United States: SEC Guidance Supports Its Position That Internal Whistleblowers Are Protected Under Dodd-Frank

On August 4, 2015 the Securities and Exchange Commission issued interpretive guidance elaborating its view that the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply equally to tipsters who claim retaliation after reporting internally, as well as those who are retaliated against after reporting information to the SEC.  The guidance reflects that there is a split among federal courts over whether Dodd-Frank's whistleblower retaliation provisions apply to internal as well as external reporting, and recognizes that the only circuit court to decide the issue to date, the Fifth Circuit, has taken a contrary position to that of the Commission in Rule 21F, the regulation the SEC adopted to implement the whistleblower legislation, holding that internal reports are not protected by Dodd-Frank. Whether internal reports qualify for Dodd-Frank coverage has important implications because, among other things, Dodd Frank provides enhanced recoveries (including two times back pay) and longer time frames (six years) for bringing a retaliation claim than would be available under the anti-retaliation provisions in the Sarbanes-Oxley Act of 2002.

Responding to criticisms that the bounties available under Dodd-Frank for those who report to the SEC would discourage internal reporting, the SEC in its Dodd-Frank regulations adopted several provisions it believed would still encourage internal reporting.  For example, the SEC has provided for a 120-day "look-back period" for whistleblowers who first report internally. Under this rule, if a whistleblower reports to the SEC within 120 days of reporting internally to the company, the whistleblower will receive 'credit' for reporting the information as of the date of the internal report. This allows the whistleblower to maintain priority status over any subsequent whistleblowers. On top of the 120-day "look-back" rule, the SEC has also said that it will consider whether a whistleblower first reported the information internally before reporting to the SEC when it is considering whether the whistleblower should receive an award and, if so, where the award should fall in the 10 – 30% discretionary range. According to the SEC, "a whistleblower's voluntary participation in an entity's internal compliance and reporting systems is a factor that can increase the amount of an award, and ... a whistleblower's interference with internal compliance and reporting is a factor that can decrease the amount of an award." However, many of the bounty awards it has issued to date have not provided information as to whether there was internal reporting or whether the percentage of the award was in fact enhanced for internal reporting.

The dispute over whether internal reporting is covered by Dodd-Frank's anti-retaliation provisions is rooted in what  the Commission has argued is conflicting statutory language.  A "whistleblower" under the Act is defined as "any individual who provides, or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission in a manner established, by rule or regulation, by the Commission."  17 C.F.R. § 240.21F-2(a)(6).  Whistleblowers, in turn, are protected for three different categories of reporting activity: (1) providing information to the SEC; (2) assisting in an SEC investigation; or (3) making "disclosures that are required or protected" under Sarbanes-Oxley, the securities laws, and other SEC regulations.  15 U.S.C. § 78u-6(h)(1)(A).  Because the third category of protected reporting activity includes laws that protect internal reporting, a number of courts have held that the statute is internally contradictory and that the best way to harmonize the conflicting provisions is to read the third category's protection of certain whistleblower disclosures not requiring reporting to the SEC as a narrow exception to section 21F's definition of a whistleblower as one who reports to the SEC.

In Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), the Fifth Circuit disagreed with the SEC.  In Asadi, the Fifth Circuitaddressed the issue of whether Dodd-Frank applied to a GE Energy executive who reported a potential violation of the Foreign Corrupt Practices Act internally. He sued, claiming retaliation, after he was subsequently given a negative performance review, pressured to step down from his position, and ultimately fired. The court adopted GE Energy's argument that Dodd-Frank did not protect employees against retaliation in response to internal reporting, stating that "[u]nder Dodd-Frank's plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC."  A number of district courts outside the Fifth Circuit have followed this holding.  See, e.g., Wagner v. Bank of Am. Corp., No. 12-cv-00381-RBJ, 2013 WL 3786643, at *4 (D. Colo. July 19, 2013); Banko v. Apple, Inc., No. CV 13-02977 RS, 2013 WL 7394596, at *6 (N.D. Cal. Sept. 27, 2013); Englehart v. Career Educ. Corp., No. 8:14-cv-444-T-33EAJ, 2014 WL 2619501, at *9 (M.D. Fla. May 12, 2014); Verfuerth v. Orion Energy Sys., 65 F. Supp. 3d 640, 646 (E.D. Wis. Nov. 4, 2014); Lutzeier v. Citigroup, Inc., 305 F.R.D. 107, 110 (E.D. Mo. Mar. 2, 2015); Wiggins v. ING U.S., Inc., Civil Action No. 3:14-CV-1089(JCH), 2015 WL 3771646, at *9-11 (D. Conn. June 17, 2015).

However, several other district courts have found that internal reports are covered by Dodd-Frank's anti-retaliation provision, some deferring to the SEC's interpretation of the statute in Rule 21F.  See, e.g., Kramer v. Trans-Lux Corp., No. 3:11cv1424 (SRU), 2012 WL 4444820 (D. Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 995 (M.D. Tenn. 2012); Genberg v. Porter, 935 F. Supp. 2d 1094, 1106-07 (D. Colo. 2013); Murray v. UBS Secs., LLC, No. 12 Civ. 5914(JMF), 2013 WL 2190084, at *3–7 (S.D.N.Y. May 21, 2013); Ellington v. Giacoumakis, 977 F. Supp. 2d 42, 45-46 (D. Mass. 2013); Rosenblum v. Thomson Reuters (Mkts.) LLC, 984 F. Supp. 2d 141, 148 (S.D.N.Y. 2013); Ahmad v. Morgan Stanley & Co., 2. F. Supp. 3d 491, 496 n.5 (S.D.N,Y, 2014); Khazin v. TD Ameritrade Holding Corp., Civil Action No. 13-4149 (SDW) (MCA), 2014 WL 940703, at *6 (D.N.J. Mar. 11, 2014); Yang v. Navigators Grp., Inc., 18 F. Supp. 3d 519, 533 (S.D.N.Y. 2014); Bussing v. CorClearing LLC, 20 F. Supp. 3d 719, 729 (D. Neb. May 21, 2014); Connolly v. Remkes, Case No,:5:14-cv01344, 2014 WL 5473144, at *6 (N.D. Cal. Oct. 28, 2014); Somers v. Digital Realty Trust, Inc., No. C-14-5180 EMC, 2015 WL 2354807, at *1 (N.D. Cal.May 15, 2015). 

The SEC's August 4 guidance has announced its position that there are two definitions of whistleblower for purposes of section 21F: one that applies to Dodd-Frank's bounty protections, and another that applies to Dodd-Frank's antiretaliation provision.  It is unclear whether this new guidance will have a substantial impact on the current split among the courts.  The SEC has routinely participated as amicus in Dodd-Frank retaliation cases around the country and its views on the issue are well-known.  The next major pronouncement is likely to come from the Second Circuit, which heard oral argument on the scope of Dodd-Frank's whistleblower protections in Berman v. Neo@Ogilvy on June 17, 2015.  If the Second Circuit takes a contrary view to that of the Fifth Circuit, this is an issue that could very well make its way to the U.S. Supreme Court, where the issue of Chevron deference to the SEC's interpretation will be center stage.  In the meantime, the SEC has taken the position that it may itself bring retaliation cases, see, e.g., In re Paradigm Capital Management, and we certainly expect to see more such cases brought by the Commission in the near future.

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