){kind=logo}
Whistleblower Protections Limited in Three Recent Cases
Verfuerth v. Orion Energy Systems, Inc., No. 16-3502 (Jan. 11, 2018)
Digital Realty Trust, Inc. v. Somers, 583 U.S. ____ (2018)
Martensen v. Chicago Stock Exchange, No. 17-2660 (Feb. 20, 2018)
In the Dodd-Frank and Sarbanes-Oxley Acts, two of the most important Wall Street reforms in the last 70 years, Congress included incentives and protections for insiders to blow the whistle on colleagues committing fraud or breaking the securities laws. Three court opinions published in the last month – two in the Seventh Circuit and one Supreme Court case – have clarified that those protections are not as broad as might have been believed.
The purported whistleblower in Verfuerth was the company’s CEO. When the board of directors fired him after he brought numerous concerns about corporate practices to the board’s attention, he claimed anti-retaliation protection under SOX. The Seventh Circuit rejected his claim because he neither blew the whistle to a governmental agency nor to someone who could be deemed his “supervisor.”
Since then, the Supreme Court decided a similar question in Digital Realty Trust. The Court construed the scope of the anti-retaliation provisions of Dodd-Frank to be even narrower than the recently-narrowed scope of those provisions under SOX in Verfuerth. In resolving a circuit split, the Court held that the Dodd-Frank protections apply only to whistleblowers who report their concerns directly to the SEC. Reports made to internal supervisors are not enough to trigger those protections.
Finally, in Martensen, the Seventh Circuit addressed a related issue: whether causation is a requirement of the anti-retaliation provisions of Dodd-Frank. The plaintiff in that case was a compliance supervisor at the Chicago Stock Exchange. Unlike the claimants in the other two cases, Martensen reported the suspected misconduct directly to the SEC before he was fired. However, Martensen acknowledged that his firing was not based on the report to the SEC, but on an unrelated internal complaint he subsequently filed with the Stock Exchange itself. The Seventh Circuit rejected his argument that his prior report to the SEC conferred “whistleblower status” on him so that he couldn’t be fired for any subsequent internal reports that he did not also make to the SEC. The Court specifically held that although the statute does not have an explicit causation requirement, it is inherent to the concept of retaliation.
Health Care Fraud: Low Chance of Detection Justifies Increased Sentence
United States v. Brown, No. 15-3117 (Jan. 19, 2018)
Brown was sentenced to 87 months imprisonment for defrauding Medicare. He and his co-conspirators falsely billed for home healthcare services for patients that were not qualified for those services, were dead, or otherwise did not receive the services claimed. The district court justified the length of the sentence because of what the court believed was the enhanced need for general deterrence of white collar crimes. The district court particularly believed that the low likelihood of getting caught for health care fraud compelled a higher sentence than might otherwise be required. Defendant challenged that justification on appeal. He argued that the district court relied on an “unfounded assumption” that would-be white-collar criminals engage in a cost-benefit analysis in deciding whether to engage in illicit activities.
The Court affirmed Brown’s sentence, accepting the district court’s rationale that the goal of general deterrence allows a sentence to be increased against a particular defendant in order to make the calculus of future would-be offenders more difficult. The Court did not directly respond to the defendant’s argument that no evidence exists to support that premise. Instead, the Court accepted that the belief in the efficacy of general deterrence – especially in white collar cases – is fundamental to the criminal justice system. No actual empirical data or other evidence is necessary to justify a sentence based on that goal.
Probation Sentence Overturned in Blow to Booker
United States v. Henshaw, No. 17-1628 (Jan 18, 2018)
Henshaw’s sentencing range under the advisory guidelines for his drug offense conviction was 151 to 181 months. That calculation was enhanced largely because of his criminal history. The district court nonetheless sentenced defendant to probation, citing his minimal role in the offense, his mitigating personal characteristics, and the draconian consequences of the convictions for non-violent conduct. In doing so, the district court relied on its discretion under Booker to reject the advisory guidelines.
On the government’s appeal, the Court found the sentence of probation to be substantively unreasonable. In particular, the Court found that a probationary sentence was insufficient given defendant’s recidivism and the need for specific deterrence. Because such a departure from the advisory guidelines constituted what the Court held was an abuse of discretion, it vacated and remanded for re-sentencing.
No Right to Present Live Character Witnesses at Sentencing
United States v. Cunningham, No. 16-3543 (Feb. 21, 2018)
Submitting “character letters” at sentencing in aid of mitigation has often been used by defense counsel to great effect. Especially in the post-Booker era, humanizing the defendant and giving the judge a picture of the client’s lifetime of good conduct is essential to leading the court to view the defendant as a whole person and not just the person who committed the offense. Character letters have been a routine aspect of that effort. Less frequently, defense counsel have sought to present live witnesses to testify at sentencing about the defendant’s character
Verfuerth v. Orion Energy Systems, Inc., No. 16-3502 (Jan. 11, 2018)
Digital Realty Trust, Inc. v. Somers, 583 U.S. ____ (2018)
Martensen v. Chicago Stock Exchange, No. 17-2660 (Feb. 20, 2018)
In the Dodd-Frank and Sarbanes-Oxley Acts, two of the most important Wall Street reforms in the last 70 years, Congress included incentives and protections for insiders to blow the whistle on colleagues committing fraud or breaking the securities laws. Three court opinions published in the last month – two in the Seventh Circuit and one Supreme Court case – have clarified that those protections are not as broad as might have been believed.
