Whistleblower Retaliation Remains in the SEC’s Crosshairs

Whistleblower tips and awards for securities law violations have increased dramatically over the past year, according to the staff of the SEC Enforcement Division’s Office of the Whistleblower. Also during that time, the Whistleblower Office has stepped up its vigilance over retaliation by companies against whistleblowers, imposing penalties against companies more frequently and expanding the scope of what constitutes illegal retaliation. Furthermore, there is so far no reason to think the new Trump Administration will seek to reverse this trend. Direct retaliation can take many forms, most of which are recognizable by attentive management. Note, however, that certain less obvious behaviors may also be deemed retaliatory. For example, in one case an employee submitted a complaint about the company’s accounting practices through its internal procedures and to the SEC. When the SEC notified the company of its decision to investigate that complaint, the company was able to determine the whistleblower’s identity and revealed it in an internal email related to the investigation. The Fifth Circuit Court of Appeals in Halliburton, Inc. v. Administrative Review Board, United States Department of Labor concluded that illegal retaliation had occurred, stating that the “undesirable consequences” of being revealed to one’s colleagues as having accused them of fraud were “obvious.” (See this Doug’s Note.) The SEC has also focused recently on indirect forms of illegal retaliation embedded in company policies and agreements. Provisions in such documents may inadvertently violate Rule 21F-17(a) under the Securities Exchange Act, which provides that: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing,...

Loss Contingency Disclosures–A Warning from the SEC

Companies frequently struggle with how to account for loss contingencies and when to make the related disclosures. A recent complaint by the SEC against RPM International, Inc. and its General Counsel highlights the importance of getting it right…and the potential consequences of getting it wrong. It also provides a useful summary of the SEC’s analysis of the issue. In its complaint, the SEC alleges that that RPM was under investigation for three years by the U.S. Department of Justice for overcharging the government on certain contracts. Edward W. Moore, RPM’s General Counsel and Chief Compliance Officer, oversaw RPM’s response to the DOJ investigation, but according to the SEC, did not inform RPM’s CEO, CFO, Audit Committee and independent auditors of material facts about the investigation. As a result, the SEC alleges that RPM failed to disclose in its filings any loss contingency related to the DOJ investigation, or to record an accrual on its books, as required by GAAP and securities laws. Also as a result, in the SEC’s opinion, RPM failed to disclose a material weakness in its internal control over financial reporting and its disclosure controls. The SEC noted that RPM ultimately restated its financial results for three quarters that occurred during the DOJ investigation, filed amended SEC filings disclosing the DOJ investigation and related accruals and disclosed errors relating to the timing of its disclosure and accrual for the DOJ investigation. The final resolution of the SEC’s complaint and the merit of its allegations are, of course, uncertain at this time. The RPM complaint is instructive, however, due to its articulation of the loss contingency accrual and reporting...

The NLRB Continues to Monitor Social Media Policies

According to this EmployNews report, the National Labor Relations Board continues to interpret the National Labor Relations Act to prohibit social media policies that restrict employees’ ability to publically complain about their working conditions, even when those communications may be disparaging to their employer. Most recently, Chipotle Mexican Grill bore the consequences of the NLRB’s efforts. The Chipotle case… A Chipotle employee published a series of tweets complaining about the company’s inclement weather policy, the cost of Chipotle’s food and the lack of relationship between its expenses and employee wages, then topped it off by complimenting a competitor’s pricing policies. Chipotle apparently took a dim view of the posts and asked him to delete them. After he was subsequently fired due to disputes with a manager, the employee filed an unfair labor practice charge with the NLRB contending, among other things, that Chipotle’s social media policy violated his right to engage in protected concerted activity. The ALJ agreed, broadly interpreting Section 7 of the NLRA to protect the employee’s compliments about Chipotle’s competitor’s food and pricing as complaints about the terms and conditions of his employment. According to EmployNews, the ALJ “had no difficulty concluding that tweets aimed at customers constituted protected concerted activity, even though there was little evidence that other employees were involved in the exchanges.” Action steps… The NLRB’s efforts to protect social media communications by employees has been picking up steam for several years, dating back at least to 2012. Since that time, numerous NLRB actions, including the Chipotle case, have made it clear that polices containing broad restrictions on employee social media use or vague...

Mixed Enforcement Messages (and What’s in a Name?)

