United States: Whistleblower Claims Under SOX And Dodd-Frank: Recent Developments

Section 806 of the Sarbanes-Oxley Act ("SOX") and Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") both extend whistleblower protection to certain individuals who report conduct they reasonably believe constitutes federal mail, wire or bank fraud or a violation of any rule or regulation of the Securities and Exchange Commission ("SEC") or any provision of federal law relating to shareholder fraud. Dodd-Frank also required the SEC to implement a new whistleblower program — the so-called bounty program — that pays awards to whistleblowers who provide the SEC with information about violations of securities laws that leads to a successful enforcement action resulting in monetary sanctions in excess of $1 million.

As described in more detail below, the U.S. Department of Labor ("DOL") has issued final regulations governing the procedures for handling SOX whistleblower claims. The SEC has announced its view that, for purposes of the employment retaliation provision in Dodd-Frank, an employee's status as whistleblower does not depend on whether that individual reported wrongful conduct to the SEC. The Second Circuit Court of Appeals followed suit in a recent decision, creating a circuit split on this issue, which now may be resolved by the United States Supreme Court. Moreover, a number of notable recent federal court decisions, including those issued by two circuit courts, have addressed the standards for establishing "protected activity" under SOX.

The DOL Issues Final Rule on SOX Whistleblower Complaints

Earlier this year, the DOL's Occupational Safety and Health Administration ("OSHA") issued final regulations governing procedures applicable to whistleblower claims under SOX. It had been more than three years since OSHA had issued an "interim rule," which had during that period governed the agency's approach to SOX retaliation complaints.

The Final Rule does not substantially alter OSHA's approach to investigating retaliation claims under SOX. The key features of the regulations include:

  • An employee, or someone on the employee's behalf, may file a retaliation complaint, either orally or in writing, in any language, with OSHA within 180 days from the date of the alleged retaliation or the date on which the employee becomes aware of the violation.
  • A complainant must make a prima facie case showing that he or she engaged in protected activity and that activity was a "contributing factor" in the adverse action by the employer. Once the employee makes that showing, the burden shifts to the employer to prove by clear and convincing evidence "that it would have taken the same adverse action in the absence of the protected activity."
  • At the conclusion of the investigation, if OSHA determines that there is reasonable cause to believe that the statute was violated, it will issue a preliminary order for relief, including immediate preliminary reinstatement. Employers may request a hearing before an administrative law judge and may apply for a stay of the preliminary order of reinstatement.
  • Whistleblowers may be provided "economic reinstatement" — payment of wages in lieu of employment — if OSHA determines that it is not advisable for the employee to return to work. Perhaps surprisingly, if the employer ultimately prevails in the whistleblower action, OSHA will not order reimbursement to the employer of wages paid to the former employees during the economic reinstatement period.

SEC Announces That Internal Whistleblowers Have Full Protections Under Dodd-Frank

The SEC declared on August 4, 2014, that for purposes of the employment retaliation protections provided by Dodd-Frank, an individual's status as a whistleblower does not depend on whether or not he or she reported wrongdoing to the SEC. Among other reasons, the SEC stated that its conclusion "best comports with our overall goals in implementing the whistleblower program." By providing protection for internal whistleblowers, said the SEC, its interpretation avoids a structure that might discourage some individuals from first reporting internally in appropriate circumstances and thus jeopardize the investor-protection and law-enforcement benefits that can result from internal reporting.

Second Circuit Decision Holds That Internal Whistleblowers Are Entitled to Protection Under Dodd-Frank, Creates Circuit Split

On September 10, 2015, the U.S. Court of Appeals for the Second Circuit ruled that the anti-retaliation provisions of Dodd-Frank apply to whistleblowers who report wrongdoing "internally" — to the employer — without the requirement of also reporting to the SEC. Berman v. Neo@Ogilvy, 801 F.3d 145 (2d Cir. 2015). The court focused on an "arguable tension" within the statute: While the statute defines "whistleblower" to mean only those who report violations to the SEC, the substantive anti-retaliation provision applies to all whistleblowers who provide information as required or protected under SOX, which extends protection to internal whistleblowers even if they do not report alleged wrongdoing to the SEC. The court therefore found the language of the statute sufficiently ambiguous to warrant deference to the interpretation of the SEC, which (as noted above) has announced that Dodd-Frank's retaliation provision includes protection for individuals who provide information internally.

