Speak Up, But Speak Only to the SEC: The Current State of Whistleblower Protections under Securities Law

by Hillary Brouillette, Senior Associate

Introduction

“If you tell the truth you won’t have to remember anything”[1]—except the Sarbanes-Oxley and Dodd-Frank Acts, that is. For people who work in the financial industry, telling the truth about securities law violations within their workplace is not as clear-cut as Mr. Twain suggested. Specifically, to whom one should and must report violations of federal or state law in order to avoid resulting unemployment is much more complicated and less intuitive than remembering the truth.

I. Confusion for Whistleblowers under Sarbanes Oxley and Dodd-Frank

The Sarbanes-Oxley Act (“SOX”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) provide incentives and protections for whistleblowers who report violations of federal securities laws.[2] But until the United States Supreme Court weighed in just last month, federal courts of appeals were split on the issue of to whom a worker had to blow his whistle—his boss, the Securities Exchange Commission (“SEC”), or both.[3] In Digital Realty Trust, Inc. v. Somers, the Supreme Court unanimously agreed that Dodd-Frank only protects employees who externally report information relating to securities law, including SOX, violations to the SEC.[4] Meanwhile, internal reports of the same violations may be protected by SOX, which is referenced as protected whistleblower conduct under Dodd-Frank.[5]

II. Background of Whistleblower Provisions under SOX and Dodd-Frank

Congress enacted SOX in 2002, largely in response to the collapse of Enron, with the goal of restoring public trust in financial markets.[6] Six years later, the financial crisis of 2008 invited Congress to impose more regulations that would increase accountability and transparency to ensure financial stability.[7] The Security Exchange Act of 1934 was amended by Dodd-Frank in 2010.[8] Recognizing that “whistleblowers often face the difficult choice between telling the truth and . . . committing ‘career suicide,’”[9] Congress included in Dodd-Frank “a new, robust whistleblower program designed to motivate people who know of securities law violations to tell the SEC.”[10] Congress also added an award program for whistleblowers who voluntarily give information to the SEC that leads to monetary sanctions against violators of securities law.[11]

The anti-retaliation protections for whistleblowers in each act are vital to the larger regulatory goals of detection and punishment of corporate misconduct and increased consumer protection. SOX protects corporate employees who provide information or assistance either to a federal regulatory or law enforcement agency, Congress, or any person with supervisory authority over the employee from discharge or employment discrimination for reporting information the employee reasonably believes is a violation of criminal fraud statutes, any SEC rule or regulation, or any federal law relating to fraud against shareholders.[12] The qualifications for whistleblower protection under Dodd-Frank are similar but not synonymous, although both acts often protect the same individuals for reporting misconduct. The exact variations and effects of which were at issue before the Supreme Court in Digital Realty Trust.[13]

III. The Confusion Behind Dodd-Frank’s Whistleblower Standards

Dodd-Frank universally defines a “whistleblower” as “any individual who provides . . . information relating to a violation of securities law to the Commission, in a manner established, by rule or regulation, by the Commission.”[14] The anti-retaliation provisions prohibit an employer from discharging, harassing, or discriminating against a whistleblower “because of any lawful act done by the whistleblower” in three circumstances.[15] First, “in providing information to the Commission in accordance with this section.”[16] Second, “in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information.”[17] And third, “in making disclosure that are required or protected under” SOX, the Securities Exchange Act of 1934, the criminal anti-retaliation prohibition at 18 U.S.C. § 1513(e), or “any other law, rule, or regulation subject to the jurisdiction of the Commission.”[18] The cross reference to SOX within the third category of qualifying conduct obviously led to confusion about how, and specifically to whom, an employee must report securities law violations in order to avoid discrimination.[19]

