SEC Combats Corporate Retaliation Against Whistleblowers

September 20, 2024

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Since the Dodd-Frank Act was enacted in the United States in 2010, the role of whistleblowers has proven crucial in helping authorities prevent fraud, bribery, and other legal violations. This is because the government lacks the personnel and resources to efficiently monitor the market on its own.

On the other hand, it is no surprise that the United States leads the world in having one of the most sophisticated and well-structured compliance systems. Unlike in other countries, serious misconduct within a company is often more likely to be exposed by whistleblowers from within. Therefore, it is not enough to merely have a code of ethics and a handful of policies if the company’s compliance is ineffective, and employees are not clearly informed about what constitutes proper conduct and the consequences of misconduct. Without strong compliance, a company risks facing serious issues with authorities, potentially damaging both its finances and reputation.

On September 9, 2024, the Securities and Exchange Commission (SEC) announced charges against seven companies for allegedly using agreements to alter employment contracts, severance packages, and other measures that violated anti-retaliation rules. These actions aimed to prevent whistleblowers from reporting potential misconduct to SEC. In contrast, one of the core principles of the Dodd-Frank Act’s whistleblower provisions are safeguards against retaliation by the company.

Thus, SEC has civilly penalized the following companies for a total of more than $3 million:

Company	Penalty Amount
1. Acadia Healthcare Company, Inc.	US$ 1,386,000.00
2. Brands Holding Corp.	US$ 399,750.00
3. AppFolio, Inc.	US$ 692,250.00
4. Idex Corporation	US$ 75,000.00
5. LSB Industries	US$ 156,000.00
6. Smart for Life, Inc.	US$ 19,500.00
7. TransUnion	US$ 312,000.00

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Whistleblower Protection Rules

Anyone who reads the Dodd-Frank Act may be surprised by its length, which rivals that of large legal codes, such as Brazil’s civil code.

All provisions related to whistleblower protection are contained in Section 922 of the Act, which serves as a model for many countries that wish to implement whistleblower protections but have not yet established the necessary guarantees for informants to perform their role effectively, as in in Brazil and France. Thus, it is clear that, at least in these two countries, the concept of a whistleblower exists in law, but in practice, it’s ineffective: without proper state-backed incentives and protections, individuals are unlikely to risk their jobs to report wrongdoing.

In addition to Section 922, the SEC has issued Rule §240 21F-17(a), which prohibits anyone from taking actions that would prevent a whistleblower from directly contacting the SEC to report potential securities law violations.

Both of these provisions will be discussed in more detail in a future article.

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The Role of the Whistleblower in Brazil

In Brazil, the concept of the whistleblower was codified into law through the anti-crime package introduced by former Minister Sérgio Moro. Law #13,964, enacted on December 24, 2019, established the following provisions:

Topic	Definition
Identity Protection	Whistleblowers have the right to have their identity preserved, which will only be disclosed in cases of significant public interest or when essential for the investigation. Any disclosure of identity will occur only after notifying the whistleblower and obtaining their formal consent.
Whistleblower Protections	In addition to the protective measures provided under Law #9,807 of July 13, 1999 (Threatened Victims and Witnesses Protection Act), whistleblowers are protected against actions or omissions made in retaliation, such as arbitrary dismissal, unjustified changes in roles or attributions, sanctions, financial or material losses, withdrawal of direct or indirect benefits, or refusal to provide positive references.
Who to Report	The federal government, states, Federal District, municipalities, as well as their autonomous agencies, foundations, public companies, and mixed-economy companies, must maintain an ombudsman or oversight unit to allow individuals to report crimes against public administration, administrative offenses, or any acts or omissions harmful to public interest
Consequences of Retaliation	Retaliatory actions or omissions against whistleblowers constitute serious disciplinary offenses and can lead to dismissal in the interest of public service. Whistleblowers are entitled to double compensation for any material losses caused by such retaliation, as well as compensation for emotional distress.
Whistleblower Reward	When the information provided by a whistleblower leads to the recovery of proceeds from a crime against public administration, the whistleblower may receive a reward of up to 5% of the recovered amount.

As shown above, several deficiencies discourage whistleblowers in Brazil from coming forward. The following table illustrates these issues:

Topic	Deficiency
Identity Protection	Revealing the identity of a whistleblower is a significant error. Although lawmakers have attempted to require formal consent, in a high-pressure environment, authorities can coerce whistleblowers into agreeing under threat. Once their identity is exposed, ensuring their safety becomes nearly impossible.
Who to Report	The lack of a centralized agency and reliance on various ombudsman offices poses a serious issue, as these offices are not equipped to offer sufficient protections to whistleblowers.
Consequences of Retaliation	While lawmakers have classified retaliation against whistleblowers as a serious offense, leading to dismissal for the public good, this primarily applies to public service employees. However, retaliation is more likely to come from the private company where the whistleblower works. By focusing only on the public sector, the state misses the opportunity to expand oversight to the private sector without needing additional resources or personnel.
Whistleblower Reward	Limiting whistleblowing to crimes against public administration significantly weakens the potential to improve market integrity. Furthermore, offering only 5% of the recovered amount is insufficient to justify the risks involved in making a report; although rewarding whistleblowers is not common practice in Brazil. However, there is still time to change and enhance this system.

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