative proceeding, a principal of the investment adviser conducted transactions between the firm and a broker dealer that she also owned while trading on behalf of a client, without disclosing to the client that the firm was participating on both sides of the trade and without obtaining the client’s consent. According to the SEC order, after the investment adviser’s head trader reported the misconduct to the SEC, the investment adviser engaged in retaliatory actions that ultimately lead to the head trader’s resignation. Among other actions, the day after the whistleblower revealed that he had reported the misconduct to the SEC, he was informed that he would be removed from the trading desk and temporarily relieved of his day-to-day trading and supervisory responsibilities. He was also denied access to certain of the investment adviser’s trading and account systems, as well as his email and instructed to prepare a report detailing the facts that supported the violations he reported . The SEC found that the investment adviser had no legitimate reason for removing the whistleblower from his position as head trader, tasking him with investigating the conduct that he had reported to the SEC, changing his job function from head trader to compliance assistant, removing his supervisory responsibilities and “otherwise marginalizing him.”
Statements by SEC Chair
SEC Chair May Jo White highlighted this settlement in a speech that she recently gave at Stanford University’s Annual Directors’ College. She noted that the SEC takes “any retaliation against whistleblowers very seriously and will continue to aggressively take action whenever companies attempt to stifle, deter, or punish efforts to expose wrongful conduct.” This case signifies the SEC’s intention to support whistleblowers and to encourage individuals with information regarding possible violations of the U.S. securities laws to come forward with such information without fear of retaliation. It also serves as a warning to employers that retaliatory conduct will not be tolerated by the SEC.