The purported whistleblower in Verfuerth was the company’s CEO. When the board of directors fired him after he brought numerous concerns about corporate practices to the board’s attention, he claimed anti-retaliation protection under SOX. The Seventh Circuit rejected his claim because he neither blew the whistle to a governmental agency nor to someone who could be deemed his “supervisor.”
Since then, the Supreme Court decided a similar question in Digital Realty Trust. The Court construed the scope of the anti-retaliation provisions of Dodd-Frank to be even narrower than the recently-narrowed scope of those provisions under SOX in Verfuerth. In resolving a circuit split, the Court held that the Dodd-Frank protections apply only to whistleblowers who report their concerns directly to the SEC. Reports made to internal supervisors are not enough to trigger those protections.
Finally, in Martensen, the Seventh Circuit addressed a related issue: whether causation is a requirement of the anti-retaliation provisions of Dodd-Frank. The plaintiff in that case was a compliance supervisor at the Chicago Stock Exchange. Unlike the claimants in the other two cases, Martensen reported the suspected misconduct directly to the SEC before he was fired. However, Martensen acknowledged that his firing was not based on the report to the SEC, but on an unrelated internal complaint he subsequently filed with the Stock Exchange itself. The Seventh Circuit rejected his argument that his prior report to the SEC conferred “whistleblower status” on him so that he couldn’t be fired for any subsequent internal reports that he did not also make to the SEC. The Court specifically held that although the statute does not have an explicit causation requirement, it is inherent to the concept of retaliation.
Health Care Fraud: Low Chance of Detection Justifies Increased Sentence
United States v. Brown, No. 15-3117 (Jan. 19, 2018)
Brown was sentenced to 87 months imprisonment for defrauding Medicare. He and his co-conspirators falsely billed for home healthcare services for patients that were not qualified for those services, were dead, or otherwise did not receive the services claimed. The district court justified the length of the sentence because of what the court believed was the enhanced need for general deterrence of white collar crimes. The district court particularly believed that the low likelihood of getting caught for health care fraud compelled a higher sentence than might otherwise be required. Defendant challenged that justification on appeal. He argued that the district court relied on an “unfounded assumption” that would-be white-collar criminals engage in a cost-benefit analysis in deciding whether to engage in illicit activities.
The Court affirmed Brown’s sentence, accepting the district court’s rationale that the goal of general deterrence allows a sentence to be increased against a particular defendant in order to make the calculus of future would-be offenders more difficult. The Court did not directly respond to the defendant’s argument that no evidence exists to support that premise. Instead, the Court accepted that the belief in the efficacy of general deterrence – especially in white collar cases – is fundamental to the criminal justice system. No actual empirical data or other evidence is necessary to justify a sentence based on that goal.
Probation Sentence Overturned in Blow to Booker
United States v. Henshaw, No. 17-1628 (Jan 18, 2018)
Henshaw’s sentencing range under the advisory guidelines for his drug offense conviction was 151 to 181 months. That calculation was enhanced largely because of his criminal history. The district court nonetheless sentenced defendant to probation, citing his minimal role in the offense, his mitigating personal characteristics, and the draconian consequences of the convictions for non-violent conduct. In doing so, the district court relied on its discretion under Booker to reject the advisory guidelines.
On the government’s appeal, the Court found the sentence of probation to be substantively unreasonable. In particular, the Court found that a probationary sentence was insufficient given defendant’s recidivism and the need for specific deterrence. Because such a departure from the advisory guidelines constituted what the Court held was an abuse of discretion, it vacated and remanded for re-sentencing.
No Right to Present Live Character Witnesses at Sentencing
United States v. Cunningham, No. 16-3543 (Feb. 21, 2018)
Submitting “character letters” at sentencing in aid of mitigation has often been used by defense counsel to great effect. Especially in the post-Booker era, humanizing the defendant and giving the judge a picture of the client’s lifetime of good conduct is essential to leading the court to view the defendant as a whole person and not just the person who committed the offense. Character letters have been a routine aspect of that effort. Less frequently, defense counsel have sought to present live witnesses to testify at sentencing about the defendant’s character
Here, the Court held that there is no right to present live character witnesses during sentencing proceedings. The right of allocution (the defendant’s right to speak on his own behalf) does not encompass a right to live testimony from others. Nor does the right to present character witnesses during trial extend to presenting them at sentencing. Of course, the district court may exercise its discretion to allow such testimony during the penalty phase, but no rule requires it.
This article was first published in the February 2018 issue of the Seventh Circuit White Collar Litigation Update on the 7th Circuit Bar Association’s website.
Loeb & Loeb partner Corey Rubenstein authors this monthly newsletter containing helpful summaries and practice pointers for key Seventh Circuit Court opinions involving civil and criminal white collar matters.