Conducting Internal Investigations in Whistleblower Litigation
Conducting Internal Investigations in Whistleblower Litigation
Employee filed whistleblower complaint with SEC yesterday. Alleged accounting fraud, falsified financial statements, violations of internal controls. SEC hasn’t contacted you yet but complaint means investigation is coming. You’re trying to figure out: Do we investigate this internally before SEC shows up? If we investigate and find violations, are we required to self-disclose? Can we fire the whistleblower if investigation shows complaint was made in bad faith?
Thanks for visiting Spodek Law Group – a second-generation law firm managed by Todd Spodek, with over 40 years of combined experience defending companies in whistleblower litigation and conducting internal investigations for SEC compliance. We’ve handled investigations triggered by Dodd-Frank whistleblower complaints, represented executives in retaliation claims, negotiated with SEC enforcement staff post-investigation. This article tells you how to conduct internal investigation when whistleblower complaint has been filed, what retaliation prohibitions actually mean in 2025, and how investigation findings impact both SEC enforcement and civil litigation.
DOJ’s 2025 Whistleblower Program Means More Complaints, More Investigations
The Department of Justice launched Corporate Whistleblower Awards Pilot Program in May 2025 to incentivize reporting of corporate crime. DOJ expanded program in June 2025 – now offering financial compensation to individuals with knowledge of white collar crime if information enables DOJ to recover more than $1 million in civil or criminal forfeiture. This is on top of existing SEC whistleblower program which paid $617 million in awards in 2024. What this means for companies: employee suspects accounting fraud, files complaint with SEC and DOJ simultaneously, government pays employee millions if investigation yields forfeiture, employee cannot be fired or retaliated against or company faces separate enforcement action for retaliation. Department of Labor enforces whistleblower protections – employer cannot retaliate against employee for exercising rights under whistleblower protection laws. In 2025, whistleblower protections are expanding and internal investigations are under more scrutiny than ever. Companies facing whistleblower complaints are caught between conflicting pressures: investigate complaint to assess validity and potential SEC exposure, but investigation findings can be used against company by SEC and by whistleblower in retaliation litigation, terminate whistleblower if complaint is baseless or made in bad faith, but termination triggers massive retaliation liability even if investigation proves complaint was wrong.
The volume of whistleblower complaints is exploding in 2025. SEC whistleblower program incentivizes reporting by offering 10-30% of sanctions collected when violations exceed $1M. Dodd-Frank prohibits retaliation against employee who reports to SEC, even if report is made before reporting internally. SEC whistleblower protections prohibit employer from discharging, demoting, suspending, threatening, harassing, or discriminating against whistleblower for providing information to SEC. Employee files SEC complaint alleging violations. Company investigates internally, finds no violations, terminates employee for unrelated performance issues six months later. Employee sues for retaliation under Dodd-Frank. Company argues termination was for performance, not whistleblowing. Burden is on company to prove termination was unrelated to complaint – and timing alone creates inference of retaliation. Jury awards employee double back pay, reinstatement, attorneys’ fees. This happens even when original whistleblower complaint was unfounded. Retaliation claim is separate from whether underlying complaint was valid.
The 120-Day Window That Determines SEC Enforcement Outcome
Dodd-Frank creates perverse incentive structure for whistleblowers and companies. If whistleblower reports information to SEC within 120 days of reporting internally, SEC uses internal report date for determining whether information is “original” for award purposes. Whistleblower also benefits from information company produces during internal investigation. Here’s why this matters: Employee suspects accounting fraud, reports internally to compliance hotline. Company launches internal investigation, interviews witnesses, reviews documents, hires forensic accountants. Investigation takes 90 days, produces detailed report documenting violations. Employee files SEC complaint on day 119 – within 120-day window. Now SEC gets: whistleblower’s information as of internal report date (making it “original” for award purposes), all evidence company gathered during 90-day internal investigation, company’s own findings documenting violations. Whistleblower gets credit for early reporting plus benefit of company’s investigation. Company gets SEC enforcement action based on evidence company itself produced. This is why companies fear internal investigations triggered by whistleblower complaints – investigation findings become roadmap for SEC prosecution.
