[authors: Bryan B. House, Pamela L. Johnston, Michael P. Matthews, Lisa M. Noller, Kenneth B. Winer]
In enacting the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), Congress provided a private right of action for employees who claimed retaliatory discharge under certain circumstances. The Act defined a “whistleblower” in an apparently narrow manner — in particular, as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the Securities laws to [the SEC] in a manner established, by rule or regulation, by [the SEC].” 15 U.S.C. § 78u-6(a)(6) (2012). A narrow reading of this definition could lead to limited recovery to circumstances in which an individual reported his observations to the SEC. However, in three reported decisions, including one reported last week, federal district courts have interpreted Dodd-Frank to afford broad protections to whistleblowers, and have not required that complaints be reported to the SEC.
In Egan v. Tradescreen, Inc., et al., 2011 U.S.Dist. LEXIS 47713 (S.D.N.Y. May 4, 2011), the plaintiff alleged he was terminated after he made reports to his superiors of malfeasance, witness interference, and violations of the Sarbanes-Oxley Act and FINRA rules. In the first reported analysis of this provision of the Dodd-Frank Act, the court ruled that to recover, the plaintiff was not required to complain to the SEC prior to filing his lawsuit. In Nollner v. Southern Baptist Convention, Inc., et al., 852 F.Supp.2d 986 (M.D.Tenn. 2012), plaintiffs alleged their employment was terminated following a complaint that their employer’s conduct violated the FCPA. The court followed Egan’s reasoning, and also held that plaintiffs were not required to report their concerns to the SEC.
Importantly, the Egan and Nollner courts dismissed the plaintiffs’ claims despite the plaintiffs having properly followed procedures for reporting alleged misconduct. Although the plaintiffs were not required to report directly to the SEC, their complaints could only give rise to a private right of action if the complaint fell into one of four categories: those under the Sarbanes-Oxley Act, the Securities and Exchange Act, 18 U.S.C. § 1513(e), or other laws and regulations subject to the jurisdiction of the SEC. See 15 U.S.C. § 78u-6(h)(1)(A). In both cases, the courts dismissed the plaintiffs’ complaints, finding that the allegations did not fall into one of these specifically enumerated categories.
On September 25, 2012, another court not only reaffirmed that a whistleblower is not required to report his claim directly to the SEC, but also allowed the suit to proceed. In Kramer v. Trans-Lux Corp., Case No. 3:11-cv-01424-SRU (D. Ct. Sept. 25, 2012), the plaintiff alleged the defendant terminated him after he internally reported that the defendant had unlawfully deviated from its pension plan rules. (The plaintiff also wrote to the SEC directly about the same issue.) The court rejected the defendant’s arguments and denied its motion to dismiss the complaint.
In Kramer, the court arguably broadened the Egan and Nollner line of cases. First, the court held that a whistleblower may pursue claims under both Dodd-Frank and Sarbanes-Oxley; in fact, disclosures that are protected under Sarbanes-Oxley also are protected under Dodd-Frank. Second, it ruled that plaintiffs do not have to report a tip to the SEC in the manner prescribed by the SEC in the Dodd-Frank Act. Instead, a whistleblower must allege only that he had a reasonable belief that the information relates to a possible violation of the securities laws. Third, the court found that the plaintiff’s complaint about the mismanagement of the defendant’s pension plan, including potential conflicts of interest and failure to submit plan amendments to the board or the SEC, satisfied Sarbanes-Oxley’s requirement that a plaintiff “reasonably” believes there had been a violation of SEC rules or regulations. Thus, the plaintiff’s disclosures were protected under Sarbanes-Oxley and Dodd Frank.
Kramer will now proceed to discovery, and the parties will explore whether the plaintiff’s belief that his employer violated the securities laws was reasonable. However, the bar has been lowered: to survive a motion to dismiss, Kramer holds that a whistleblower need only allege he reasonably believed there was a qualifying violation. This is the first reported decision where a Dodd-Frank retaliation claim has survived a motion to dismiss, and it likely will encourage other potential whistleblowers to sue under Dodd-Frank.