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OFAC Expands Reporting Requirements for Rejected Transactions

In late June, with minimum notice or fanfare, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued an interim final rule (the “Interim Rule”) that, inter alia, introduced new, broad requirements for covered parties to report rejected transactions.

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Catnip for Whistleblowers: The Status of SOX Whistleblower Protections in FCPA Cases


Time to Read: 5 minutes Practices: Anti-Corruption / International Risk

A recent decision in the 9th Circuit limits the Sarbanes-Oxley whistleblower protections available to former employees who face retaliation for blowing the whistle in FCPA cases, though the case remains under appeal. In Wadler v. Bio-Rad Laboratories, Inc., No. 17-16193, 2019 WL 924827 (9th Cir. Feb. 26, 2019), the panel vacated almost $3 million of the $11 million a jury awarded plaintiff Sanford Wadler, Bio-Rad’s former general counsel, for claims of retaliation under Sarbanes-Oxley, Dodd-Frank, and California state law. Wadler alleged that Bio-Rad fired him for reporting FCPA violations committed by Bio-Rad’s Chinese subsidiary; Bio-Rad claimed that Wadler was simply bad at his job. The court decided, in relevant part, that the FCPA is not a “rule or regulation of the” SEC, and so the Sarbanes-Oxley whistleblower protections do not apply.

The Bio-Rad saga began in 2009, when an internal audit showed that Bio-Rad salespeople were making improper payments in Vietnam and Thailand. Upon receiving this information, Wadler recommended that Bio-Rad hire outside counsel to investigate the potential FCPA violations. The investigation, concluded in 2011, uncovered evidence of FCPA bribery and books-and-records violations not only in Vietnam and Thailand, but also in Russia. In Vietnam and Thailand, Bio-Rad’s subsidiaries paid distributors massively inflated commissions with the understanding that the distributors would bribe government officials with their commission payments. According to SEC documents, Bio-Rad’s Vietnamese and Thai offices paid almost $3 million in commissions to agents and distributors. A similar scheme was used in Russia, where Bio-Rad paid intermediaries huge fees to perform services that they did not, and could not, perform. DOJ documents state that Bio-Rad managers used the code “bad debt” when referring to these illicit payments, which Bio-Rad used to win 100% of the Russian government contracts it sought. Although the investigation raised several red-flags, it did not uncover evidence of improper payments in China.

The next year, a separate audit revealed that Bio-Rad was missing sales documentation for products in the Chinese market. Wadler and another in-house lawyer located documents for a single transaction and concluded that they showed evidence of bribery. Wadler’s concerns reportedly increased as he spoke to other Bio-Rad employees, who told him of compliance concerns and “a widespread ‘under the covers’ scheme” wherein import/export documents were forged to give customers free products. Wadler also learned that Bio-Rad employees in China had entered into contracts with distributors that did not include FCPA compliance provisions.

On February 8, 2013, Wadler delivered a memo to the Audit Committee of Bio-Rad’s Board of Directors summarizing his findings and his belief that there were “serious and prolonged violations of the FCPA in Bio-Rad’s business in China.”  In response, the Audit Committee authorized Wadler to again hire outside counsel to investigate. On June 4, 2013, outside counsel reported that there was “no evidence to date of any violation–or attempted violation–of the FCPA” in China. Three days later, Bio-Rad CEO Norman Schwartz fired Wadler. Bio-Rad eventually paid a combined total of $55 million to the DOJ and SEC for FCPA violations in Vietnam, Thailand, and Russia; the company was not found liable for any violations in China.

Wadler brought his wrongful termination suit in May of 2015. He alleged violations of the Sarbanes-Oxley and Dodd-Frank whistleblower protections, as well as a California state law that prohibits terminations that are against public policy. The Sarbanes-Oxley Act prohibits retaliation against whistleblowers who lawfully report “any conduct which the employee reasonably believes constitutes a violation of … any rule or regulation of the Securities and Exchange Commission.” 18 U.S.C. § 1514A. For its part, Bio-Rad argued that it terminated Wadler for performance reasons, citing a negative performance review from April 2013 that indicated Wadler misunderstood business dealings in China and had obstructed a corporate securities filings.  While Bio-Rad relied heavily on this review, it turned out that the document’s metadata suggested that the written review was not created until a month after Wadler was fired in June 2013. The CEO claimed that he had drafted the review from handwritten notes that he had later discarded.

The jury was instructed, in relevant part, that the FCPA constitutes a “rule or regulation of the” SEC. As a result, Wadler had to prove that he reasonably believed that the China conduct he described in his memo violated the FCPA to win his case. The jury found for Wadler on all three counts, awarding him $2.96 million in compensatory damages, which was doubled under Dodd-Frank to $5.92 million, as well as $5 million in punitive damages.

On appeal, Bio-Rad argued that the FCPA is not a “rule or regulation of the” SEC, and the 9th Circuit agreed. According to the panel, the “natural and plain reading of these words together and in context is that they refer only to administrative rules or regulations.” Having concluded that the district court’s instruction was in error, the panel chose to remand to the district court to determine whether a retrial was required. The panel denied Bio-Rad’s request that it order judgment in Bio-Rad’s favor, concluding that a reasonable jury could find that “a general counsel in Wadler’s position reasonably believed” that Bio-Rad’s conduct in China constituted FCPA violations.

For Wadler, the decision makes little difference. The panel affirmed the district court’s decision on the state court claim, which was not disputed in Bio-Rad’s appeal. As a result, only $2.96 million of the almost $11 million award was overturned pursuant to a recent Supreme Court decision in Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018). Digital Realty held that Dodd-Frank does not apply to purely internal whistleblower complaints, so Wadler lost the benefit of the doubling provision of that act. Bio-Rad has appealed to the Ninth Circuit for an en banc rehearing, arguing that the decision to allow liability under the state law has created a loophole that “will provide catnip for would-be lawyer whistleblowers and needlessly expand baseless whistleblower litigation in this circuit.”

In a broader sense, it remains unclear what effect this decision will have on FCPA whistleblower cases if it stands. On the one hand, the court’s decision narrows the scope of protections available under Sarbanes-Oxley. However, the availability of state law protections for wrongful termination based on allegations of violation of federal law could provide alternative means of whistleblower protection.

 
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