By cross referencing laws outside of Dodd-Frank, including SOX, this third category of behavior protects disclosures to agencies and individuals other than the SEC.[20] But internal disclosure directly conflicts with the definitional requirement of whistleblowers under the same section of Dodd-Frank. The confusion about whether an employee must make external reports to the SEC before his termination or discrimination was only furthered by the rules and regulations for the implementation of Dodd-Frank. Contrary to the text of Dodd-Frank, the SEC defined “whistleblower” differently for the award program and anti-retaliation protections of Dodd-Frank.[21] Under Rule 21F-2, an individual who “provide[s] the Commission with information . . . relat[ing] to a possible violation of the Federal securities laws” is a whistleblower for purposes of Dodd-Frank’s award program.[22] In a second definition, Rule 21F-2 defines whistleblower for anti-retaliation purposes as a person who “possess[es] a reasonable belief that the information you are providing relates to a possible securities law violation . . . and [y]ou provide that information in a manner described in” the three categories of conduct above.[23] This second definition expressly applies whether or not the person qualifies as a whistleblower under the award program.[24] Rule 21F-2 in conjunction with the statutory cross reference to internal reports independently protected by SOX means, according to the SEC, that an individual could get anti-retaliation protections as a whistleblower without reporting violations to the SEC.[25]

IV. The Supremes Provide a Narrow Definition for Whistleblowers under Dodd-Frank

Which definition and conduct qualified whistleblowers for Dodd-Frank protection was up in the air until the Supreme Court weighed in during February. In Digital Realty Trust, Inc. v. Somers,[26] the Court held that an employee must provide information to the SEC before his termination to be entitled to the anti-retaliation and award provisions of Dodd-Frank.[27] Digital Realty Trust terminated Paul Somers after he reported the company’s elimination of internal controls, a SOX violation, to Digital Realty’s senior management.[28] Because Somers did not seek the requisite administrative remedy within 180 days as required by SOX, his only chance at recovery for his allegedly retaliatory discharge was Dodd-Frank, which allows a whistleblower to initially file a complaint in federal court within a more lenient six-year limitation.[29] Unfortunately, Somers’s anti-retaliation claim under Dodd-Frank failed in a crucial way—he was not a whistleblower according to the language of the statute itself.

Even though Somers’s conduct—reporting SOX violations internally to his supervisor—is protected under both acts, Dodd-Frank only protects internal reporting by those who report “to the Commission” before their employers retaliate.[30] The Court rejected pressure to give deference to the SEC’s definitions in Rule 21F-2, unlike courts below, because “Congress has directly spoken to the precise question at issue.”[31] Similarly, the Court rejected arguments that shrinking the protection of Dodd-Frank from previous application and ordinary meaning to require external reporting to the SEC would lead to absurdity.[32] Quite simply, the Court pointed to the explicit definitions within Dodd-Frank for the answer and rejected a purposive approach that had previously allowed courts to reach more fair results.[33]

Conclusion: The Murky State of Whistleblower Protections

Now it is clear that an employee who only reports a securities law violation to an internal supervisor and is subsequently terminated or demoted is not a Dodd-Frank whistleblower, although he may be protected by SOX.[34] Under Dodd-Frank, a whistleblower must report suspected securities law violations to the SEC. Internal reporting, although not precluded, is not sufficient. The differences between the qualifications may not make much difference if whistleblowers act fast, but that requires enough of an understanding of these laws to comfort an employee in his decision to report misconduct to anyone at all. And the type of reporting may weigh heavily on the remedies available to whistleblowers.

Although both acts protect employees who report corporate misconduct, fraud, or violations of SEC rules or regulations from employer retaliation, they do not provide identical remedies or avenues of recovery for whistleblower claims.[35] Terminated whistleblowers may be entitled to “all relief necessary to make the employee whole,” including back pay with interest, reinstatement, and special damages resulting from discrimination and accompanying litigation costs under SOX, but must exhaust administrative remedies before heading to federal court.[36] A complaint must be filed with the Secretary of Labor within 180 days of the termination.[37] But an aggrieved employee may be able to avoid the 180-day deadline to file a complaint with the Secretary of Labor and immediately file a complaint for retaliatory discrimination in federal court if he is also protected from retaliation by Dodd-Frank.[38]

Where this leaves an employee under state law is less clear. For example, Louisiana’s “whistleblower” statute only protects an employee who advises his employer of a violation of state law in good faith.[39] Because violations of state Blue Sky laws are likely to also violate federal securities laws, whistleblowers may have claims under SOX, Dodd-Frank, and state whistleblower protections. Taking advantage of this opportunity requires an in-depth understanding of the qualifications of each statute and quick maneuvering. An employee needs to blow his whistle both internally and externally all before any employer discrimination, or risk the ultimate price for paying the truth—“career suicide.”[40]

[1] Thomas DeMichele, If You Tell the Truth, You Don’t Have to Remember Anything, Fact/Myth (Aug. 22, 2016), http://factmyth.com/factoids/if-you-tell-the-truth-you-dont-have-to-remember-anything/ (While this quote is widely attributed to Mark Twain, it is questionable whether he coined it. If the Twain connection is a myth, then the debate over its attribution to Twain proves the words of the quote) [https://perma.cc/A7M4-G6LE].