The only other circuit court decision to address the definition of "whistleblower" under Dodd-Frank is Asadi v. G.E. Energy (USA), L.L.C., 702 F.3d 620 (5th Cir. 2013), which found that the language of the Dodd-Frank whistleblower protection provision creates a private cause of action only for individuals who provide information to the SEC relating to a violation of the securities laws. Because the Second Circuit case conflicts with the Fifth Circuit's decision in Asadi, the Supreme Court may take up the question of whether individuals who report internally (without also reporting to the SEC) are entitled to protection under Dodd-Frank.

In the meantime, it is worth noting that Dodd-Frank is far broader than SOX in many respects relevant to employers. Dodd-Frank provides the enhanced remedy of double back pay and allows whistleblowers to bring their claims directly in federal court, while SOX provides a successful claimant with the remedies of back pay and reinstatement and requires that a complaint first be filed with the DOL. In addition, under Dodd-Frank, whistleblowers who engage in SOX-protected activity must file in court either within six years after the date when the violation occurs or within three years after the date "facts material to the right of action are known or reasonably should have been known by the employee," but not more than 10 years after the date of the violation. The limitations period under SOX is 180 days.

California District Court Limits Protected Activity Under Dodd-Frank

In Nazif v. Computer Sciences Corp., No. 13-cv-5498 (N.D. Cal. June 17, 2015), a suit brought by a CPA who was allegedly fired by Computer Sciences Corp. for complaining to his managers about various purported errors in the company's accounting practices, the Northern District of California granted the employer summary judgment, dismissing Nazif's claims. The court concluded there was no evidence that his purported belief that the company violated securities laws was objectively reasonable under SOX.

The court relied on Ninth Circuit precedent for the proposition that to have an objectively reasonable belief of a violation of one of the SOX-enumerated laws — in this case, securities fraud — the complaining employee's theory of such fraud "must at least approximate the basic elements of a claim of securities fraud." According to the court, this means that the plaintiff must have had an objectively reasonable belief that his employer's violations involved a material misrepresentation or omission, scienter (intent or knowledge of wrongdoing), a connection with the purchase or sale of a security, reliance, economic loss, and loss causation.

The court reviewed Nazif's evidence, including his purported belief that the aggregate effect of the various alleged accounting irregularities would have resulted in approximately $15 million in misstatements. It concluded that no objectively reasonable accountant could have believed that a revenue misstatement of this size was sufficiently material to a company as large as this one, which reported annual revenue of over $14 billion. "At best," held the court, "a jury could conclude that Nazif reported 'minor or technical' GAAP violations to his superiors." Because Nazif's complaint concerned a trivial matter in terms of its relationship to shareholder interests, held the court, he did not engage in protected activity under SOX.

Sixth Circuit Rejects 'Specifically and Definitively' Standard for SOX Whistleblower Protected Activity

In Sylvester v. Parexel Int'l LLC, DOL ARB No. 07-123 (May 25, 2011), the DOL's Arbitration Review Board ("ARB") held that complainants only have to express a "reasonable belief" of a violation of law to engage in SOX-protected activity — the protected activity does not have to describe an actual violation of the law. In doing so, the ARB rejected the "definitive and specific" evidentiary standard announced in the ARB's 2006 decision in Platone v. FLYI Inc., DOL ARB No. 04-154 (2006), which had held that protected conduct had to definitively and specifically describe a violation of one or more of the laws listed in SOX.

