October 21, 2013 Top Story

Under Dodd-Frank Act, a Whistleblower Is a Whistleblower

Whistleblower requirements are the same under anti-retaliation and bounty provisions

John W. Joyce

The first federal appellate court to consider the issue has held that Dodd-Frank’s anti-retaliation provisions create a private cause of action only for those whistleblowers who provide information regarding a violation of the securities laws directly to the Securities Exchange Commission (SEC) and not to those who only report internally. Asadi v. G.E. Energy (USA), L.L.C. (PDF). The Fifth Circuit’s conclusion is at odds with the SEC’s own interpretation of the statute and that of the district courts who have considered the issue.

Section leaders see in the ruling a tension between the letter and purpose of Dodd-Frank. “Technically speaking, the decision is sound, yet most practitioners would say that the purpose of Dodd-Frank was to protect anyone who reported securities law violations, even if internally,” says D. Grayson Yeargin, Washington D.C., cochair of the ABA Section of Litigation’s Criminal Litigation Committee.

Dodd-Frank and the Consumer Protection Act 

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 [PDF] in response to the financial crisis of 2008, intending to improve accountability and transparency in the financial system. Among other features, Dodd-Frank established incentives and protections for those who report wrongdoing. The statute created bounty awards for whistleblowers and a private cause of action for whistleblowers who suffer retaliatory discharge.

The definitional section of Dodd-Frank, 15 U.S.C. § 78u-6(a)(6) [PDF], defines a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the [Securities and Exchange] Commission, in a manner established, by rule or regulation, by the Commission.”

The anti-retaliation provision, 15 U.S.C. § 78u-6(h)(1)(A), prohibits an employer from retaliating against a whistleblower who makes one of three types of disclosures: (i) those required by the Sarbanes-Oxley Act of 2002 (SOX), (ii) those required by the Securities Exchange Act of 1934, and (iii) those required by any other law, rule, or regulation subject to the SEC’s jurisdiction.

The courts and the SEC have grappled with the question of whether anti-retaliation protections, which appeared to include internal reporting, broaden the definition of a whistleblower. The SEC had taken the position that, for purposes the anti-retaliation protections, a whistleblower included anyone who provided information under 15 U.S.C. § 78u-6(h)(1)(A), even if he or she did not report directly to the SEC. 17 C.F.R. 240.21F-2(b)(1). Several federal district courts had taken the same position.

The Asadi Case

Asadi was GE Energy’s Iraq County Executive. He alleged that GE Energy terminated him for making an internal report of a potential Foreign Corrupt Practices Act violation on the part of GE Energy. Asadi did not report the potential violation to the SEC.

GE moved to dismiss on two grounds: (1) Asadi was not a whistleblower because he did not report a violation to the SEC, and (2) Dodd-Frank did not apply extraterritorially. The district court granted the motion on the second ground.

The Fifth Circuit Opinion

The court of appeals analyzed the relationship between the whistleblower definition in 15 U.S.C. § 78u-6(a)(6), which requires an SEC report, and the whistleblower-protected acts in 15 U.S.C. § 78u-6(h)(1)(A)(iii), which do not require an SEC report. The court framed the issue as “whether an individual who is not a ‘whistleblower’ under the statutory definition of that term . . . may, in some circumstances, nevertheless seek relief under the whistleblower-protection provision.”

Asadi argued that the two district court cases that found the definition of “whistleblower” is actually broader than the statutory definition should provide the proper analysis. Asadi argued that even if he did not make a report directly to the SEC, he qualified as a Dodd–Frank whistleblower because his internal report was required or protected under SOX and the Foreign Corrupt Practices Act.

Even though it recognized that “Asadi has some case law as well as the SEC regulation on this issue in his corner,” the court still rejected his argument, reasoning that “[u]nder Dodd-Frank’s plain language and structure, there is only one class of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.” It decided that the protected acts provision did not expand the definitional scope of a whistleblower, which was the threshold to maintaining a cause of action. Because Asadi did not report to the SEC, he had no claim.

In addition to relying on plain textual analysis, the court observed that Asadi’s interpretation would render SOX’s anti-retaliation laws moot because his interpretation would render all SOX whistleblowers the same as Dodd-Frank whistleblowers, and nobody would ever report under SOX because Dodd-Frank provides a better bounty, a more direct right of action, and more favorable statutes of limitations.

Finally, the court rejected the argument that it should defer to the SEC’s own regulations, because the SEC’s interpretation was contrary to the plain terms of the statute.

Practical Impact

Though at first blush the decision appears a victory for employers, the practical impact of the decision might not be so favorable.

“This very question was contemplated during the Dodd-Frank rulemaking process, and the consensus was to incentivize employers to solve problems internally,” says Yeargin. “This decision may create the opposite incentive.”

“The ruling is likely to create headaches for employers, who may have to rethink the structure of their compliance policies and what they advise their employees about the whistleblower laws,” predicts Mauro M. Wolfe, New York, cochair of the White Collar & Corporate Investigation Subcommittee of the Section’s Securities Litigation Committee.

The Fifth Circuit may not have the last word on the issue. “I would not be surprised to see the next appellate court come down differently on the question,” says Wolfe.

Keywords: Dodd Frank, whistleblower, Consumer Protection Act, Sarbanes-Oxley Act

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