Understanding Corporate Whistleblowing in California’s Financial Sector
Generally, whistleblowing refers to the reporting of information reasonably believed to violate any law, rule, or regulation by an individual, business, or government entity. Whistleblower reports most often include information about gross mismanagement, gross waste of funds, abuses of authority, or a substantial and specific danger to public health or safety.
In California’s corporate financial sector, whistleblowers typically report financial fraud, including embezzlement, tax fraud, billing schemes, insider trading, and securities fraud. A set of federal and California state laws aims to prohibit securities and financial fraud in California. This collection of laws safeguards investors and the public by making fraud illegal, while also encouraging individuals to report fraud by offering whistleblowers legal protection against retaliation and providing a financial reward.
In California’s financial sector, whistleblowers from within financial institutions are vital to exposing wrongdoing, upholding ethical standards, ensuring legal compliance, protecting shareholders, and maintaining public trust in the financial markets.
Key Whistleblower Laws Regarding Securities and Financial Fraud
A patchwork of federal and state laws and agencies overlaps to prohibit and prosecute securities and financial fraud and to reward whistleblowers who report such violations. Both federal and California laws may apply to instances of fraud occurring in California. Consult with an attorney to determine which federal or state laws most strongly apply to your case.
Key Federal Protections
- False Claims Act: Under the Federal False Claims Act (FCA), anyone who submits a false claim, including but not limited to tax fraud, healthcare fraud, Medicaid fraud, or Medicare fraud, and securities fraud, to the federal government can be held liable for significant damages amounting to three times the government’s damages plus a penalty linked to inflation. The False Claims Act (FCA) allows the federal government to pursue bad-acting individuals and companies and includes a provision that allows whistleblowers to bring cases forward. The whistleblower FCA process begins when an individual with knowledge of fraud files a qui tam lawsuit against the bad actor. The qui tam lawsuit is initially filed under seal, giving the government the opportunity to investigate the allegations if it so chooses. If the government decides to pursue the claims, the case is pursued jointly by the whistleblower and the government. If the government does not intervene, the whistleblower can proceed with the lawsuit independently. In either instance, the whistleblower is entitled to a significant portion of the damages should the case prevail.
- Dodd-Frank Act: The Dodd-Frank Act, passed in response to the 2008 financial crisis, established whistleblower programs at both the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). Under the Dodd-Frank Act, the SEC and CFTC are authorized to provide whistleblower awards to those who come forward to the federal government with high-quality information tips. Whistleblower awards under the Dodd-Frank Act typically amount to 10%-30% of the funds collected by the government in connection with their disclosure. The Dodd-Frank Act prohibits retaliatory acts against whistleblowers, including termination, threats, demotion, suspension, harassment, or other adverse employment action.
- Sarbanes-Oxley Act (SOX): The Sarbanes-Oxley Act (SOX), enacted in 2002, mandates strict financial reporting requirements for public corporations. Under SOX, individuals and corporations that fail to meet reporting requirements or are found to have made fraudulent reports face severe civil and criminal penalties. SOX also offers protection to whistleblowers who expose fraudulent behavior, with strong anti-retaliation provisions.
- Whistleblower Protection Act: The Whistleblower Protection Act (WPA) protects federal employees who blow the whistle on improper governmental activities. The WPA offers protection to job applicants and current or former employees against whistleblower retaliation. The WPA makes retaliation against federal employees, including failure to hire, termination, demotion, or harassment, illegal.
Key State Protections
- California False Claims Act: Under the California False Claims Act (CFAC), similar to the FEC, any person who submits a false claim, including but not limited to tax fraud, healthcare fraud, Medicaid fraud, or Medicare fraud, and securities fraud, to the state government can be held liable for significant damages. The CFAC allows the state government to pursue bad actors and companies, and includes a provision that allows whistleblowers to bring cases in state court. Like the FAC, the CFAC whistleblower process begins when an individual with knowledge of fraud files a qui tam lawsuit against a bad actor. The qui tam lawsuit is initially filed under seal, giving the state government the opportunity to investigate the allegations. If the government decides to pursue the claims, the case is pursued jointly by the whistleblower and the government. If the government does not intervene, the whistleblower can proceed with the lawsuit independently. In either instance, the whistleblower is entitled to a significant portion of the damages should the case prevail.
- California Labor Code section 1102.5: In California, Labor Code section 1102.5 provides protection against whistleblower retaliation. Under section 1102.5, disclosing information reasonably believed to be a violation of laws, rules, or regulations, including but not limited to fraud, is a protected activity. Employers are prohibited from retaliating against employees who engage in whistleblowing. Section 1102.5 further prohibits employers from retaliating against employees whom the employer believes may make a disclosure, whether or not that disclosure has occurred.
- California Whistleblower Protection Act: The California Whistleblower Protection Act (WPA) protects California state employees who report a reasonable belief of misconduct or other legal violations at state agencies. The WPA protects job applicants, employees, and former employees against adverse action. The WPA makes retaliation in the form of personnel actions, including failure to hire, termination, demotion, or harassment, illegal.
