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Does the whistleblower protection provision of the Dodd-Frank Act protect internal whistleblowing?

Split of Authority About Dodd-Frank Whistleblower Protection for Internal Disclosures

A split of authority has emerged regarding whether internal disclosures are protected under Section 922 of Dodd-Frank, 15 U.S.C. § 78u-6(h). The split stems from what appears to have been a drafting error. Under § 78u-6(a)(6), the term “whistleblower” means “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.” The anti-retaliation provision in Section 922, however, defines protected conduct as lawful actions taken by a 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.), this chapter, including section 78j-1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

15 U.S.C. § 78u-6(h)(1)(A).

While the definition of “whistleblower” appears to require a disclosure to the SEC, the “catch-all” provision in § 78u-6(h)(1)(A)(iii) encompasses conduct protected by Section 806 of SOX, including internal disclosures made to supervisory personnel irrespective of whether those disclosures are made to the SEC.

SEC Broadly Construes Dodd-Frank Whistleblower Protection

The SEC has adopted the position that Dodd-Frank whistleblower protections cover those who make only internal disclosures. On August 5, 2015, the SEC released interpretive guidance reiterating that Dodd-Frank whistleblower protection is not limited to disclosures made to the SEC in accordance with the procedures for obtaining a whistleblower award. Rather, protection extends to whistleblowers who report potential securities law violations, whether internally or to the SEC. See Exchange Act Release No. 34-75592, 80 Fed. Reg. 47,829 (Aug. 10, 2015).

The SEC offered three reasons not to limit Dodd-Frank whistleblower protection to disclosures to the Commission:

  • First, the text of Rule 21F-2(b)(1) clarifies that Dodd-Frank whistleblower protection extends to the broad range of disclosures identified in Section 21F(h)(1)(A). This includes (i) providing information to the SEC through the whistleblower program; (ii) initiating, testifying in, or assisting in any investigation or judicial or administrative action of the SEC based upon or related to a whistleblower submission to the SEC; or (iii) making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 or “any other law, rule, or regulation subject to the jurisdiction of the Commission.” Id. The whistleblower protection provision of SOX includes internal disclosures about a violation of any SEC rule or regulation.
  • Second, Rule 21F-2(b)(1)(iii) expressly provides that “[t]he anti-retaliation protections apply whether or not [an individual] satisf[ies] the requirements, procedures and conditions to qualify for an award.” Id.
  • Third, the SEC’s construction of Dodd-Frank whistleblower protection is driven by the policy goals and intent of the SEC whistleblower reward program:

Specifically, by providing employment retaliation protections for individuals who report internally first to a supervisor, compliance official, or other person working for the company that has authority to investigate, discover, or terminate misconduct, our interpretive rule avoids a two-tiered structure of employment retaliation protection 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. Under our interpretation, an individual who reports internally and suffers employment retaliation will be no less protected than an individual who comes immediately to the Commission. Providing equivalent employment retaliation protection for both situations removes a potentially serious disincentive to internal reporting by employees in appropriate circumstances. A contrary interpretation would undermine the other incentives that were put in place through the Commission’s whistleblower rules in order to encourage internal reporting.

Id.

In September 2015, the U.S. Court of Appeals for the Second Circuit became the first federal appellate court to adopt the SEC’s reasoning. See Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015). Berman squarely addressed whether Dodd-Frank’s anti-retaliation protection extends to an employee’s internal disclosures to his employer. The Berman decision focuses on whether the conflicting provisions create an ambiguity requiring the court to defer to the SEC’s interpretation pursuant to Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The Second Circuit held that Chevron deference is warranted and adopted the SEC’s position that internal disclosures constitute protected activity under Dodd-Frank. Berman, 801 F.3d at 155.

The court began by noting that this case was much closer than similar cases involving statutory ambiguity because, here, the two provisions at issue created no “absolute conflict.” Id. at 150. However, the anti-retaliation provision would have an “extremely limited scope” if the court were to apply therein the Dodd-Frank definition of whistleblower, which requires a disclosure to the SEC. Id. at 151. Pursuant to the Dodd-Frank definition of whistleblower, there would be “virtually no situation” where subsection (iii) would apply, except in rare cases where an employee reported internally and to the SEC at essentially the same time. Id. at 152.

