New York Securities Lawyer Blog
On September 29th, 2016 the Securities and Exchange Commission (“SEC”) announced that International Game Technology (“IGT”), a casino-gaming company, would pay a penalty of $500,000 for dismissing an employee (the “Whistleblower”) who raised questions about its cost accounting model. The SEC alleges this termination occurred as retaliation for the Whistleblower investigating company accounting practices (the “Complaint”). This case is the first stand-alone whistleblower retaliation case without charges of other misconduct. On further investigation it was revealed that IGT did conform to Generally Accepted Accounting Practices (“GAAP”) and was not engaging in any illegal activities. However, IGT is being fined for violating whistleblower retaliation provisions in Section 21F(h) of the Securities Exchange Act of 1934 (the “Exchange Act”). This fine was submitted pursuant to an Offer of Settlement (the “Offer”), without admitting or denying the findings contained within the Complaint.
The SEC protects whistleblowers from retaliation by their employers. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which became effective in July 2010, contains new whistleblower provisions that provide substantial incentives and protections for individuals who voluntarily provide information to the SEC concerning securities law violations. Securities violations that can be reported by whistleblowers to the SEC include the following: unregistered offer or sale of securities; insider trading; market manipulation; theft or misappropriation of funds or securities; bribery of foreign officials; filing false or misleading SEC reports or financial statements; Ponzi schemes; abusive naked short selling; fraudulent conduct associated with municipal securities transactions or public pension plans; and other fraudulent conduct.
IGT is a Nevada based corporation that is a subsidiary of IGT PLC, which is a public limited company that trades on the New York Stock Exchange (“NYSE”) as a foreign private issuer. The Whistleblower joined IGT in 2008, and prior to his termination on October 30, 2014, had been promoted to the position of Director, overseeing a budget exceeding $700 million. The Whistleblower was given only positive performance reviews during that time period, and his bonuses were in the highest range allowed for someone of his seniority. According to the Complaint, the Whistleblower’s supervisors had put him at the top of their “talent planning matrix,” with the potential to be promoted to a vice-president role.
Beginning in June 2013, the Whistleblower was assigned projects relating to IGT’s used gaming parts business. His directive was to evaluate whether it was more cost efficient for IGT to refurbish used parts with outside vendors, or internally with IGT service personnel. A small percentage of the parts that IGT refurbished internally were sold to third party buyers. These internally refurbished parts were repaired with an overhead budget equal to 35% of the cost of the same part if it were new. The Whistleblower was concerned that this flat 35%-of-an-equivalent-new-part cost estimation for old refurbished parts was grossly inflated, based on his research of market rates for refurbishing. These inflated costs would then be transferred among IGT divisions, as they bought these refurbished parts from the servicing division.
According to the Complaint, the actual costs of material and labor required to refurbish these parts was, by the Whistleblower’s estimation, far lower than 35%, meaning that the cost differential between the real and inflated estimation was creating phantom cost reporting in other IGT divisions—resulting in potential tax savings that would constitute SEC violations. After an internal investigation overseen by outside council, IGT concluded that the cost accounting model currently used did not violate any SEC provisions, given that there was an end process to correct the 35% cost estimation with the actual labor and material costs. The 35%, while high, was chosen so divisions could be conservative with overhead budgets.
While the Whisteblower’s concern proved to be incorrect, under measures established by the Sarbanes-Oxley Act (“Sarbanes-Oxley”), the threshold for reasonable belief had been met–that which an ordinary person of average intelligence and sound mind would believe. This is a broad interpretation of the reasonable belief standard, but it is in line with the criteria used to judge the standard: a subjective, and objective analysis of whether a reasonable person could believe laws were violated. First, it is examined whether the person subjectively believed the conduct reported was illegal. A disgruntled former employee could simply file suit under Sarbanes-Oxley protections and allege that they thought their employer was violating laws, when in fact they did not believe these allegations to be true during the time period they were employed. Next, it is examined whether an objectively “reasonable person” could believe illegal activities were occurring, given the experience and information the whistleblower possessed. If it is determined that an objectively reasonable person could make the subjective conclusion that illegal activities were occurring, they are then eligible for protection under the anti-retaliation protections of the SEC whistleblower program.
The SEC’s whistleblower program has awarded more than $54 million to 22 whistleblowers who provided information that yielded a successful enforcement action. The awards are paid out of an investor protection fund that is financed by monetary sanctions paid to the SEC by rule violators.
Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Additionally, Lax & Neville has extensive experience in successfully handling whistleblower litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.