Each whistleblower law varies in key fundamentals, including statutes of limitations, protected audiences, and available remedies or awards. Knowledgeable attorneys can help you understand the state or federal law that applies to your unique circumstance, and are able to give confidential legal advice tailored to your goals as a whistleblower, and can help you respond to any retaliation that occurs after making a protected disclosure.
Reporting Corporate, Securities, and Financial Fraud: Where and How to File a Complaint
Filing securities fraud whistleblower complaints is complex; where and how to file a complaint depends on the nature of the claims, the available evidence, and the desired outcomes. If you are considering blowing the whistle on fraud, consult with an attorney as soon as possible to understand your options and position yourself strategically.
California whistleblowers have several options for reporting misconduct. The appropriate reporting methods depend on the nature of the violation:
- Internal Reporting: Some whistleblowers first report fraud violations to their employer’s compliance department or human resources before involving outside agencies. Internal reporting may be appropriate in companies with genuine compliance cultures, a history of appropriately responding to complaints, or when the violation is limited to individual low-level bad actors rather than occurring at systemic or leadership levels within the corporation. Reporting waste or fraud internally carries risks, including alerting individuals involved in fraud to your complaint, allowing them to cover their tracks, and exposing yourself to retaliation or disciplinary action. If you choose to report internally, keep a detailed record of the evidence of fraud and your complaint process so that if you do experience retaliation, you can prove that retaliation occurred. The Sarbanes-Oxley Act (SOX) and California Labor Code section 1102.5 protect employees who report internal fraud violations from retaliation.
- External Reporting: Some employees chose to report fraud violations directly to outside agencies. External reporting is appropriate if the fraud poses significant public harm, if fraudulent behavior is taking place at systemic or leadership levels, if a company does not have an internal compliance culture, or if you do not feel safe reporting internally for any reason. The venue for external reporting depends on the violation; the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Office of the Inspector General (OIG), and the California State Auditor all accept and investigate whistleblower reports of fraud. Whistleblowers may alternatively choose to file qui tam complaints under seal with the courts in lieu of reporting to an agency. The appropriate channel for any fraud-related whistleblower report will vary depending on the nature of the misconduct. Consult with an attorney before filing a report in order to ensure that you are filing your report in the correct channel and meeting all legal and administrative requirements in a timely manner.
Key federal government agencies investigating corporate fraud include the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Internal Revenue Service (IRS), and the Offices of Inspector General (OIGs). The Department of Labor (DOL) enforces protections against employer retaliation. In California, the California State Auditor investigates corporate fraud and works with the state Attorney General (AG) to prosecute whistleblower fraud cases and enforce the California False Claims Act. The California Labor Code prohibits employer retaliation.
Navigating Investigations and Resolutions in Securities and Financial Fraud Cases
Financial fraud investigations led by federal or state regulators, such as the SEC, CFTC, IRS, OIG, and the California State Auditor, seek to uncover the truth behind whistleblower reports. While each investigation is unique, investigations often last 12 to 24 months and follow a similar trajectory. Investigations are typically initiated after a whistleblower tip, or through market surveillance or referrals from other agencies, and begin with an informal inquiry to determine whether a full investigation is needed. If evidence is found during the informal inquiry, the regulator will open a formal investigation and use subpoena power to compel witnesses and access documents. Once thoroughly investigated, cases may be settled administratively, through a civil lawsuit in federal court, or referred to the DOJ for criminal prosecution. Among many possible outcomes are sanctions on the fraudulent actor, corporate penalties, whistleblower financial awards, and corrective compliance mandates.
Whistleblower Protections against Adverse Employment Action
Retaliation occurs when an employer takes an adverse employment action against an employee because the employee engaged in protected activity, such as reporting unlawful conduct or asserting workplace rights. An adverse action is not limited to termination or demotion — it includes any conduct that would reasonably deter an employee from engaging in protected activity. This can include negative performance reviews, denial of promotions, reductions in pay or hours, increased scrutiny, disciplinary action, reassignment to less favorable duties, denial of training opportunities, or other actions that materially affect the terms, conditions, or privileges of employment. Sudden negative performance reviews, job reassignments, and hostile work environments are common forms of retaliation. In cases of corporate fraud whistleblowing, retaliation may also take the form of unusual exclusion from financial meetings, heightened censorship or scrutiny by management, or newly restricted access to documents and financial information. Many federal and state employment laws prohibit employers from retaliating against whistleblowers for their disclosures.
If you are facing whistleblower retaliation, gather any evidence of the retaliation and reach out to an attorney immediately. With an experienced attorney and sufficient evidence, you may be able to bring claims against your employer in court and recover back pay, emotional distress damages, punitive damages, litigation costs, and reinstatement if applicable.
Legal Representation for California Whistleblowers
If you are a potential whistleblower or are seeking legal representation for a whistleblower case in California, reach out to Navruz Avloni for a confidential consultation today. Whether or not you are a signed client, all related communications, including initial consultations and case evaluations, with Navruz Avloni are confidential and covered by the attorney-client privilege. Avloni Law is a law firm dedicated to representing California employees in whistleblower cases and holding fraudulent companies to account.