SEC Cracks Down on Whistleblower Retaliation as OSC Whistleblower Program Ramps up

On September 29, 2016 the Securities Exchange Commission (“SEC”) announced that it had issued orders in relation to settled proceedings with casino-gaming company, International Game Technology (“IGT”) in relation to charges of whistleblower retaliation. While IGT did not admit to any wrongdoing, IGT agreed to pay the SEC $500,000 for terminating the employment of an employee with consistently positive performance reviews, after he reported to the SEC and internally to IGT that IGT’s financial statements might be distorted. In combination with the SEC’s power to provide monetary rewards to whistleblowers (a power that has led to the making of significant awards), the SEC’s power to protect whistleblowers from employer retaliation is a key pillar of its successful whistleblower program.

The Basis for the Proceedings

The SEC whistleblower protection provisions were created by amendments to the Securities Exchange Act of 1934 (the “Act”). As section 21F (h) of the Act provides, employers are prohibited from directly or indirectly discharging, demoting, suspending, threatening, harassing or otherwise discriminating against an employee for providing the SEC with information or participating in administrative or judicial investigations or proceedings.

As set out in the SEC’s order, the employee began working with IGT in 2008 and received positive performance reviews throughout his employment. In 2014 his supervisors recommended him for a special retention bonus because he was a “flight risk:, and then, about a month later, the employee raised concerns about possible misstatements in IGT’s publicly-reported financial statements to his managers, IGT’s internal complaint hotline and to the SEC. Based on the complaint, IGT conducted an internal investigation with the assistance of outside counsel and concluded that there was no misstatements in its financial statements. The order further sets out that the employee was removed from significant work assignments shortly after making his complaint, and terminated roughly three months later. The SEC determined that IGT’s conduct was contrary to section 21F (h) of the Act and agreed to impose sanctions consistent with IGT’s offer to settle on the basis of IGT ceasing and desisting from future breaches of section 21F (h) and payment of a $500,000 penalty.

A Warning for Ontario Employers

The OSC’s widely-anticipated whistleblower program was launched in July 14 2016. Like its American counterpart, the OSC is empowered by statute to bring enforcement proceedings to crack down on whistleblower retaliation by an employer. Section 121.5 of the Ontario Securities Act makes it an offence to take reprisal against an employee who reports or plans to report potential violations of securities law to their employer, the OSC, a recognized self-regulatory organization or to law enforcement.

A couple of quick points concerning the drafting of this reprisal section:

  1. The reprisal prohibition covers not only the employer, but also those who are “acting on behalf of the” employer.
  2. A prohibited reprisal is “any measure taken against the employee that adversely affects his or her employment”. In other words it is not limited to terminations or other forms of discipline.
  3. The protected activity is broad and extends far beyond actual communications with the OSC. Protected activity covers having “sought advice about providing” information to the OSC or internally within the employer’s organization.
  4. The subject matter of the protected communication is not limited to those items which the whistleblower “reasonably believes is contrary to Ontario securities law”, but also covers “a by-law or other regulatory instruments of a recognized self-regulatory organization…”

As we have recently reported on our blog, the OSC’s Office of the Whistleblower has already received at least 30 tips from whistleblowers since opening in July 2016. As Ontario’s program continues to ramp up, Ontario employers should take note of decisions like the one made by the SEC in the IGT case, as it provides useful examples of how the anti-retaliatory provisions of Ontario’s whistleblower program may be applied to issues related to whistleblowers and their employers. Employers should ensure that appropriate policies, training, and personnel are in place to deal with whistleblowers in the workplace. This should be done in conjunction with establishing best practices for internal reporting and compliance.