Second Circuit Broadens Dodd-Frank Whistleblower Interpretation
Investment Management Update
Date: September 15, 2015
While both the Sarbanes-Oxley Act1 and the Dodd-Frank Act2 provide various protections to whistleblowers, federal district and circuit courts have inconsistently interpreted who is a whistleblower protected by Dodd-Frank’s anti-retaliation provisions. A recent decision by the U.S. Court of Appeals for the Second Circuit provides a broader interpretation.
Sarbanes-Oxley prohibits a publicly traded company from retaliating against a whistleblower employee who provides information concerning securities law violations to, among others:
- A federal regulatory agency
- A law enforcement agency
- A member of Congress
- A person with supervisory authority over the employee3
Dodd-Frank expanded upon these anti-retaliation protections by adding that no publicly traded company 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:
- In providing information to the Securities and Exchange Commission (SEC)
- In initiating, testifying in or assisting in any SEC investigation or judicial or administrative action based upon or related to such information
- In making disclosures that are required or protected under Sarbanes-Oxley and any other law, rule or regulation subject to the SEC’s jurisdiction4
Subsequently, the SEC adopted rules to further define “whistleblower” under the sections of the Securities Exchange Act of 1934 (Exchange Act) amended by Dodd-Frank.5
Second Circuit Decision
On September 10, 2015, the Second Circuit, in Berman v. Neo@Ogilvy,6 No. 14-4626, reversed a lower court opinion holding that a whistleblower-employee, Berman, was not a “Dodd-Frank whistleblower,” and thus not entitled to Dodd-Frank’s anti-retaliation protections. The lower court reasoned that, because Berman had not yet notified the SEC of the suspected accounting fraud by the time his employer terminated him, he was outside the ambit of whistleblower for purposes of Dodd-Frank. As an employee, Berman was responsible for financial reporting, compliance with GAAP, and accounting procedures of his employer and its parent company. He alleged that he uncovered accounting fraud, reported the suspected fraud internally and was terminated because of his internal whistleblowing activity. However, he did not report to the SEC until after his employment ended. The lower court dismissed his claim based on its view that Dodd-Frank provides protection only to those who claim to have been discharged as a result of reporting alleged violations to the SEC. The appeals court found that the lower court, the U.S. District Court for the Southern District of New York,7 had interpreted whistleblower under Dodd-Frank too narrowly. The appeals court held that the section of Dodd-Frank that deals with whistleblowers was sufficiently vague such that the SEC rule interpreting the law on who is covered by Dodd-Frank’s anti-retaliation measures should be allowed to hold sway. Specifically, the appeals court found that Dodd-Frank was ambiguous because the definition of whistleblower in Section 21F(a)(6) of the Exchange Act (which requires SEC reporting by a whistleblower) was partially inconsistent with Section 21F(h)(1)(A)(iii) (which recognizes internal reporting by whistleblowers, as described in Sarbanes-Oxley).
SEC Policy Position
Fairly recently, and prior to the appeals court’s decision, the SEC provided further guidance in an interpretive release8 that stated: “[F]or purposes of the employment retaliation protections provided by Section 21F of the … Exchange Act, an individual’s status as a whistleblower does not depend on adherence to the reporting procedures specified in Exchange Act Rule 21F-9(a), but is determined solely by the terms of Exchange Act Rule 21F-2(b)(1).” This guidance noted that one SEC rule-based definition of whistleblower applies only to the award and confidentiality provisions of Dodd-Frank included in the Exchange Act, while another applies to the anti-retaliation provisions.
As a federal court, the Second Circuit’s decisions would not be binding precedent on state or federal courts outside the Second Circuit (New York, Connecticut and Vermont). This decision conflicts with a 2013 U.S. Court of Appeals for the Fifth Circuit (Texas, Louisiana and Mississippi) decision, which found that a plaintiff must have previously reported to the SEC to benefit from Dodd-Frank’s anti-retaliation protections.
The Supreme Court may be asked to resolve this circuit split, but it is not presently known if the defendants in the Berman case will file a petition with the Supreme Court for a writ of certiorari, or return to further litigate the matter in the U.S. District Court for the Southern District of New York, to which the case was remanded.
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1Sarbanes-Oxley Act of 2002, Public L. No. 107-204, 116 Stat. 475 (2002).
2Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, Title IX, § 922(a), 124 Stat. 1376, 1841 (2010).
3Sarbanes-Oxley, Section 806(a), 18 U.S.C. § 1514A(a)(1).
415 U.S.C. § 78u-6.
517 CFR 240.21F-2.
6Berman v. Neo@Ogily LLC et al., 2nd U.S. Circuit Court of Appeals, No 14-4626, Sept. 10, 2015.
7Berman v. Neo@Ogilvy LLC, No. 1:14-cv-523-GHW-SN, 2014 WL 6860583 (S.D.N.Y. Dec. 5, 2014).
8SEC Release No. 34-75592, 2015 WL 4624264 (F.R.) (Aug. 4, 2015).