Commentators, employers and especially whistleblowers have paid a tremendous amount of attention to the whistleblower bounty provisions of the Dodd-Frank Act. Much less attention has been paid to an SEC rule implementing the anti-retaliation provisions of that Act, giving the SEC enforcement authority against employers who retaliate against their whistleblowing employees. The SEC has not yet brought an enforcement action for retaliation, but recent statements by SEC officials indicate that the agency is looking for just such a case to test the bounds of its authority.
In a Q&A published last week in the Wall Street Journal, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, warned that the SEC is “actively looking for ways to be proactive in pursuing, under appropriate circumstances,” enforcement actions against companies that retaliate against whistleblowers. McKessy emphasized that the SEC will enforce the Dodd-Frank whistleblower protection provisions not only in cases in which there was “substance to the underlying report,” but also in cases where a whistleblower reported in good faith but the information did not establish a securities law violation. According to McKessy, the enforcement staff is “on the lookout for one of these stand-alone retaliation cases.”
Mary Jo White, the SEC Chair, similarly announced last week that the SEC intends to aggressively utilize its enforcement powers. In a speech to the Council of Institutional Investors, White warned that the SEC will “deploy[ its] full enforcement arsenal for the benefit of investors” and will be “aggressive and creative in the way [it uses] the enforcement tools at [its] disposal.”
As my last post pointed out, the scope of the Dodd-Frank anti-retaliation provision is being consistently tested, with the question of whether the SEC has the authority to bring enforcement proceedings against companies for retaliation where the employee only reported internally and not to the SEC still up for debate. In that post, I discussed a split in the federal courts on this issue with the most recent salvo being the Fifth Circuit’s decision in a case involving a retaliation claim brought against G.E. Energy (USA), L.L.C by an employee who reported potential Foreign Corrupt Practices Act violations internally. In that case, the Court held that the employee was not a “whistleblower” for purposes of Dodd-Frank because he did not “provide information relating to a violation of the securities laws to the SEC.” Thus, the employee was not protected under the Act’s anti-retaliation provisions. The Fifth Circuit’s ruling, however, contradicted the rulings of five federal district courts that have held that employees who report suspected wrongdoing to upper management, but not to the SEC are “whistleblowers” for purposes of the Act, entitled to the protection of Dodd Frank’s anti-retaliation provisions. Multiple district courts are poised to rule on this issue and it remains to be seen which interpretation will prevail. Whether that interpretation will extend to SEC enforcement actions also remains uncertain, as then does the scope of the “aggressive and creative” ways the SEC can use its enforcement power.
So, yes, employers need to beware. McKessy’s and White’s announcements strongly suggest that more change is coming to the SEC enforcement landscape. Not only do companies need to be vigilant against actually committing securities violations, they need to be cognizant of the additional significant consequences they could face from their everyday employment decisions. Employers subject to the SEC’s jurisdiction have recognized for some time now – at least since the enactment of laws like Sarbanes-Oxley and its progeny – that they were at risk of being sued for retaliation if they chose to terminate a whistleblowing employee. Nevertheless, many companies have made strategic and economic decisions to terminate those employees nonetheless, reasoning that it is better to face the limited economic hit of an employee’s wrongful termination litigation than to continue to retain an individual who is passing intelligence to the SEC. However, if the SEC does decide to commence enforcement actions against companies even when they have not committed a securities law violation, employers may want to think more carefully about taking any action against a whistleblower. The harm that may result from an enforcement action, including potential suspensions or disbarments, not to mention the disruption to a company’s business and impact on its reputation, may be far-reaching.
The scope of the SEC’s authority to enforce the Dodd-Frank whistleblower protection provisions is unclear. What is clear is that the SEC is looking to test its authority and an employer that retaliates against a Dodd-Frank whistleblower risks being the target of an SEC enforcement action.