A Shift in Whistleblower Protections: New Incentives for Employees to Report to the SEC Directly

by BakerHostetler

On July 17, 2013, the United States Court of Appeals for the Fifth Circuit ruled in Asadi v. G.E. Energy (USA) L.L.C. that whistleblowers are only eligible for protection under Dodd-Frank when they make disclosures directly to the Securities and Exchange Commission (SEC). This ruling, the first from a Court of Appeals, may signal a shift from expansive whistleblower protections when employees report internally to a more restrictive set of protections, only available when employees report directly to the SEC.


Congress enacted Dodd-Frank, a comprehensive reform of the nation's financial regulatory system, after the 2008 financial crisis. As part of this reform, Section 922 of Dodd-Frank incentivizes whistleblowers to step forward and provide information relating to securities laws violations to the SEC. To do this, the law provides both monetary incentives to those who provide information that leads to a successful enforcement action and creates a private cause of action against employers who retaliate against them for whistleblowing.

Under the whistleblower protection provision, the term "whistleblower" is first defined as any individual who provides "information relating to a violation of the securities law to the Commission." The provision then defines three "protected activities" that provide for a private cause of action if a whistleblower is retaliated against for performing. These activities are: 1) providing information to the SEC; 2) initiating, testifying, or otherwise assisting the SEC with an investigation; and 3) making disclosures that are required or protected by various federal laws, including the Sarbanes-Oxley Act of 2002 and the Securities Exchange Act of 1934.

It was an employee engaging in this third type of "protected activity" that led to the Fifth Circuit's ruling.


The court in Asadi, applying principles of statutory interpretation, held that the Section's definition of a "whistleblower" as one who provides information to the SEC means that only those who actually report to the SEC, as opposed to disclosing internally, are protected. Asadi was a GE Energy executive working in Jordan. Iraqi officials informed him that GE Energy may have violated the Foreign Corrupt Practices Act. Asadi reported this information to his supervisor and, after being pressured to step down from his position, was fired by GE Energy about one year after making his report. Asadi argued that, even though he did not report the violation to the SEC and was thus not a "whistleblower" as defined by the Section, he was engaging in the third category of protected activity and should be protected.

Dismissing his arguments, the Court reasoned that Congress did not intend for all individuals who engage in the third type of protected activity to be covered under the Section. Whistleblowers who report internally are already protected by Sarbanes-Oxley, but the protections are weaker and harder to obtain than under Dodd-Frank. Under Dodd-Frank, the court held, only those who meet the definition of whistleblower in the Section and engage in a protected activity can qualify for that Section's heightened protections.


Although this ruling is limited only to the Fifth Circuit, which covers Texas, Louisiana and Mississippi, it may have effects across the country as more courts deal with this issue. While many companies may initially view Asadi as a victory -- in that it limits potential retaliation claims -- the reality is that the court, by only providing Dodd-Frank's increased whistleblower protections to those who go directly to the SEC, may have struck a significant blow to these same companies. Employees who were previously inclined to report internally may now opt to go directly to the SEC in order to ensure they are fully protected against retaliation.

Asadi could have negative ramifications for the SEC as well. The SEC's Office of the Whistleblower is already flooded with tips, and this ruling is likely to increase the number of tips they receive. Many of these tips are likely to be either unsubstantiated or unrelated to the securities laws, thereby further straining the SEC's finite resources.

In order to keep internal compliance programs safe and strong and encourage internal reporting of suspected misconduct, companies should develop or strengthen their own whistleblower-protection policies. While the ruling in Asadi limits the legal obligation of employers to employees who blow the whistle, this does not prevent employers from pledging to not retaliate if suspected misconduct is reported internally. By voluntarily extending the protections afforded to whistleblowers under Dodd-Frank to all employees who report internally, companies can attempt to level the playing field and encourage internal disclosure first.

If you have any questions about this alert, please contact John J. Carney at jcarney@bakerlaw.com or 212.589.4255; George A. Stamboulidis at gstamboulidis@bakerlaw.com or 212.589.4211 or any member of BakerHostetler's White Collar Defense and Corporate Investigations Team.

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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