The court examined the legislative history, statutory text, and other cases deciding the issue. It observed that only one other federal court of appeals had taken up the issue. Id. at 153 (citing Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013)). In Asadi, the Fifth Circuit reached the opposite conclusion, holding that Dodd-Frank’s statutory language is not ambiguous and that Section 922 protects only disclosures to the SEC. Asadi, 720 F.3d at 627–31. The Second Circuit in Berman, however, sided with the majority of district courts, which have concluded that it is unclear whether Congress intended for the law’s anti-retaliation provision to have such a narrow scope. See Berman, 801 F.3d at 153. Because of this uncertainty, the Second Circuit held, a statutory ambiguity exists and deference to the SEC’s reasonable interpretation of “whistleblower” is appropriate. See id. at 155.

As noted above, most district court opinions on this issue have held that Section 922 protects internal disclosures. See, e.g., Lutzeier v. Citigroup Inc., No. 4:14CV183 (E.D. Mo. Nov. 19, 2015); Somers v. Digital Realty Trust, Inc., 119 F. Supp. 3d 1088 (N.D. Cal. 2015); Khazin v. TD Ameritrade Holding Corp., No. 13-4149-SDW-MCA, 2014 WL 940703 (D.N.J. Mar. 11, 2014); Yang v. Navigators Grp., Inc., 18 F. Supp. 3d 519 (S.D.N.Y. 2014); Ahmad v. Morgan Stanley & Co., 2 F. Supp. 3d 491 (S.D.N.Y. 2014); Rosenblum v. Thomson Reuters (Markets) LLC, 984 F. Supp. 2d 141 (S.D.N.Y. 2013); Ellington v. Giacoumakis, 977 F. Supp. 2d 42 (D. Mass. 2013); Murray v. UBS Sec., LLC, No. 12-civ-5914, 2013 WL 2190084 (S.D.N.Y. May 21, 2013); Genberg v. Porter, 935 F. Supp. 2d 1094 (D. Colo. 2013); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986 (M.D. Tenn. 2012); Kramer v. Trans-Lux Corp., No. 3:11cv1424-SRU, 2012 WL 4444820 (D. Conn. Sept. 25, 2012). These cases have consistently rejected Asadi, found ambiguity in the provisions at issue, and held that internal disclosures are protected.

For example, in an October 2013 decision, the U.S. District Court for the Southern District of New York disagreed with Asadi and found that the differing statutory definitions of “whistleblower” created an ambiguity that was best resolved by deferring to the SEC’s implementing regulations. See Rosenblum, 984 F. Supp. 2d at 148. The U.S. District Court for the District of New Jersey took a similar approach in Khazin v. TD Ameritrade Holding Corp. In that case, an investment oversight officer at a securities firm was terminated after reporting a compliance violation to his supervisors. The court found that the statute was ambiguous and that it was therefore appropriate to defer to the SEC’s interpretive guidance. See Khazin, 2014 WL 940703, at *6.

As another example, Judge Edward M. Chen recently issued an opinion concluding that Asadi is fatally flawed and that the SEC’s implementing regulations should be afforded Chevron deference. See Somers, 119 F. Supp. 3d at 1106. Paul Somers was a vice president at Digital Realty, who was terminated after reporting to senior management that his supervisor had violated SOX.

Somers brought suit under Dodd-Frank, alleging that he was terminated in retaliation for internally reporting securities law violations. Digital Realty filed a motion to dismiss, arguing that Somers did not qualify as a “whistleblower” under Dodd-Frank because he reported his concerns internally and not to the SEC. Judge Chen denied Digital Realty’s motion, finding that SEC Rule 21F-2(b)(1) is entitled to Chevron deference so that individuals like Somers, who report their suspicions only internally, are protected under Dodd-Frank. See id.

Applying the surplus-usage and harmonious-reading canons of statutory interpretation, in conjunction with the legislative intent behind Dodd-Frank, Somers rejected the Asadi court’s reasoning and concluded that the statutory language is ambiguous. See id. at 1100–05. In Asadi, the court determined that an expansive reading of Dodd-Frank would make the anti-retaliation provision of SOX moot. In contrast, Somers reasons that individuals might file claims under SOX in addition to, or instead of, Dodd-Frank because they might prefer an administrative forum and because a prevailing plaintiff can recover monetary damages other than back pay, such as damages for noneconomic harms. See id. at 1103–04.

