In Somers v. Digital Realty, the Ninth Circuit joins the Second Circuit in holding that whistleblower protections apply to individuals who report securities violations internally, not just to those who report to the Securities and Exchange Commission (the Commission or SEC).
On March 8, 2017, the Ninth Circuit addressed a question that had divided the Second and Fifth Circuits: Is an employee who reports securities violations internally, but not to the SEC, entitled to the anti-retaliation protections of Section 21F of the Securities Exchange Act of 1934 (Exchange Act)?
The Fifth Circuit had previously answered “no,” while the Second Circuit said “yes.” Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 621 (5th Cir. 2013); Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 155 (2d Cir. 2015). A divided panel of the Ninth Circuit sided with the Second Circuit, holding that Section 21F’s anti-retaliation provision protects “those who report internally as well as to those who report to the SEC.” Somers v. Digital Realty Trust Inc., No. 15-17352 (9th Cir. Mar. 8, 2017) (Somers). Given the circuit split, we believe the issue is one that may be addressed by the U.S. Supreme Court.
The Dodd-Frank Act added Section 21F to the Exchange Act for the purpose of “improving accountability and transparency in the financial system” of the United States. Somers. Section 21F contains certain protections for “whistleblowers.” The statute defines “whistleblower” to mean “any individual who provides . . . information relating to a violation of the securities laws to the Commission.” 15 U.S.C. § 78u-6(a)(6). Section 21F also contains an anti-retaliation provision:
“No employer may discharge . . . a whistleblower . . . because of any lawful act done by the whistleblower . . . in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter, including section 78j-1(m) of this title, section 1513(e) of title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.”
15 U.S.C. § 78u-6(h)(1)(A)(iii).
The Ninth Circuit panel noted that although the literal definition of “whistleblower” includes “only those who report information to the SEC,” the anti-retaliation provision incorporates Sarbanes-Oxley’s disclosure requirements, which also “mandate internal reporting.” The anti-retaliation provision therefore “necessarily bars retaliation against an employee of a public company who reports violations to the boss.” Somers. Otherwise, an employee could be fired for making disclosures required by Sarbanes-Oxley, effectively nullifying the anti-retaliation provision. Somers. To the extent the anti-retaliation provision’s use of the term “whistleblower” created any uncertainty, the SEC removed that uncertainty in a 2011 rule stating: “you are a whistleblower if . . . you provide that information in a manner described in . . . 15 U.S.C. 78u-6(h)(1)(A).” Somers (quoting 17 C.F.R. § 240.21F-2). For all of those reasons, the panel concluded that the anti-retaliation provision “should be read to provide protections to those who report internally as well as to those who report to the SEC.” Somers.