A debate has been raging in the courts over whether an employee who reports suspected misconduct only to his employer but not to the U.S. Securities and Exchange Commission (“SEC”) is a “whistleblower” entitled to the protection of the Anti-Retaliation Provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). Last summer, in Asadi v. G.E. Energy (USA), L.L.C., the Fifth Circuit Court of Appeals – the only federal appellate court to address this issue –ruled that an employee who reported a potential Foreign Corrupt Practices Act (“FCPA”) violation to his employer was not a “whistleblower” because he did not “provide information relating to a violation of the securities laws to the SEC,” contradicting five federal district courts which had found internal reporting to be adequate. (I analyzed the Asadi opinion and its likely effect on internal reporting in “When Is A ‘Whistleblower’ Not Really A ’Whistleblower’?”). A few district courts have since adopted the Fifth Circuit’s interpretation, but most have concluded that, consistent with the SEC’s own rules, internal reporting is sufficient to implicate Dodd-Frank’s protections.
To date, the Second Circuit has not ruled on this issue. Practitioners who follow the developments in federal whistleblower law had hoped that would change with the Circuit’s consideration of the appeal in Liu Meng-Lin v. Siemens AG, a case in which an overseas whistleblower reported misconduct internally but did not report any potential violations to the SEC until after he was terminated. In an October 2013 opinion dismissing the retaliation complaint in that case, the district court declined to “wade into the debate” over whether an employee must report suspected misconduct to the SEC to become a Dodd-Frank “whistleblower.” The district court instead disposed of the case on the grounds that Dodd-Frank’s Anti-Retaliation Provision does not apply extraterritorially to “a Taiwanese resident [who brought a case] against a German corporation for acts concerning its Chinese subsidiary relating to alleged corruption in China and North Korea.” The court also ruled that the whistleblower’s disclosure of alleged FCPA violations did not implicate Dodd-Frank’s Anti-Retaliation Provision because disclosure of FCPA violations is not “required or protected” under the Sarbanes-Oxley Act.
English: By Richard Wheeler (Zephyris) 2007. (Photo credit: Wikipedia)
The district court did not determine whether reporting to the SEC is required, but the issue remains in play on appeal. In an Amicus brief submitted to the Second Circuit in support of the Appellant, the SEC urged the Circuit to make a determination on this issue and give deference to its rule granting protection from retaliation under Dodd-Frank to employees who make protected disclosures irrespective of whether they report the information to the SEC. The SEC argued, in part, that if its rule is invalidated, its “authority to pursue enforcement actions against employers that retaliated against individuals who report internally would be substantially weakened.”
On June 16, 2014, the court heard oral argument in the case. The focus of the argument was on the issue of extraterritoriality, suggesting that the Circuit would choose not to address the reporting issue in its opinion. But the issue of retaliation was addressed. Specifically, Judge Reena Raggi queried why the United States has an interest in protecting overseas employees from retaliation, while Judge Gerard E. Lynch poked holes in the Appellant’s argument that because overseas employees are eligible for whistleblower bounties and because the Anti-Retaliation Provision is at least as broad as the bounty provision, overseas employees also must be protected from retaliation. However, the issue of whether a whistleblower must report to the SEC was raised only briefly by Judge Raggi and received very little attention, suggesting that the SEC and whistleblower enthusiasts may need to wait for the next case of retaliation against an individual who reported only internally before this issue is settled in the Second Circuit.
The failure to achieve clarity on this issue is unlikely to stop the SEC from pursuing companies for retaliation under any circumstances. In fact, just earlier this week, the SEC exercised its authority to bring an enforcement action for retaliation – for the first time – charging a hedge fund advisory firm with engaging in prohibited transactions and then retaliating against the employee who reported the misconduct to the SEC. The SEC simultaneously announced the charges and a settlement of $2.2 million with the firm and its owner on both the underlying violations and the retaliation. (I previously discussed the SEC’s intention to aggressively utilize its enforcement powers in “Employers Beware: Will the SEC Be A Safety Net For Terminated Whistleblowers?”). Given the position that the SEC staked out in Liu, it is likely that until the SEC is directed otherwise by the Circuit or the Supreme Court, the Enforcement Staff will continue to use their powers – outside of the Fifth Circuit – to pursue companies that retaliate against their employees for reporting potential securities violations, even in cases where the employee reported only internally.