NSCP Currents NSCP Currents
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FEBRUARY 2017 FEBRUARY 2017
FEBRUARY 2017 SPECIAL REPRINT
Lessons from the SEC’s Whistleblower
Anti-Retaliation Cases
By Vincente L. Martinez and Curtis S. Kowalk
I. Introduction
While announcements of large cash awards grab most
of the spotlight for the Securities and Exchange
Commission’s (SEC or the Commission) whistleblower
program, SEC officers have also stated that protecting
whistleblowers is an SEC priority, and that they are committed to
enforcing the program’s whistleblower anti-retaliation provisions.1
To date, the SEC has brought three actions where it has found
an employer’s treatment of an employee whistleblower to be
retaliatory. Through two of those actions, the SEC has also made
clear that it will bring charges against employers based solely
on the manner in which they handle employee whistleblowers,
without charging other violations of the federal securities
laws. Management, compliance, legal and human resource
professionals should therefore understand how the SEC’s anti-
retaliation provisions work, as well as the circumstances that
have led to enforcement actions, in order to avoid unnecessary
liability. This article explains the relevant law, describes the SEC’s
anti-retaliation enforcement actions, and offers suggestions for
responding appropriately to employee whistleblowers.
II. The Anti-Retaliation Provisions
1. See, e.g., SEC Charges Hedge Fund Adviser with Conducting Conflicted Transactions
and Retaliating against Whistleblower, SEC Press Rel. No. 2014-118 (June 16, 2014)
(“We will continue to exercise our anti-retaliation authority in these and other types of
situations where a whistleblower is wrongfully targeted for doing the right thing and
reporting a possible securities law violation” – Sean McKessy); Mary Jo White, Speech
for the Ray Garrett, Jr. Corporate and Securities Law Institute-Northwestern Univer-
sity School of Law, The SEC as the Whistleblower’s Advocate (Apr. 30, 2015) (“The
ambivalence about whistleblowers can indeed sometimes manifest itself in an unlawful
response by a corporate employer and we are very focused at the SEC on cracking
down on such misconduct”).
Section 21F(h)(1)(A) of the Exchange Act of 1934 (Exchange
Act) states that “[n]o employer may discharge, demote,
suspend, threaten, harass, directly or indirectly, or in any other
manner discriminate against, a whistle-blower in the terms and
conditions of employment because of any lawful act done by the
whistleblower ….”2 The provision is worded broadly in terms of
the conduct that may constitute a violation. It also applies to a
wide variety of activities, including (i) providing information to the
Commission, (ii) participating in any Commission investigation
or judicial or administrative action, or (iii) making disclosures
required or protected by the Exchange Act, the Sarbanes-Oxley
Act of 2002, “and any other law, rule or regulation subject to the
jurisdiction of the Commission.”3
The SEC’s whistleblower program is implemented through
a set of Whistleblower Rules.4 Rule 21F-2(b)(2) states that
“Section 21F(h)(1) of the Exchange Act …, including any rules
promulgated thereunder, shall be enforceable in an action or
proceeding brought by the Commission.”5 This rule is meant
to make clear that the SEC can bring an action for retaliation
against a whistleblower. It is important to note, however, that
Exchange Act Section 21F(h) also permits employees to bring
suit in federal district court to seek reinstatement, back pay,
and compensation for litigation costs, expert witness fees, and
reasonable attorneys’ fees.6 Accordingly, a violation of the anti-
retaliation provisions exposes an employer to potential liability
from both the SEC and the employee whistleblower.7
III. The Anti-Retaliation Cases8
A. In the Matter of Paradigm Capital Management, Inc. et al.
(Paradigm)9
In this matter, Paradigm’s head trader reported to the SEC that
the firm had engaged in principal transactions with an affiliated
broker-dealer without providing effective disclosure to, or
obtaining effective consent from, its managed fund. The trader
then told the firm’s owner and its Chief Compliance Officer
2. 15 U.S.C. 78u-6(h)(1)(A). Section 21F, entitled “Securities Whistleblower Incentives
and Protection,” was added to the Exchange Act by Section 922 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010.
3. Id.
4. 17 C.F.R. 240.21F-1 through 17.
5. 17 C.F.R. 240.21F-2(b)(2).
6. 15 U.S.C. 78u-6(h)(B) and (C).
7. In certain circumstances, a whistleblower may also be able to assert retaliation claims
under state law. See, National Conference of State Legislatures, State Whistleblower
Laws, which can be found at http://www.ncsl.org/research/labor-and-employment/
state-whistleblower-laws.aspx.
8. It should be noted that all three of the actions described herein were settled without
the respondents admitting or denying the Commission’s findings. Accordingly, we take
no view on whether the findings are accurate, but rather report what is stated in the
settlement orders.
9. Exchange Act Rel. No. 72393 (June 16, 2014).
About the Author
Vincente L. Martinez is Partner at K&L Gates LLP,
www.klgates.com. He can be reached at
vince.martinez@klgates.com.
Curtis S. Kowalk is an Associate at K&L Gates LLP,
www.klgates.com. He can be reached at
curtis.kowalk@klgates.com.
This article was originally published in the February 2017 issue of
NSCP Currents, a professional journal published by the National
Society of Compliance Professionals. It is reprinted here with
permission from the National Society of Compliance Professionals.
This article may not be further re-published without permission from
the National Society of Compliance Professionals.
