United States: SEC’s Second Amicus Brief On Whether Dodd-Frank Protects Internal Reports

On December 11, 2014, the SEC filed an amicus brief in support of Plaintiff-Appellant Mikael Safarian asking the Third Circuit to revive his Dodd-Frank whistleblower claim and endorse the agency's definition of "whistleblower" as including individuals who only report internally.  If the Third Circuit addresses this issue—and it might not since it was not a basis for the district court's ruling—and adopts the SEC's position, such a circuit split could compel the U.S. Supreme Court to issue a final determination.

Background

Safarian filed a lawsuit in the District of New Jersey alleging, among other things, that American DG Energy, Inc. (the "Company"), a publicly-traded utility company, violated the Dodd-Frank anti-retaliation provision by terminating his employment because he internally objected to alleged overbilling, improper construction, and failure to obtain permits.  The district court granted the Company's motion.   It did not squarely address whether Safarian was entitled to protection under the anti-retaliation provision.  The court concluded that it "need not weigh in on this issue and determine if Plaintiff's failure to report to the SEC alone forestall his claim because Plaintiff fails to show that his disclosures fall under any of the four categories listed in Section 78-u6(h)(1)(A)(iii)."

The SEC's Amicus Brief

Nevertheless, when Safarian appealed to the Third Circuit, the SEC took this opportunity to argue that the court should defer to its interpretation in Rule 21F-2(b)(1) that Dodd-Frank's anti-retaliation provision protects all individuals who disclose activity specified in Dodd-Frank regardless of whether they report to the SEC.  The SEC portrays Rule 21F-2 as a "carefully calibrated" response to concerns that Dodd-Frank's bounty program undermined internal corporate compliance programs by incentivizing external reporting to the SEC.  The SEC submits that "if the rule were invalidated, the Commission's authority to pursue enforcement actions against employers that retaliate against individuals who report internally would be substantially weakened."

The SEC asserts that there is "considerable tension" between the types of activity the statute protects, enumerated in Section 21F(h)(1)(A), and the definition of "whistleblower" in Section 21F(a)(6).  It notes that "Section 21F(h)(1)(A) prohibits an employer from retaliating against a whistleblower: (i) for 'providing information to the Commission in accordance with this section'; (ii) for assisting in an investigation or action of the Commission 'based upon or related to such information'; or (iii) for 'making disclosures that are required or protected under' Sarbanes-Oxley, the Exchange Act, 18 U.S.C. § 1513(e), 'and any other law, rule, or regulation subject to the jurisdiction of the Commission."  The SEC submits that it is clear that "clauses (i) and (ii), together, protect individuals who report to the Commission about securities law violations," but that the anti-retaliation protection afforded by clause (iii) "reaches beyond just disclosures involving securities law violations and disclosures to the Commission."

The SEC also asserts that the Fifth Circuit in Asadi erred in concluding that Rule 21F-2 "renders the SOX anti-retaliation provision, for practical purposes, moot" because Dodd-Frank enables recovery of potentially greater monetary damages (e.g., double backpay), provides a substantially longer statute of limitations, and enables plaintiffs to sue directly in federal court without exhausting administrative remedies.  The SEC contends that whistleblowers might still prefer to pursue a claim under Section 806 of SOX over Section 922 of Dodd-Frank because of the lower cost and burden associated with SOX's administrative procedures and the possibility of recovering for "pain and suffering" under SOX.

Implications

It is unclear whether the Third Circuit will reach the issue of whether individuals who do not report to the SEC are protected by Dodd-Frank's anti-retaliation provision because the district court did not base its decision on this issue.  That alone illustrates the SEC's level of aggression.  Also, we previously addressed employers' concerns with the SEC's arguments here (e.g., the SEC's position would essentially eviscerate the administrative exhaustion requirements in Section 806 of SOX, and SOX is arguably a more favorable whistleblower protection statute than Dodd-Frank).   In addition, as we explained last month, the Fifth Circuit remains the only circuit court to have ruled on whether internal reports are protected under Dodd-Frank—it ruled that reports must be made to the SEC—and district courts have come out both ways.   Thus, if Third Circuit determines that internal reporting is protected, that would create a circuit split that could ascend to the Supreme Court.  We will monitor this closely ... stay tuned!

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