Strategic considerations during 120-day window: If company investigates and finds violations, company may be required to self-disclose to SEC under cooperation credit policies. Failure to self-disclose means harsher penalties when SEC investigates based on whistleblower complaint. If company investigates and finds no violations but whistleblower files SEC complaint anyway, investigation findings can help defend against SEC enforcement. But if investigation was inadequate or missed violations SEC later discovers, company faces obstruction allegations for conducting sham investigation. If company delays investigation hoping 120-day window expires, whistleblower can still file with SEC and SEC investigation proceeds. Delay just means company lacks evidence to defend itself and can’t claim cooperation credit for self-disclosure. The calculus: investigate immediately and risk findings being used against company, or delay/avoid investigation and risk inadequate defense plus loss of cooperation credit. Most companies choose immediate investigation because SEC enforcement is more threatening than civil retaliation litigation. But investigation must be conducted properly or it creates more liability than it prevents.
How to Conduct Whistleblower Investigation Without Creating Evidence for SEC
Internal investigation triggered by whistleblower complaint requires different approach than normal compliance investigation. Attorney-client privilege is critical. Investigation must be conducted under attorney supervision with purpose of providing legal advice to company. If investigation is conducted by HR or internal audit without attorney involvement, findings are not privileged. SEC subpoenas investigation report and all findings become SEC evidence. Proper structure for whistleblower investigation: Outside counsel retained to conduct investigation. Counsel reports to general counsel or board (depending on investigation scope). Counsel interviews witnesses, reviews documents, analyzes allegations. Counsel provides legal advice to company regarding findings and compliance obligations. Investigation findings documented in privileged memorandum to general counsel. Only this structure protects findings from SEC discovery. If company uses internal teams without counsel supervision, privilege doesn’t apply. If counsel shares findings with business executives beyond legal advice recipients, privilege is waived. If company later produces investigation findings to SEC for cooperation credit, privilege is waived for those findings and potentially for entire investigation.
Witness interviews create specific risks in whistleblower investigations. Employees being interviewed must receive Upjohn warnings: counsel represents company not employee, communications may not be privileged as to employee, company can waive privilege and produce employee statements to government. Whistleblower cannot be prevented from communicating with SEC or DOJ. Any attempt to restrict whistleblower’s right to report is itself retaliation. Company can require employees to cooperate with internal investigation but cannot threaten retaliation for government reporting. Document preservation is mandatory. Moment whistleblower complaint is filed, litigation hold attaches. All potentially relevant documents must be preserved. Destruction of evidence after complaint = obstruction, separate federal crime, enhanced penalties in any subsequent enforcement. Findings and recommendations create decision points. Investigation finds violations: company must assess whether violations are material enough to require self-disclosure, whether self-disclosure earns cooperation credit vs. waiting for SEC investigation, whether remedial actions (terminations, disgorgement, control improvements) reduce SEC sanctions. Investigation finds no violations: company must assess whether investigation was thorough enough to satisfy SEC if they investigate independently, whether whistleblower has information company’s investigation didn’t uncover, whether additional investigation is needed before closing matter. Investigation inconclusive: company must decide whether to continue investigating, self-disclose incomplete findings to SEC, wait for SEC investigation to clarify allegations.
Retaliation Claims That Cost More Than Underlying SEC Enforcement
Company conducts investigation, determines whistleblower complaint was unfounded or made in bad faith, terminates whistleblower. Dodd-Frank anti-retaliation provisions protect whistleblowers even when underlying complaint was wrong. Whistleblower sues under Dodd-Frank Section 21F(h). Claims company terminated employee for filing SEC complaint, demands reinstatement, double back pay with interest, litigation costs, attorneys’ fees. Discovery in retaliation litigation is devastating. Whistleblower entitled to all documents related to decision to terminate: investigation findings, emails discussing whistleblower and complaint, performance reviews, comparative treatment of other employees. Company’s internal investigation findings get discovered and used to prove company had retaliatory motive. Investigation showed allegations were unfounded – proves company knew complaint was protected activity and terminated anyway. Performance issues cited as termination reason – whistleblower shows other employees with similar performance issues weren’t terminated. Timing of termination – anything within one year of complaint creates inference of retaliation. Juries in retaliation cases favor employees over corporations. Whistleblower testifies: “I reported fraud to protect investors, company fired me to silence me.” Company testifies: “We investigated, found no fraud, terminated for performance issues.” Jury believes whistleblower. Verdict: reinstatement, $500K back pay doubled to $1M, $300K attorneys’ fees. Total: $1.3M plus whistleblower is back working at company with guaranteed retaliation if terminated again.
