The Tip Is In the Mail: Court Tries to Make Sense of Dodd-Frank’s Whistleblower and Retaliation Provisions and Asks Whether It’s Enough Just to Send a Letter

by Orrick - Securities Litigation and Regulatory Enforcement Group
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In what may be one of the first Dodd-Frank retaliation claims to make it past a motion to dismiss, a federal court on September 25, 2012 issued a ruling attempting to harmonize the definition of “whistleblower” under the landmark statute with its protections against employer retaliation for engaging in whistleblower activities. Acting in accord with the SEC’s final rule on the statute as well as opinions from the few federal courts to have weighed in on the subject, the court sided with the alleged whistleblower.

For some eighteen years, Richard Kramer had served as the vice president of human resources and administration at Trans-Lux Corporation. In that role, he had a number of responsibilities related to Trans-Lux’s ERISA-governed pension plan. Concerned with what he saw as conflicts of interest and deficiencies in the pension plan committee’s composition and reporting, Kramer went to Trans-Lux’s leadership and later the board’s audit committee to sound the alarm. Kramer eventually sent a letter to the SEC the old-fashioned way—by regular mail—a choice that would later have significance in the case.

Within hours of Kramer reaching out to Trans-Lux’s audit committee with his concerns, Trans-Lux’s CEO and another Trans-Lux employee reprimanded Kramer, and went downhill from there: Kramer’s staff was reassigned, an investigation into him was launched by Trans-Lux’s in-house counsel, his responsibilities were diminished, and he was eventually terminated. Kramer later sued Trans-Lux, claiming among other things that the Company had retaliated against him in violation of Dodd-Frank. Trans-Lux moved to dismiss.

In its motion to dismiss, Trans-Lux tried to cobble together two Dodd-Frank provisions relating to the definition of “whistleblower” and to retaliation. Specifically, Dodd-Frank defines a “whistleblower” to include any individual who provides 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). By contrast, Dodd-Frank’s anti-retaliation section protects whistleblowers from retaliation in connection with specific activities, including making certain disclosures that are required or protected under other laws—activities which are not, by definition, within the narrower definition of whistleblower. 15 U.S.C. § 78u-6(h)(1)(A). Confused? The courts have been as well.

Trans-Lux argued that Dodd-Frank’s anti-retaliation provision applies only to individuals who both (a) are a whistleblower under the statute, and (b) have engaged in one of the protected activities under the anti-retaliation section. Kramer had sent his letter to the SEC by regular mail. But in order to have provided information to the SEC “in a manner established . . . by rule or regulation” under the definition of whistleblower, Kramer could have submitted the information online, or he could have mailed or faxed in a “Form TCR” (Tip, Complaint or Referral), but he could not merely mail a regular letter. Thus, Trans-Lux argued, Kramer did not meet the definition of whistleblower and could not therefore qualify for protection under the anti-retaliation provision.

In rejecting Trans-Lux’s argument, the court noted that the company’s “interpretation would dramatically narrow the . . . protections available to potential whistleblowers,” which was inconsistent with Dodd-Frank’s goal of improving accountability and transparency in the financial system and creating new incentives and protections for whistleblowers. Instead, the court held, the better reading comes from the SEC’s final rule, which protects from retaliation an individual who possesses “a reasonable belief” that the information provided relates to a possible securities violation and who then provides the information in a manner prescribed within the anti-retaliation section. The court characterized this reading as a “narrow exception” to Dodd-Frank’s definition of whistleblower. Put another way, the definition of whistleblower is broader when it comes to Dodd-Frank’s anti-retaliation section than it is for the rest of the statute.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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