April 18, 2018 SEC Fraud
Anti-Retaliation Whistleblower Protection Under Dodd-Frank
Fifth Court Differentiates Whistleblower Protection If Whistleblower Reports to SEC or Internally to Company
The Fifth Circuit ruled on June 17, 2013, that anti-retaliation provisions in Dodd-Frank only protect whistleblowers who disclose alleged fraud to the U.S. Securities and Exchange Commission (“SEC”) and not just internally to the company. The case is Asadi v. GE Energy USA LLC, case number 12-20522, in the U.S. Circuit Court of Appeals for the Fifth Circuit.
Khaled Asadi, a former GE Energy USA LLC executive, was allegedly fired after reporting a possible securities law violation. The Fifth Circuit appeals court ruled that he could not sue GE under Dodd-Frank’s anti-retaliation provision since he did not qualify as a whistleblower under Dodd-Frank because he only reported the fraud internally and did not report it to the SEC.
Whistleblower Defined Under Dodd-Frank
Dodd-Frank defines a whistleblower as any individual who discloses potential wrongdoing “to the Commission.” 15 USC § 78u-6(a)(6) A separate provision allows whistleblowers (who seemingly by definition must have reported to the SEC) to sue employers for retaliation in three enumerated situations, one of which requires that the whistleblower has made disclosures required or protected by the Sarbanes-Oxley Act (“SOX”). 15 USC § 78u-6(h)(1) SOX, however, does not specifically require disclosure to the SEC. Therein lies the root of the issue – a conflict between the definition of whistleblower and the specific language of the anti-retaliation section.
SEC States Whistleblowers are Protected No Matter Where Reporting Takes Place
The SEC itself has stated that a whistleblower need not have reported wrongdoing to the SEC to avail himself of Dodd-Frank’s anti-retaliation protections. The SEC’s May 25, 2011, Adopting Release for its DFA whistleblower regulations states that this provision provides protection, in certain circumstances, for those who have only reported wrongdoing internally:
“[T]he retaliation protections for internal reporting afforded by Section 21F(h)(1)(A) do not broadly apply to employees of entities other than public companies. . . . In a few limited situations – reporting by employees of subsidiaries and NRSRO’s [nationally recognized statistical rating organizations] covered by SOX Section 806, and by employees whose reports were required or protected under SOX or the Exchange Act, see DFA Section 21F(h)(1)(A)(iii) – internal reporting is expressly protected.”
Thus, outside of a public company, internal reporting will give rise to anti-retaliation protection only if that reporting was “required or protected” by a law, rule or regulation within the SEC’s purview.
Split in Circuit Courts for Dodd-Frank Could be Seen by U.S. Supreme Court Soon
At least five federal district courts have ruled that the two Dodd-Frank provisions at issue are either ambiguous or conflicting, and each has adopted the more expansive view of Dodd-Frank whistleblower protections that allows for anti-retaliation protections for those who only report internally. The Asadi decision is the first by an appeals court on the issue. This means that a split among circuit courts may occur, which could lead to U.S. Supreme Court review.
Why Report Under Sarbanes-Oxley versus Dodd-Frank?
Plaintiffs who claim retaliation for activity that is protected under Sarbanes-Oxley but who do not report to the SEC would, in many instances, desire to sue under Dodd-Frank in order to take advantage of its plaintiff-friendly anti-retaliation provisions, which include greater potential damages (Dodd-Frank allows an award of two times back pay, while SOX only allows for a single back pay award), a longer Statute of Limitations (up to 10 years) and the ability to sue in federal court (as opposed to SOX which requires an administrative filing with the U.S. Department of Labor).
In the end, The Fifth Circuit’s decision may benefit the SEC by encouraging whistleblowers to report their concerns directly to the SEC.
Dodd-Frank v. Sarbanes Oxley: Remedies, Awards & Payout
Both SOX and Section 922 of the Dodd-Frank Act each allow for reinstatement and attorneys’ costs and fees. Section 922 allows an award of two times back pay, while SOX only allows for a single back pay award.
Dodd-Frank v. Sarbanes Oxley: Direct or File
One benefit of the whistleblower protections under Section 922 is that such claims can be brought directly in the U.S. district courts. Other federal laws, like SOX, require an employee to file an administrative complaint with the U.S. Department of Labor, Occupational Safety and Health Administration, before bringing suit in federal court.
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