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Amici Briefs Filed In Supreme Court Case Involving The Definition Of Whistleblower Under Dodd-Frank

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  • Posted on: Oct 25 2017

On October 17, 2017, the National Whistleblower Center, a non-profit, tax-exempt, non-partisan whistleblower legal advocacy organization, Senator Charles Grassley, and the U.S. Government filed amici briefs before the U.S. Supreme Court in Digital Realty Trust v. Somers (No. 16-1276).

In July of this year, this Blog posted an article about the case. (Here.)

The issue in Somers concerns the definition of “whistleblower,” and whether the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or the “Act”) extend to individuals who have not reported alleged misconduct to the Securities and Exchange Commission (“SEC”).

In enacting the Dodd-Frank Act, Congress granted the SEC the authority to define the “manner” in which an individual can provide the SEC with information and qualify as a “whistleblower” under the Act. In promulgating the final rules, the SEC included internal reporting as one of the “manners” in which an individual can qualify as a “whistleblower.” As Mary L. Shapiro, the Chair of the SEC at the time, stated: “[p]erhaps most significantly, the final rules would give credit to a whistleblower whose company passes the information along to the Commission, even if the whistleblower does not.” (Here.)

In Digital Realty, the Ninth Circuit joined the Second Circuit in finding that the term “whistleblower” as used in the Dodd-Frank Act did not limit the anti-retaliation protections of the Act to those who disclose information to the SEC only. Rather, the anti-retaliation provisions also protect those who were fired after making internal disclosures of alleged unlawful activity under the Sarbanes-Oxley Act of 2002 and other laws, rules, and regulations. (Discussed here.) By contrast, the Fifth Circuit, which was the first to address the issue, strictly applied the Act’s definition of “whistleblower” to apply only to those who disclose suspected wrongdoing to the SEC. Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 621 (5th Cir. 2013). In doing so, the court rejected the SEC’s regulation (17 C.F.R. § 240.21F-2), which extends the anti-retaliation protections to those who make disclosures of suspected violations, whether the disclosures are made internally or to the SEC. Id. at 630.

In its brief (here), the National Whistleblower Center argued that the language and legislative history of the Dodd-Frank Act demonstrates that individuals who internally report violations of the securities laws are protected from retaliation under the Act. In this regard, the National Whistleblower Center argued:

  • During the SEC’s rulemaking process, the regulated community urged the SEC to incorporate internal disclosures into the core definition of the “manner” employees could qualify as a “whistleblower.” In fact, numerous corporations argued that internal reporting should be a mandatory requirement that employees would have to meet in order to become a qualified “whistleblower.”
  • In determining the “manner” in which an individual can qualify as a “whistleblower” under 15 U.S.C. § 78u-6(a)(6), the SEC concluded that the balance of equities encouraged internal reporting to fall within the definition.
  • The SEC concluded that including internal reporting within the definition of whistleblower would: “[a]llow companies to take appropriate actions to remedy improper conduct at an early stage”; “[a]llow companies to self-report”; “[a]void undermining internal compliance programs”; “[a]llow the Commission to preserve its scarce resources by relying upon corporate compliance programs”; “[p]romote a working relationship between the Commission and companies”; and “[i]ncrease the quality of tips.”

In his brief (here), Senator Grassley, the author of numerous statutes that protect whistleblowers and incentivize them to report waste, fraud, and abuse in the government and economy, argued that the Act’s anti-retaliation provision supplements and enhances existing protections by including both internal and external reporting in the definition of whistleblower. In that regard, Senator Grassley argued:

  • The Dodd-Frank Act’s anti-retaliation provision reinforces Sarbanes-Oxley by protecting internal whistleblowers. In that regard, the language of the Act expressly protects “disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.” Consequently, many disclosures are made internally to facilitate voluntary compliance with the law. However, if the anti-retaliation provision is read narrowly to apply only to those whistleblowers who report information to the SEC, then it would not provide any meaningful protection to individuals who report internally. “That incongruity is nonsensical—and it would also discourage internal reporting, e., the very reporting Congress sought to encourage with the third prong of Dodd-Frank’s antiretaliation provision.”
  • A narrow interpretation of the Act will encourage overreporting to the SEC. This is significant because the SEC’s resources are strained, and additional reporting will exacerbate the problem by requiring the SEC to evaluate, investigate, and where appropriate take enforcement action—when an internal report could have produced a quick course correction without any expenditure of public resources.
  • The SEC’s interpretation encourages internal reporting and compliance, bolstering the Sarbanes-Oxley reforms. Indeed, timely use of internal procedures gives management an opportunity to correct financial information and can help produce more accurate financial statements to investors.
  • Protection for internal whistleblowers is consistent with other whistleblower anti-retaliation programs, including the False Claims Act, the Whistleblower Protection Act, the Whistleblower Protection Enhancement Act, and the FBI Whistleblower Protection Enhancement Act. Therefore, it is “illogical” for Congress to have explicitly protected all “disclosures that are required or protected under” the Sarbanes-Oxley Act, the Exchange Act, and every other law enforced by the SEC, while denying protection to the employees who make those very reports.

In its brief (here), the U.S. Government argued that the Ninth Circuit applied a sensible approach that was consistent with the legislative history of the Act, and preserved the specialized meaning of “whistleblower” in the award provisions of the Act, while applying its ordinary meaning to facilitate the effective implementation of the anti-retaliation provisions. In that regard, the Government argued:

  • A narrow reading of the Act would prohibit employers from retaliating only against employees who have reported to the SEC. But employers generally do not know that an employee has reported to the SEC, which is required to keep reports confidential, so such a reading would substantially diminish the deterrent effect of the retaliation prohibition.
  • In addition, a narrow reading would not protect an employee who reports a suspected securities-law violation to company management, in the hope of triggering internal compliance mechanisms that would make a report to the SEC unnecessary, and who is fired immediately thereafter. Excluding such persons from the Act’s protections would depart from usual understandings of the term “whistleblower” and would undermine Congress’s effort to promote more rigorous and effective internal compliance programs.
  • There is nothing in the legislative history to indicate that Congress intended to limit the scope of the term “whistleblower” to only those individuals who report wrongdoing to the SEC.
  • The Dodd-Frank Act is intended to strengthen protections for internal whistleblowers. Reading the anti-retaliation provision to protect only whistleblowers who report to the SEC would defeat Congress’s purpose, weaken internal corporate-compliance programs, and potentially flood the SEC with allegations that have not been vetted by the corporate insiders best situated to address them in the first instance.

The Court has scheduled oral argument for November 28, 2017. A decision is expected in early 2018.

Takeaway

Mary Jo White, then-Chair of the SEC observed in April 2015 that the SEC whistleblower program has proven to be a “game changer.” (Here.) Andrew Ceresney (“Ceresney”), then-Director, Division of Enforcement of the SEC, echoed that observation in a September 2016 speech, wherein he described the impact of the SEC whistleblower program as “transformative”, “both in terms of the detection of illegal conduct and in moving … investigations forward quicker and through the use of fewer resources.” (Discussed by this Blog here.)

As these former officials noted, the SEC whistleblower program is working. Investors are protected and companies are investing in their compliance programs. For this reason, whistleblowers need to be encouraged, whether they report violations directly to the SEC, or work through the internal reporting procedures. The Ninth Circuit’s decision strikes the right balance in furthering the success of the program; it harmonizes internal reporting requirements set forth in the federal securities laws, with the whistleblower award and retaliation provisions in the Dodd-Frank Act.

This Blog will continue to follow the case through argument and decision.

 

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