[2] 18 U.S.C. § 1514A (2018); 15 U.S.C. § 78u-6.

[3] See, e.g.,Asadi v. G.E. Energy (USA), 720 F.3d 620 (2013); Berman v. Neo@Ogilvy, L.L.C., 801 F.3d 145 (2015); Somers v. Digital Realty Trust Inc., 850 F.3d 1045 (2017).

[4] Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018).

[5] See 15 U.S.C. § 78u-6(h)(1)(A)(iii); 18 U.S.C. § 1514A(a)(1)(A)-(C).

[6] See Brooke Masters, Enron’s fall raised the bar in regulation, Fin. Times, Dec. 1, 2011,https://www.ft.com/content/9790ea78-1aa9-11e1-ae14-00144feabdc0 [https://perma.cc/PVY7-VSAL].

[7] 124 Stat. 1376.

[8] Digital Realty Trust, 138 S. Ct. at 773 (citing Lawson v. FMR L.L.C., 571 U.S. 429, ___ (2014)).

[9] Id. at 773–74 (quoting S. Rep. No.111-176, 111-112 (2010)).

[10] S. Rep. No. 111-179, p. 38 (2010).

[11] 15 U.S.C. § 78u-6(b)(1) (2018).

[12] 18 U.S.C. § 1514A(a)(1)(A)-(C).

[13] Digital Realty Trust, 138 S. Ct. 767.

[14] 15 U.S.C. § 78u-6(a)(6) (emphasis added); Digital Realty Trust, 138 S. Ct. 767.

[15] 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii).

[16] 15 U.S.C. § 78u-6(h)(1)(A)(i).

[17] 15 U.S.C. § 78u-6(h)(1)(A)(ii).

[18] 15 U.S.C. § 78u-6(h)(1)(A)(iii).

[19] Id.; see, e.g., Asadi v. G.E. Energy (USA), 720 F.3d 620, 624 n.6 (2013) (citing to Kramer v. Trans-Lux Corp., 2012 WL 4444820 (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., 2011 WL 1672066, at *4–5 (S.D.N.Y. May 4, 2011).

[20] 18 U.S.C. § 1514A; 15 U.S.C. § 78u-6.

[21] 75 Fed. Reg. 70488 (2010); 15 U.S.C. § 78u-6(j).

[22] 17 C.F.R. § 240.21F-2(a)(1) (2018).

[23] 17 C.F.R. § 240.21F-2(b)(1)(i)-(ii) (2018); 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii).

[24] 17 C.F.R. § 240.21F-2(b)(1)(iii).

[25] Compare17 C.F.R. § 240.21F-2(a)(1), with 17 C.F.R. § 240.21F-2(b)(1)(iii) . See also 80 Fed. Reg. 47829 (2015) (SEC reiterated that a providing information to the SEC is not a condition precedent to anti-retaliation protection of a whistleblower).

[26] Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018).

[27] Id.

[28] Id.

[29] Id.

[30] 15 U.S.C. § 78u-6(a)(6) (2018); 15 U.S.C. § 78u-6(h)(1)(A)(iii) (2018).

[31] Digital Realty Trust, 138 S. Ct. at 781–82 (quoting Chevron USA v. Natural Res. Def. Council, 467 U.S. 837, 842 (1984)).

[32] Id.at 767–77.

[33] Id.(citing Burgess v. United States, 553 U.S. 124 (2008) for the interpretive rule that a statute’s explicit definition must be followed regardless of any variations from ordinary meaning).

[34] Id.

[35] 18 U.S.C. § 1514A (2018); 15 U.S.C. § 78u-6.

[36] 18 U.S.C. §§ 1514A(b)(1), (c).

[37] 18 U.S.C. § 1514A(b)(2)(D).

[38] Id.

[39] La. Rev. Stat. § 23:967 (2018).

[40] Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 774 (2018) (quoting S. Rep. No.111-176, 111-112 (2010)).

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