• Supreme Court Decision Encourages Employees to Report All Potential Compliance Violations Initially to The SEC—and to Bypass Internal Compliance Departments
  • April 2, 2018 | Authors: M. Richard Schroeder; Justin M. Woodard
  • Law Firm: Jones Walker LLP - New Orleans Office
  • On February 21, 2018, the U.S. Supreme Court held that under Dodd-Frank’s anti-retaliation provision, an employee must report a suspected violation of securities laws to the SEC in order to qualify as a protected “whistleblower.” Digital Realty Trust, Inc. v. Somers, No. 16-1276 (Feb. 21, 2018) (the Somers decision). The decision resolves a federal circuit split regarding the interpretation of the term “whistleblower” under Dodd-Frank and clarifies that employees who only report suspected violations internally to their employers are not protected “whistleblowers” under Dodd-Frank, and therefore are not eligible for Dodd-Frank’s bounty program. The result will be that more employees will report potential violations initially to the SEC, before or in lieu of reporting internally.

    Background

    The collapse of Enron and the emergence of other corporate and financial fraud cases in the early 2000s, as well as the 2008 financial crisis, prompted Congress to pass legislation protecting employees who seek to report corporate wrongdoing. The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) each shield whistleblowers from retaliation for reporting certain corporate misconduct. Sarbanes-Oxley protects “employees” who report violations of securities laws to any federal regulatory or law enforcement agency, Congress, or internal corporate supervisor. Dodd-Frank, however, both protects and rewards “whistleblowers.” It defines a “whistleblower” as someone who provides “information relating to a violation of the securities laws to the [SEC].” Dodd-Frank incentivizes reporting through a bounty program that allows qualifying whistleblowers to recover an award of 10 to 30 percent of monetary sanctions collected in an enforcement action by the SEC. The protections against retaliation under Sarbanes-Oxley and Dodd-Frank include prohibiting employers from discharging or otherwise discriminating against an employee or whistleblower.