Not long ago I wrote about a speech by Andrew Ceresney, Director of the SEC’s Division of Enforcement, at the Directors Forum 2016 in San Diego. In his speech, Mr. Ceresney made a point of noting the SEC’s continuing commitment to pursue “gatekeepers” who fail to comply with their legal and professional obligations. (See this Doug’s Note.) This follows the now infamous Yates memo, which highlighted the Department of Justice’s modified prosecution procedures designed to hold individuals (rather than, or in addition to, corporations) accountable for perceived violations. (See this Featured Article.) Now come recent comments by Lara Shalov Mehraban, an Associate Director in the SEC’s New York Regional Office, at a recent Practicing Law Institute conference, as reported by Stephen Joyce in Securities Law Daily, a Bloomberg BNA publication. Mr. Joyce states that Ms. Mehraban attempted to allay concerns about the SEC’s enforcement posture toward directors and other gatekeepers: “Enforcement isn’t second guessing good-faith decisions by the board, but rather bringing cases where directors have either taken affirmative steps to participate in fraud or enabled fraudulent conduct by unreasonably turning a blind eye to obvious red flags.” Ms. Mehraban stated that cases involving directors remain “rare,” and typically result when there is a “significant departure from normal corporate governance and appropriate conduct.” Even so, she went on to state that outside directors are “key gatekeepers” who must “take concrete steps to learn all of the relevant facts and ensure that the company cease filing annual and quarterly reports until they are satisfied with the accuracy of the filings” any time they learn of information “suggesting that the company...

Enforcement Heats Up at the SEC

Andrew Ceresney, Director of the SEC’s Division of Enforcement, gave the keynote address at last week’s Directors Forum 2016 in San Diego. In his speech, Mr. Ceresney made several points worth highlighting. First of all, the SEC continues to aggressively pursue financial reporting deficiencies at all levels of public companies and within all industries. He notes, for example, that since 2013 the SEC more than doubled the annual number of actions related to issuer reporting and disclosure. Furthermore, the SEC has significantly increased the number of individuals charged with such violations. And despite substantial advances in the areas of internal control, audit committee oversight and corporate governance, violations still occur regularly and “gatekeepers” still fail to comply with their legal and professional obligations. Here’s Mr. Ceresney’s list of the primary causes of financial reporting problems: Significant pressure to meet earnings and other performance expectations; Excessive focus on short term performance rather than longer term success; Poor oversight in units and subsidiaries; Growth outpacing the reporting and accounting infrastructure; and Management’s over-reliance on processes and poor “tone at the top.” It’s interesting to note when reading this list that these causes could apply to some degree, from time to time, to almost every company. In particular, consider the opportunities for missteps during periods of rapid growth through acquisitions, which many companies are currently experiencing. Think also about past situations where performance pressure felt particularly intense due to aberrational circumstances. Mr. Ceresney then offered specific examples of the types of issues at the heart of the SEC’s enforcement actions, most of which you have seen before: Improper revenue recognition, largely because...

Corporate Governance Considerations in Light of the Yates Memo

Last fall, United States Deputy Attorney General Sally Yates released a memorandum titled “Individual Accountability for Corporate Wrongdoing.” The “Yates Memo” is the latest installment in a series of prosecution guidelines for United States Department of Justice attorneys to consider when conducting corporate fraud investigations, making charging decisions and developing prosecution strategies. (See this Featured Article by Brian Cromwell for a detailed discussion.) The Yates Memo generated a storm of negative responses due to its emphasis on holding individuals accountable for alleged criminal activity, as compared to previous guidelines that had placed a greater emphasis on charging companies. Perhaps overshadowed in the discussion are its implications for corporate governance. What does the Yates Memo Say? The Yates Memo requires companies to identify all individuals involved in potential wrongdoing “regardless of their position, status or seniority” in order to receive credit for cooperation. The DOJ appears, in essence, to be demanding full and complete access to facts throughout the investigation process in order for a company to receive cooperation credit. The policy will, therefore, pressure companies to provide more factual evidence than previously required against the individual wrongdoers. A related concern is whether the Yates Memo also erodes the attorney-client privilege by requiring companies to turn over information that is protected. Mr. Cromwell and others expect there to be a strong shift in the DOJ’s focus toward individual accountability. As a result, individuals should expect to be prosecuted for their involvement in corporate misconduct.  Companies, on the other hand, must be extremely careful when collecting information during internal investigations, knowing that, in order to be considered “cooperative,” a company will have...