Attorney: Omar Jafri
Pomerantz Monitor September/October 2017
Next term, the Supreme Court has agreed to resolve a split of authority among the federal courts of appeals on whether an employee who blows the whistle on corporate misconduct internally, but has not yet registered a formal complaint with the SEC, is protected by the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).
Section 21F of the Exchange Act, added by Dodd-Frank, directs the SEC to pay awards to individuals who provide information to the SEC that forms the basis of a successful enforcement action, and prohibits employers from retaliating against such whistleblowers for reporting violations of the securities laws. Section 21F defines a “whistleblower” as “any individual who provides . . .information relating to a violation of the securities laws to the Commission . . . ” This definition limits whistleblowers to people who actually provide information to the SEC; but subdivision (iii) of the anti-retaliation provisions protects any employee who makes disclosures to the SEC or makes “disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 [“SOX”], . . . the Securities Exchange Act of 1934 . . . and any other law, rule, or regulation subject to the jurisdiction of the Commission.” So, the question is whether the anti-retaliation provisions apply to people who may not fall within the definition of whistleblowers under the Act.
In 2013, the manager of G.E. Energy in Iraq filed a lawsuit against the company pursuant to the antiretaliation provisions of Dodd-Frank. He alleged that he was fired because he reported to senior corporate officers that the company had engaged in corruption to curry favor with a government official in an effort to negotiate a lucrative business deal. When he was fired he had not (yet) reported the violations to the SEC. The Fifth Circuit affirmed the dismissal of his complaint, holding that the plain and unambiguous meaning of the statutory term “whistleblower” did not include anyone who had not yet reported any corporate misconduct to the SEC. It rejected the argument that the anti-retaliation provision was broader than the statutory definition of a whistleblower because it was plausible that an employee could simultaneously report corporate misconduct to both the company and the SEC, thus qualifying for protection. Based on this far-fetched hypothetical scenario, the Fifth Circuit refused to defer to the SEC’s contrary interpretation, and held that the statute’s plain and unambiguous language precluded its application to those who had only reported corporate misconduct to management.
Most federal courts, including the Second and Ninth Circuits, have disagreed with the Fifth Circuit’s reasoning. These courts have concluded that the anti-retaliatory provisions of the statute protect people who are protected or required under SOX, even if they do not meet the statutory definition of a whistleblower. They have held that the anti-retaliation provisions are, at least, in tension with each other if not independently ambiguous, justifying deferring to the SEC’s judgment that internal whistleblowers are protected by Dodd-Frank.
The Fifth Circuit’s reasoning would have an especially dramatic effect on auditors and attorneys, who are prohibited by SOX and SEC rules from filing reports with the Commission unless they first report corporate misconduct to senior managers or to a committee of the board of directors of the company. If they can be picked off before they have a chance to report violations to the SEC, companies may be able to stifle them. Auditors and attorneys played a central role in the Enron and other scandals, and the purpose and intent of SOX is to also regulate the behavior of these professionals. The Fifth Circuit utterly failed to address the impact of its decision on the obligations imposed by SOX on auditors and attorneys.