- Fifth Circuit to Dodd-Frank Whistleblowers: Call the SEC First
- July 24, 2013
- Law Firm: Duane Morris LLP - Philadelphia Office
The U.S. Court of Appeals for the Fifth Circuit's decision last week in Asadi v. G.E. Energy (USA)1 has been hailed as a win for employers because it requires whistleblowers who bring retaliation claims under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to show that they suffered retaliation because they reported potential violations to the U.S. Securities and Exchange Commission (SEC). The Fifth Circuit expressly rejected the position adopted by the SEC in its regulations implementing Dodd-Frank,2 and by the few district courts3 that have addressed the issue. That approach interprets Section 9224 of Dodd-Frank to apply its enhanced protections to certain whistleblowers even if they have not reported their concerns to the SEC.
Although this decision narrows the category of employees who can seek the enhanced protections of Dodd-Frank, it will likely increase the number of whistleblowers who report their concerns to the SEC before, or at least at the same time as, they tell their employer. Plaintiff-side employment or securities lawyers are likely to counsel individuals concerned about reporting securities violations to their employers to report them to the SEC so as to qualify for the enhanced benefits and protections offered by Dodd-Frank. The likely result is that companies learning of potential securities violations will have SEC involvement earlier in their internal investigations of such allegations, and more often.
The controversy addressed in Asadi arose from a seeming inconsistency, or contradiction, between subsections (a) and (h) of 15 U.S.C. § 78u-6. Subsection (a) defines a "whistleblower" as:
any individual who provides, or 2 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.
Subsection (h) lists three categories of activity for which a whistleblower is protected from retaliation:
No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower-
i. in providing information to the Commission in accordance with this section;
ii. in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
iii. in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), including section 10A(m) of such Act (15 U.S.C. 78f(m)), section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.
The third of those categories does not, on its face, require that the whistleblower have disclosed information to the SEC. The district courts presented with this apparent inconsistency held that it was grounds to "interpret" the term whistleblower as used in the protection provisions to include individuals who engage in the activity described in § 78u-6(h)(1)(A)(iii) even if they have not also made a report to the SEC.5
The Fifth Circuit rejected the reasoning of the district courts and held that there was no justification for judicial interpretation of the term "whistleblower" because (1) the term is defined in the statute and (2) the language of subsection (h)(iii) did not constitute an ambiguity or contradiction. The Fifth Circuit reasoned that subsection (a) defined the term whistleblower and that subsection (h) addressed a completely different question: which activities entitled the whistleblower to protection. The fact that the activities listed in subsection (h)(iii) do not explicitly include reporting to or cooperating with the Commission does not change the definition of the persons who are protected if they engage in those activities.
The Asadi decision is significant not just because it reached a different result than all of the district courts who have considered the question. The Fifth Circuit also rejected the SEC's definition of whistleblower in the final regulations implementing Dodd-Frank that became effective on August 12, 2011.
The Fifth Circuit's decision certainly seems more faithful to the spirit of Dodd-Frank. The statute's whistleblower provisions encourage individuals with information concerning potential securities laws violations to provide the information directly to the SEC. The decision in Asadi involved the anti-retaliation provisions of Section 922 of Dodd-Frank, 15 U.S.C. § 78u-6. That is one of two related provisions that encourage whistleblowers to contact the SEC directly. The other provision of Section 922, and the one that has sparked the most public discussion, gives a whistleblower whose report to the SEC leads to a successful enforcement action the right to a significant monetary reward. As the court in Asadi noted, its decision limits the enhanced protections of Dodd-Frank to those whistleblowers who report to and cooperate with the SEC. Whistleblowers who chose to raise their concerns only internally nonetheless continue to be protected from retaliation by Sarbanes-Oxley.6
Ironically, by encouraging whistleblowers to report potential violations to the SEC, these provisions of Dodd-Frank will make it more difficult for companies to make the self-report, based on a thorough internal investigation and prompt remedial measures, that is incentivized in the Federal Sentencing Guidelines and expressly encouraged in public guidance issued by the Department of Justice, the SEC and other federal regulators, such as the Office of Foreign Assets Control. Moreover, companies will be subject to more SEC oversight of their internal investigations, even when the allegations are entirely unfounded.
Asadi v. G.E. Energy United States, 2013 U.S. App. LEXIS 14470 (5th Cir. July 17, 2013).
- 17 C.F.R. § 240.21F-2(b)(1).
- See, e.g., Kramer v. Trans-Lux Corp., No. 3:11CV1424 (SRU), 2012 WL 4444820, at *4 (D. Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 994 n.9 (M.D. Tenn. 2012); Egan v. TradingScreen, Inc., No. 10 Civ. 8202 (LBS), 2011 WL 1672066, at *4-5 (S.D.N.Y. May 4, 2011).
- See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank"), 15 U.S.C. § 78u-6.
- See, e.g., Nollner, 852 F. Supp. 2d at 994 n.9; Kramer, 2012 WL 4444820, at *4-5; Egan, 2011 WL 1672066, at *4-5.
- See 18 U.S.C. § 1514A.