Enforcement News: SEC Amends Complaint to Charge Issuer and CEO with Violating Anti-Retaliation Laws to Silence Whistleblowing by Company InvestorsPrint Article
- Posted on: Nov 13 2019
Retaliation is the primary concern among those who decide to blow the whistle on wrongdoing. It represents a significant impediment to obtaining the primary goals of whistleblowing: accountability and transparency of government and corporate activities. According to a 2010 government survey of federal employees, “approximately one-third of the individuals who felt they had been identified as a source of a report of wrongdoing also perceived either threats or acts of reprisal, or both.” (See Merit Systems Protection Board, “Blowing the Whistle: Barriers to Federal Employees Making Disclosures,” November 2011 (here)). In 2017, the survey was updated, finding that approximately 30 percent of government employees feared reprisal from reporting illegal or improper conduct. See Merit Systems Protection Board, “U.S. Merit Systems Protection Board 2017 Annual Employee Survey Results” (here).
In the private sector, a survey showed that retaliation for blowing the whistle rose to 44% in 2017 from 22% in 2013, with 72% of employees who were retaliated against reporting that such reprisals occurred within one month of their reporting. See Global Business Ethics Survey, “The State of Ethics & Compliance in the Workplace, Ethics & Compliance Initiative,” March 2018 (here).
In enacting the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or the “Act”), Congress adopted strong anti-retaliation provisions to protect SEC whistleblowers who blow the whistle on violations of the federal securities laws. In that regard, Congress created a private right of action for whistleblowers to combat retaliation associated with “any lawful act done by [him/her] – ‘(i) in providing information to the Commission …; (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or (iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002,’” the Securities Exchange Act of 1934, and “‘any other law, rule, or regulation subject to the jurisdiction of the [SEC].’”
Notably, the Dodd-Frank Act does not limit the private right of action to employees. Congress extended the anti-retaliation protections to any individual claiming to have been retaliated against (e.g., threatened, harassed or subjected to discrimination) because of conduct protected under Act.
The SEC Whistleblower Program rules allow the SEC to prosecute violations of the anti-retaliation provisions of the Dodd-Frank Act through enforcement action. This means that persons who retaliate against individuals who blow the whistle on fraud or other illegal conduct risk having to defend themselves against SEC investigations and enforcement actions that may result in penalties, disgorgement, and other monetary relief.
On November 4, 2019, the SEC announced (here) that it filed claims against an online auction portal and its chief executive officer (“CEO”) in connection with their efforts to prohibit their investors from reporting misconduct to the SEC and other governmental agencies.
As explained in the November 4 press release, the SEC filed an amended complaint (here) against Collectors Café and its CEO, Mykalai Kontilai (“Kontilai”), to add allegations that they unlawfully sought to prohibit their investors from reporting misconduct to the SEC. The Commission previously charged Collectors Café and Kontilai with conducting a $23 million fraudulent securities offering based on false statements to investors and alleged that Kontilai misappropriated over $6 million of investor proceeds.
In its amended complaint, the SEC alleged that Collectors Café and Kontilai took actions to prevent investors from communicating directly with the SEC about their securities laws violations. In at least two instances, Collectors Café and Kontilai attempted to resolve investor allegations of wrongdoing against them by conditioning the return of investor money on the agreement of the investors to confidentiality clauses prohibiting the investors from communicating with law enforcement or regulators, including the SEC, about the alleged securities law violations. In one of those instances, Collectors Café and Kontilai filed a lawsuit claiming that the victims of their alleged fraud breached the confidentiality provision of the agreements by communicating with SEC staff about possible securities law violations. Collectors Café and Kontilai sought punitive and compensatory damages in that action, including repayment of the money paid to settle the claims of securities fraud. Thereafter, Collectors Café and Kontilai held the lawsuit out as a deterrent to other investors about communicating with the SEC.
The SEC claimed that these actions and agreements violated the SEC’s whistleblower protection rules.
Commenting on the new allegations, Kurt L. Gottschall, Director of the SEC’s Denver Regional Office, stated: “We allege that the defendants attempted to cover up their fraud by holding investors’ money hostage until the investors signed agreements preventing them from seeking law enforcement intervention. Through the amended complaint, the Commission seeks to hold the defendants accountable for their fraudulent stock offerings as well as the separate claims for violations of the Commission’s whistleblower protection laws.”
Jane Norberg, Chief of the SEC’s Office of the Whistleblower, underscored the reach of the Act’s anti-retaliation protections, stating that “[t]he SEC’s whistleblower protections broadly protect not just employees, but anyone who seeks to report potential securities law violations to the Commission.”
The SEC charged Collectors Café and Kontilai with violations of the antifraud and whistleblower provisions of the federal securities laws. The Commission is seeking preliminary and permanent injunctions, disgorgement, plus prejudgment interest, and penalties. The SEC also added Veronica Kontilai, Kontilai’s wife, as a relief defendant, seeking disgorgement, plus prejudgment interest, from her.