Question: When is a “whistleblower” not really a “whistleblower”?

Answer: When an employee reports potential misconduct only to his or her employer and that employer happens to be located in the Fifth Circuit.

Since the promulgation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd Frank”), five federal district courts have held that employees who report suspected wrongdoing to upper management, but not to the U.S. Securities and Exchange Commission (“SEC”), are “whistleblowers” for purposes of the Act, entitled to the protection of Dodd Frank’s anti-retaliation provisions. Going against the tide, in a recent ruling in Asadi v. G.E. Energy (USA), L.L.C., the Fifth Circuit Court of Appeals – the first Circuit Court to address this issue – has held exactly the opposite, ruling that an employee who reported a potential Foreign Corrupt Practices Act violation to his employer, G.E. Energy (USA), L.L.C., was not a “whistleblower” because he did not “provide information relating to a violation of the securities laws to the SEC.”

Rejecting the analysis of all of the previous federal cases which found the Act’s reference to whistleblower “either conflicting or ambiguous,” the Fifth Circuit analyzed the text of Dodd-Frank, finding it “unambiguous.” The Fifth Circuit also rejected an SEC regulation that broadly interpreted the definition of the term “whistleblower” in Dodd-Frank to include individuals who report or disclose potential misconduct either internally or to the SEC. Employers are likely rejoicing at the narrowing of the anti-retaliation provisions under Dodd-Frank. But those employers may want to think twice, since the Fifth Circuit’s interpretation may ultimately come back to haunt them.

Although the Sarbanes-Oxley Act of 2002(“SOX”) inarguably protects employees who report internally, Dodd-Frank provides employees with a much greater level of protection. Dodd-Frank permits an individual alleging retaliation to file a claim in U.S. District Court, without first exhausting administrative remedies by filing the claim with a federal agency, as required under SOX. It permits recovery of two times back pay, while SOX only provides for back pay. And, Dodd-Frank provides a considerably longer statute of limitations. Employees, therefore, have a significant incentive to report under Dodd-Frank rather than under SOX. The Fifth Circuit’s opinion will encourage employees seeking Dodd-Frank’s greater protections to report potential misconduct directly to the SEC.

Why is it bad for employers if whistleblowing employees report directly to the SEC? A whistleblower who reports directly to the SEC may bypass internal compliance completely, depriving a company of an opportunity to investigate and remedy potential wrongdoing before regulators get involved – and depriving them of the possibility that regulators might never need to become involved. Even if a whistleblower reports up-the-line as well as to the SEC, an employer still may be in the position of having to conduct an internal investigation at the same time as the SEC. It is much more difficult for companies to control internal investigations concerning conduct that also is being examined by the government.

Droves of employees reporting out to the SEC, while bypassing internal compliance, also may not be good for the SEC. In “First Year Anniversary of the Dodd-Frank Whistleblower Program: Not Much More than Paper,” I analyzed the SEC’s Annual Report on the Whistleblower Program, which revealed that in fiscal year 2012, the SEC had only fourteen employees administering a whistleblower program that generated 3,001 tips and required the SEC’s Staff to return over 3,050 telephone calls. It seems unlikely that the SEC can effectively police and enforce the securities laws without assistance from companies’ internal compliance personnel. The Fifth Circuit’s ruling, which may result in employees circumventing internal reporting mechanisms, thus undercuts SOX’s mandate to create and maintain robust internal compliance programs.

As additional Dodd-Frank retaliation claims that only involve internal reporting make their way to the circuit court level, it remains to be seen whether the Fifth Circuit’s interpretation will prevail. For now, the answer to the question of when is a whistleblower really a whistleblower may just come down to “location, location, location.”

 

Topics:  Dodd-Frank, Employer Liability Issues, Sarbanes-Oxley, SEC, Whistleblower Protection Policies, Whistleblowers, Willful Misconduct

Published In: Civil Procedure Updates, Civil Rights Updates, Labor & Employment Updates, Securities Updates

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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