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Tuesday, February 27, 2018

US Supreme Court News for Those Who Report Securities Law Violations: Narrow Interpretation of Whistleblower in Some Instances under Dodd-Frank Act

On February 21, 2018, the US Supreme Court issued its decision in a case, Digital Realty Trust Inc. v. Somers, that gives a restrictive interpretation of “whistleblower" in certain instances under the Dodd-Frank Act.

The Dodd-Frank Act established a new whistleblower program in 2010. This program encourages persons to provide information relating to a violation of U.S. securities laws through two provisions: The first creates a private cause of action for certain persons against employers who retaliate against them for engaging in specified protected actions. The second established a new monetary bounty system to certain types of whistleblowers. It requires the Securities and Exchange Commission (SEC) to pay significant monetary awards to persons who provide information to the SEC which leads to a successful enforcement action.

Both the Sarbanes-Oxley Act of 2002 and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act gives employee-whistleblowers protections from retaliation by their employers. However, these two Acts differ in important definitions and other aspects.

Sarbanes-Oxley Act

Under the Sarbanes-Oxley Act, protection against retaliation applies to all employees who whistleblow or report misconduct not only to the Securities and Exchange Commission (the “SEC” or “Commission”) but also extends this protection to employees who report misconduct to:

  • Any other federal agency, or to any Member or any committee of Congress; or
  • A person with supervisory authority over the employee, or
  • Any other person working for the employer who has the authority to investigate, discover, or terminate misconduct.

Whistleblower protection is also extended to those:

  • Who file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.

Under the Sarbanes-Oxley Act, if an employee engages in any of the aforementioned acts of whistleblowing, the employer may not retaliate by discharging, demoting, suspending, threatening, harassing, or in any other manner discriminating against an employee in the terms and conditions of employment.

Dodd-Frank Act

Under the Dodd-Frank Act, 15 U.S.C.S. § 78u-6(h)(1)(A)(iii), an employee whistleblower is also protected from retaliation, such as demotion or termination etc.,  by the employer for reporting or making disclosures that are required or protected under Sarbanes-Oxley, the Securities Exchange Act of 1934, the criminal anti-retaliation proscription at 18 U.S.C.S. § 1513(e), or any other law subject to the SEC's jurisdiction.

However, the Dodd-Frank Act additionally created a monetary bounty reward system designed to encourage persons to report misconduct to the SEC. Under this system, a person who reports information to the SEC, when that reporting leads to monetary penalties, may themselves receive a monetary bounty reward. However, the US Supreme Court ruled in interpreting the statute, that the definition of a “whistleblower” in terms of who may eligible for a monetary bounty under the the Dodd-Frank Act, is narrower than the definition of “whistleblower” as to the prohibition against retaliation by the employer.

The Dodd-Frank Act precisely defines  a narrower class as to the definition of a whistleblower as it pertains to those who may be eligible for a monetary bounty. Under 15 U.S.C.S. § 78u-6(a)(6), it defines "whistleblower" to mean a person who provides information relating to a violation of the securities laws to the Securities and Exchange Commission. A whistleblower so defined is eligible for monetary award if original information the person provides to the SEC leads to a successful enforcement action.

In Digital Realty Trust Inc. v. Somers, a former employee, Paul Somers, a Vice President from 2010 to 2014, suspected securities law violations by his company.  Paul Somers did report it to senior management, and he was terminated shortly after he reported to his senior management. Although Paul Somers reported it to his senior management, he did not report it to the SEC before his termination.

The Court ruled that Somers therefore was not entitled to monetary bounty relief under provision of the Dodd-Frank Act, 15 U.S.C.S. § 78u-6(a)(6), because § 78u-6(a)(6) did not include an individual who reported a  securities law violation only to his employer,  but who failed to report a securities law violation to the SEC. The Court held that the broader definition of whistleblowers ( those who report security law violations to those other than the SEC itself, such as an employer or Congress, etc.) did not apply as to a whistleblower who may be eligible for a monetary bounty.  The US Supreme Court held that Paul Somers was not a whistleblower under the definition in § 78u-6(a)(6) that allows for monetary bounty recovery.