In 2012, the Sixth Circuit adopted the Platone standard in Riddle v. First Tennessee Bank, National Association, 497 F. App'x 588 (6th Cir. 2012) (unpublished). But in Rhinehimer v. U.S. Bancorp Investments, Inc., 787 F.3d 797 (6th Cir. 2015), the Sixth Circuit abandoned the Platone "definitive and specific" standard, ruling that an employee who reports allegedly fraudulent conduct engages in protected activity under SOX when he or she has a reasonable belief that the conduct reported is prohibited under SOX, even if that belief is mistaken.

Rhinehimer was a certified financial planner at U.S. Bancorp who was terminated after he complained to his supervisor about allegedly inappropriate trades. He claimed to believe that the trades compromised his elderly client's estate plan and constituted fraud. The jury issued a verdict in favor of Rhinehimer in the amount of $250,000. On appeal, the company argued that, based on Riddle, Rhinehimer was required to establish facts from which a reasonable person could infer each element of an unsuitability fraud claim, including the misrepresentation or omission of material facts and that the broker acted with intent or reckless disregard of the client's needs. According to the company, the evidence did not support a finding by the jury that Rhinehimer had engaged in protected activity.

The court made an about-face from its holding in Riddle, stating it agreed with the ARB's standard as set forth in Sylvester. It explained that under this standard, "an employee need not establish the reasonableness of his or her belief as to each element of the violation" and that "[i]nstead, the reasonableness of the employee's belief will depend on the totality of the circumstances known (or reasonably albeit mistakenly perceived) by the employee at the time of the complaint, analyzed in light of the employee's training and experience." Based on the totality of the circumstances, the court found that the evidence was sufficient to sustain the jury's finding and that Rhinehimer reasonably believed that the trades constituted unsuitability fraud.

Fifth Circuit Reverses Dismissal of SOX Whistleblower Claims

On July 31, 2015, in Wallace v. Tesoro Corp., 796 F.3d 468 (5th Cir. 2015), the Fifth Circuit revived a SOX whistleblower complaint that was dismissed by the United States District Court for the Western District of Texas, holding that the plaintiff's alleged belief that the company violated SEC rules, as pleaded in the complaint, could be found to be objectively reasonable. The Fifth Circuit also affirmed the dismissal of claims not included in the OSHA complaint on the grounds that they were not administratively exhausted.

The plaintiff, formerly the vice president of pricing and commercial analysis at Tesoro Corp., claimed that the company retaliated against him after he complained that the company allegedly counted taxes as revenues on certain financial forms, in violation of GAAP. After OSHA dismissed his complaint, the plaintiff filed a complaint in federal district court pursuant to SOX's "kick out" provision, which permits a complainant to withdraw an unresolved complaint from OSHA's administrative process after 180 days. Once in federal court, he filed several amended complaints, alleging the same categories of protected activity as in his OSHA complaint but also alleging — for the first time — that he engaged in protected activity when he investigated and reported suspected wire fraud. The District Court dismissed the complaint, finding that the plaintiff's purported belief that booking taxes as revenue violated SEC rules was not objectively reasonable and that his other allegations did not constitute protected activity. The court also dismissed the plaintiff's claim relating to wire fraud because it alleged activity outside the scope of the OSHA complaint.

The Fifth Circuit ruled that the District Court erred in dismissing Wallace's claim that he engaged in protected activity under SOX when he reported that the company booked taxes as revenue. The court concluded that Wallace's basis for his belief that the practice violated SEC rules, including the level and role of his accounting expertise and how that should weigh against him, are grounded in factual disputes that cannot be resolved on a motion to dismiss. However, the court affirmed the dismissal of Wallace's allegations that were not raised before OSHA, holding that the exhaustion requirement applicable to Title VII claims filed with the EEOC applies with equal force to SOX claims filed with OSHA. The court stated that "[b]y failing entirely to reference a distinct category of protected activity in his OSHA complaint, Wallace did not file a complaint whose investigation would reach that activity."


Recent decisions serve as a reminder that courts may well take a broad view of what constitutes protected activity under SOX and the Dodd-Frank Act. Employers should take great care to ensure that management and human resources professionals receive proper training to ensure that potential whistleblower complaints are promptly and thoroughly investigated and assessed.

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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