In February 2025, federal court held Dodd-Frank whistleblower retaliation plaintiffs are not entitled to jury trials. But practical impact is limited – whistleblowers bring parallel claims under Sarbanes-Oxley which does allow jury trials. Multiple enforcement threats compound: SEC investigates underlying complaint, potentially brings enforcement action for violations. If SEC enforcement succeeds, whistleblower gets 10-30% award from sanctions collected. Whistleblower sues company for retaliation, recovers double damages plus fees. Company pays SEC sanctions, pays whistleblower award from those sanctions, pays separate retaliation damages, pays separate attorneys’ fees for defending retaliation litigation. DOJ investigates same conduct under criminal statutes, potentially prosecutes executives. Total exposure exceeds $10M for fraud that might have resulted in $1M SEC fine if no whistleblower complaint was filed. This is why companies settle retaliation claims even when underlying complaints are baseless – litigation costs and exposure exceed settlement costs, settlement avoids discovery that can be used in parallel SEC enforcement, settlement prevents whistleblower from testifying in SEC proceeding about retaliation.
When Internal Investigation Makes Exposure Worse Not Better
Internal investigation is not always appropriate response to whistleblower complaint. Investigation makes exposure worse when: Allegations are clearly frivolous and investigation would be sham. Conducting investigation anyway creates documentation that can be twisted in retaliation litigation. Example: employee alleges CEO is embezzling based on seeing CEO use company credit card for lunch. Investigation would take 5 hours, find corporate card policy allows business meal expenses. But investigation creates paper trail that whistleblower uses to claim company took complaint seriously (if it was frivolous, why investigate?) and termination must be retaliation. Better approach: document complaint as unfounded based on policy review, no formal investigation needed. Allegations involve senior executives who will control investigation. CEO accused of accounting fraud. General counsel reports to CEO. Investigation by general counsel lacks independence. Board should hire independent counsel. If general counsel investigates anyway, findings are compromised and SEC won’t credit investigation. Allegations have already been reported to SEC before company learned of complaint. Whistleblower reported to SEC first, company learns about SEC investigation before learning about internal complaint. Investigation now just produces evidence for SEC. Company should focus on SEC cooperation and defense, not internal investigation that SEC will view as cover-up attempt. Allegations are true and investigation will confirm violations. If company knows violations occurred, investigation will document them. Those findings get used in SEC enforcement, shareholder derivative suits, class actions. Better approach may be: immediate remediation without investigation, self-disclosure to SEC with cooperation, avoid creating detailed findings that quantify damages for civil plaintiffs.
At Spodek Law Group – we advise companies on when to investigate whistleblower complaints and when investigation creates more liability than it prevents. We conduct privileged investigations that satisfy SEC cooperation requirements while protecting findings from discovery. We defend companies in whistleblower retaliation litigation. We negotiate with SEC enforcement staff regarding self-disclosure and cooperation credit. Our approach: assess whether investigation is required or whether other responses (remediation, self-disclosure, waiting for SEC inquiry) are less risky, design investigation with proper privilege structure if investigation is necessary, conduct investigation to satisfy SEC while limiting findings that can be used in civil litigation, manage retaliation risk throughout investigation and post-investigation decision-making. Whistleblower investigations in 2025 mean: DOJ and SEC programs incentivizing more complaints with monetary awards, 120-day window where internal investigation findings benefit whistleblower and SEC, Dodd-Frank retaliation protections that make termination after complaint presumptively unlawful, investigation findings used against company in both SEC enforcement and retaliation litigation. Call us at 212-300-5196. If employee filed whistleblower complaint, we assess whether investigation is appropriate or creates more exposure. If you’re conducting investigation, we ensure privilege protection and proper scope. If you’re facing retaliation claims or SEC inquiry post-investigation, we defend and negotiate. Available 24/7.
NJ CRIMINAL DEFENSE ATTORNEYS