The Court held that the Dodd-Frank Act defined a “whistleblower”, as a person who provided information relating to a securities law violation to the SEC itself, and interpreted/applied a narrower definition of whistleblower as to who may be eligible for a monetary reward.

Prohibition Against Employer Retaliation

However, in terms of who may be given protection from employer retaliation, the US Supreme Court followed the language of the statute to allow for the broader definition of “whistleblower” and did not restrict protection from employer retaliation only to those who reported to the SEC Itself.

Under the Dodd-Frank Act, the statue states as to prohibitions from employer retaliation and as those who may have a private cause of action:

§ 78u-6. Securities whistleblower incentives and protection

(h) Protection of whistleblowers.

(1) Prohibition against retaliation.

(A) In general. 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 of the United States Code., and any other law, rule, or regulation subject to the jurisdiction of the Commission.

Therefore, the protections against retaliation to the employee apply whether or not the employee meets the requirements to qualify for a monetary award. A person receives protections against retaliation, when the person has a reasonable belief that the information reported relates to a possible securities law violation and the person provides that information in a manner described in clauses (i) through (iii) of 15 U.S.C.S. § 78u-6(h)(1)(A).Therefore, a person may have statutory protections against retaliation as a “whistleblower” without reporting suspected violations to the SEC, provided he reports the information in a manner protected by one of the anti-retaliation clauses. For example,  reporting to a company supervisor would qualify when the reporting has protection from retaliation under the Sarbanes-Oxley retaliation provision.

Two Distinct Whistleblower Definitions

The SEC’s regulations implementing the Dodd-Frank provision contain two distinct whistleblower definitions:

1.) To be eligible for the monetary bounty reward program, a “whistleblower” is required    to provide the Securities and Exchange Commission (SEC) with information relating to possible securities-law violations.

2.) However for protections from employer retaliation given to a whistleblower, it does not require the whistleblower report to the Securities and Exchange Commission (SEC).

The US Supreme Court stated its reasoning as follows:

Financial inducements alone, Congress recognized, may be insufficient to encourage certain employees, fearful of employer retaliation, to come forward with evidence of wrongdoing. Congress therefore complemented the Dodd-Frank monetary incentives for SEC reporting by heightening protection against retaliation....

When enacting Sarbanes-Oxley’s whistleblower regime, in comparison, Congress had a more far-reaching objective: It sought to disturb the “corporate code of silence” that “discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally.” . .....Accordingly, the Sarbanes-Oxley anti-retaliation provision covers employees who report fraud not only to the SEC, but also to any other federal agency, Congress, or an internal supervisor.

In sum, Dodd-Frank’s text and purpose leave no doubt that the term “whistleblower” in §78u-6(h) carries the meaning set forth in the section’s definitional provision. The disposition of this case is therefore evident: Somers did not provide information “to the Commission” before his termination, §78u-6(a)(6), so he did not qualify as a “whistleblower” at the time of the alleged retaliation. He is therefore ineligible to seek relief under §78u-6(h).

What You Can Do

If you engaged in a protected activity in your workplace by reporting legally dubious acts of other employees who you believe were directly or indirectly acting on behalf of your employer with the employer's consent and think that your employer is retaliating against you, you should contact a experienced employment law attorney to explore your legal options in the safest way for you.

I am an experienced and passionate employment attorney who will be aggressive about enforcing your rights and finding redress for you. Every situation is fact specific, and if you are a person who believes you may be the target of the employer's illegal acts, please contact Hope A. Lang, Attorney at Law, today a for a free consultation.

Hope A. Lang, Attorney at Law serves clients throughout southern and northern New Jersey, including Bergen, Middlesex, Essex, Hudson, Monmouth, Ocean, Union, Camden, Passaic, and Morris Counties with locations in Central, western and northern NJ to meet with clients.


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