After finding sufficient ambiguity to invoke Chevron deference, the Somers court decided that SEC Rule 21F-2(b)(1) eliminates the tension between Dodd-Frank’s narrow definition of whistleblower and the broad language of (iii) and so is a reasonable construction of the statute. See id. at 1106. In addition, the SEC’s rule is consistent with Dodd-Frank’s purposes to improve accountability and transparency, encourage the internal reporting of potential illegal activities, and enhance the SEC’s ability to bring actions against employers who engage in retaliatory action. See id. at 1105–06.

Other district courts declining to follow the Fifth Circuit’s decision in Asadi include the U.S. District Court for the District of Kansas, see Azim v. Tortoise Capital Advisors, LLC, No. 13-2267-KHV, 2014 WL 707235 (D. Kan. Feb. 24, 2014) (determining that an anti-retaliation claim under Dodd-Frank is not futile solely because the whistleblower did not report to the SEC), and the U.S. District Court for the District of Nebraska, see Bussing v. COR Clearing, LLC, 20 F. Supp. 3d 719 (D. Neb. 2014) (concluding that the definition of “whistleblower” under Dodd-Frank’s anti-retaliation provision unambiguously encompasses those employees who make internal disclosures and do not also report to the SEC).

In the wake of Berman and the SEC’s August 2015 interpretive guidance,[1] more courts will likely be inclined to reject Asadi’s narrow construction of Dodd-Frank protected conduct. Notwithstanding, several district courts have expressly followed the Fifth Circuit’s precedent in Asadi. See, e.g., Puffenbarger v. Engility Corp., No. 1:15-cv-188, 2015 WL 9686978, at *8–9 (E.D. Va. Dec. 31, 2015) (“[B]ecause ‘the intent of Congress is clear,’ as the statute directly and unambiguously limits whistleblower protection to individuals who report to the SEC, it is necessary to ‘give effect to the unambiguously expressed intent of Congress,’ and hence to reject the SEC’s more expansive interpretation of the term ‘whistleblower.’”); Verble v. Morgan Stanley Smith Barney, LLC, No. 3:15-CV-74-TAV-CCS, 2015 WL 8328561 (E.D. Tenn. Dec. 8, 2015); Englehart v. Career Educ. Corp., No. 8:14-cv-444-T-33EAJ, 2014 WL 2619501 (M.D. Fla. May 12, 2014); Banko v. Apple Inc., 20 F. Supp. 3d 749 (N.D. Cal. 2013).

In Englehart v. Career Education Corp., a U.S. district court in Florida held that an employee of an education services company, who internally disclosed material misrepresentations in budget forecasts to her supervisor, was not a whistleblower within Dodd-Frank’s statutory definition. The court found that the restrictive statutory definition of whistleblower was unambiguous and, therefore, disregarded the SEC’s guidance. See Englehart, 2014 WL 2619501, at *9. Rather, the court agreed with Asadi that only an employee who complains to the SEC can be a whistleblower under the law. Id.

In Banko v. Apple Inc., the U.S. District Court for the Northern District of California also followed the Fifth Circuit’s lead. Joshua Banko, an Apple engineer, reported to his supervisors that a fellow engineer was embezzling money, an allegation that an internal investigation later confirmed. Apple then terminated Banko, who responded by bringing a claim for whistleblower retaliation under Dodd-Frank. The district court, citing Asadi, granted Apple’s motion for summary judgment on the Dodd-Frank claim, on the grounds that Banko never reported his concerns to the SEC. See Banko, 20 F. Supp. 3d at 757.

The circuit split on this key issue will likely warrant Supreme Court review. But, until an authoritative ruling comes, whistleblowers who have suffered retaliation for internal disclosures should consider bringing SOX claims within the 180-day statute of limitations.

[1] For a discussion of the SEC’s interpretive guidance, see SEC Guidance on Dodd-Frank Whistleblower Protection Is a Win for Whistleblowers, Aug. 5, 2015, https://www.zuckermanlaw.com/sec-guidance-on-dodd-frank-whistleblower-protection-is-a-win-for-whistleblowers.

 

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Jason Zuckerman, Principal of Zuckerman Law, litigates whistleblower retaliation, qui tam, wrongful discharge, and other employment-related claims. He is rated 10 out of 10 by Avvo, was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” in 2015 and selected by his peers to be included in The Best Lawyers in America® and in SuperLawyers.