United States: Second Circuit Rules Internal Whistleblowers Are Protected Under Dodd-Frank

The U.S. Court of Appeals for the Second Circuit created a federal appellate split today when it revived a Dodd-Frank Act retaliation claim by an ex-finance director, who was responsible for the company's financial reporting and compliance with accounting standards.  The court held that he was protected even though he only raised claims of accounting fraud internally with his employer, but did not report them to the Securities and Exchange Commission (SEC or the Commission) before he was terminated.  The decision in Berman v. Neo @ Ogilvy LLC, No. 14-4626 (2d Cir. 2015), conflicts with the Fifth Circuit ruling in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013) that only individuals who report directly to the SEC may bring retaliation claims under Dodd-Frank.

This circuit split increases the likelihood that the U.S. Supreme Court will enter the arena and make a decision on what many have called ambiguous language in the statute.  For litigators, the Berman decision is significant, but for employers, the message is to stay the course, as the best insurance is still to have:

(1) a well-designed internal investigation program to promptly receive and expertly resolve claims of misconduct – especially claims of retaliation; and

(2) sound and well-documented reasons prior to terminating any employee.

The split arises from how the two courts handled Dodd-Frank's additions to subsection 21F of the Securities Exchange Act of 1934 (the Act), revisions entitled "Securities Whistleblower Incentives and Protection."  15 U.S.C. § 78u-6.  One provision, subsection 21F(a)(6), defines a "whistleblower" as an individual "who provides information relating to a violation of the securities laws to the Commission ..." (emphasis supplied).  The Asadi court found that language to be definitive.  If the "whistleblower" did not make a report to the SEC, then the statute did not apply.

The Berman court focused on another provision that specifically addresses protection from retaliation.  It prohibits retaliation not only when an individual provides information to the SEC or participates in investigative or judicial action of the Commission, but also prohibits retaliation in situations of internal reporting, specifically for any lawful act done by the whistleblower:

"...(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002..., this chapter [i.e., the Exchange Act], section 1513 (e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission."  See 15 U.S.C. § 78u-6(h)(1)(A) (emphasis added). 

Numerous disclosures required or protected within this language, including those made under Sarbanes-Oxley, do not require a report to the SEC.

In essence, the circuit court split demonstrates two very different approaches of legislative interpretation.  The Asadi court chose to ignore the SEC's interpretation of the law while the Berman court chose to defer to the agency.

As the governing agency, the SEC has taken the position in its implementing regulations that individuals who report internally may obtain the remedies Dodd-Frank affords against retaliation, irrespective of whether or not the individual qualifies as a whistleblower for the significant financial "bounty" awards of Dodd-Frank (the "bounty" provision requires a report to the SEC).  Relying on the ambiguity of the statutory provisions, the Second Circuit granted Chevron deference—deference to the agency charged with administering the regulations—to what it found was the Commission's reasonable interpretation of the statute.

Of particular note in the Berman decision was the court's reasoning that certain categories of whistleblowers cannot report wrongdoing to the Commission because of obligations they have to first report it to the employer, specifically, "auditors and attorneys."  According to the court, to leave such individuals without Dodd-Frank's retaliation protections for internal complaints unreasonably limited the scope of subsection (iii) to nothing (or almost nothing).

Whether the Supreme Court or Congress will promptly address the conflict in the appellate circuits remains an open question.  Perhaps more importantly, though, all employers—public and private companies alike—should take the conflicting rulings as a reminder that government regulators and employees will aggressively pursue allegations of retaliation for making internal complaints, especially those related to reports of fraud and financial misconduct.

The conflict continues to show the stakes are high when companies gamble with internal whistleblowers. Prudent employers are advised to focus attention and resources on upgrading their internal reporting and incident management systems and ensuring that the reasons for employee discipline are sound and well-documented.

In doing so, employers should consider how legally proper, consistent, and thorough their responses are to all allegations of misconduct, not just fraud.  Effective investigation programs foster exactly that consistency and are pivotal to an effective ethics and compliance program.  As best practices, investigations functions should include:

  • Well-designed investigation guidelines.
  • Escalation and notification protocols for stakeholders.
  • Management training on investigations, retaliation, and response to concerns.
  • Board training on the standard investigation process.
  • Legal oversight of the investigation function.
  • Experienced and knowledgeable investigative staff.
  • Anti-retaliation messaging, reporting definitions, effective reporting channels.
  • Trends and issues reporting integrated into the ethics and compliance program.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Earl (Chip) M. Jones III
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