Fifth Circuit Limits SEC Whistleblower Program

by Morgan Lewis
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Antiretaliation provisions only protect employees that provide information on violations of the securities laws to the SEC.

On July 17, the U.S. Court of Appeals for the Fifth Circuit issued a decision in Asadi v. G.E. Energy (USA), LLC, holding that, to be a "whistleblower" under the Securities and Exchange Commission's (SEC's) whistleblower program, an employee must provide information relating to a violation of the securities laws to the SEC.[1] In so ruling, the Fifth Circuit refused to defer to the SEC's regulation providing that internal reports could afford whistleblower protection under the program and declined to follow several district court decisions that had similarly found internal reports to be protected.

Background

The plaintiff, Khaled Asadi, worked in Amman, Jordan, as GE Energy's Iraq Country Executive. According to the lawsuit, in 2010, Iraqi officials informed Asadi of their concern that GE Energy had hired a woman closely associated with a senior Iraqi official "to curry favor with that official in negotiating a lucrative joint venture agreement."[2] Asadi reported the issue to both of his supervisors and to the GE Energy regional ombudsman based on his alleged concern that this hire would violate the Foreign Corrupt Practices Act. Soon after making these reports, Asadi received a "surprisingly negative" performance review. After being pressured to step down from his position within a year of his internal complaints, he was fired.

Asadi filed suit, alleging that GE Energy violated the SEC whistleblower protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). GE Energy moved to dismiss, arguing that (a) Asadi did not qualify as a whistleblower under Dodd-Frank and (b) that Dodd-Frank's whistleblower protections do not apply outside of the United States.

The U.S. District Court for the Southern District of Texas granted GE Energy's motion to dismiss on the grounds that Dodd-Frank's whistleblower protections do "'not extend to or protect Asadi's extraterritorial whistleblowing activity.'"[3] Asadi appealed, and the Fifth Circuit reviewed de novo.

Fifth Circuit Decision

The Fifth Circuit affirmed the district court's decision but on different grounds. The court found that Asadi was not a "whistleblower" under Dodd-Frank because he did not make a report to the SEC, holding that "the plain language of the Dodd-Frank whistleblower-protection provision creates a private cause of action only for individuals who provide information relating to a violation of the securities laws to the SEC."[4]

Dodd-Frank defines a whistleblower as "any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC]."[5] Dodd-Frank protects whistleblowers from retaliation in employment for, among other things, "making disclosures that are required or protected under" the Sarbanes-Oxley Act of 2002; the Securities and Exchange Act of 1934, including section 10A(m); section 1513(e) of title 18; and "any other law, rule, or regulation subject to the jurisdiction of the [SEC]."[6] Asadi asserted that he was a whistleblower under this protection and argued that this section, on its face, does not require disclosure of information to the SEC.

The court disagreed, finding that Dodd-Frank "expressly and unambiguously requires that an individual provide information to the SEC"[7] and "provide information relating to a securities law violation"[8] in order to be considered a whistleblower. The court found that meeting this definition of a "whistleblower" is a threshold requirement. If an employee does not meet this requirement, he or she is not covered by the antiretaliation provisions of the SEC whistleblower program. If an employee does provide information relating to a violation of the securities laws to the SEC, then he or she is protected from the categories of conduct set forth in the statute, including internal reporting as provided above. Because Asadi never reported to the SEC, the court found he was not a "whistleblower" under the terms of Dodd-Frank's SEC whistleblower program.

In this ruling, the Fifth Circuit refused to defer to the SEC's regulations on the Dodd-Frank whistleblower program. On May 25, 2011, the SEC promulgated final regulations that specifically state that an individual may be a whistleblower even though they never report to the SEC, so long as they make disclosures that are "required or protected under the Sarbanes-Oxley Act of 2002."[9] The Fifth Circuit found that the text of Dodd-Frank itself requires that a whistleblower report to the SEC, and the Court rejected the SEC's expansive interpretation of the term.

Practical Implications

This decision significantly narrows the definition of a "whistleblower" under Dodd-Frank's SEC whistleblower program from the expansive definition provided in the SEC's regulation and adopted by several district courts. As a result, fewer employees will have a private right of action for retaliation under this program. Employees making internal reports of wrongdoing, however, may still be protected under the Sarbanes-Oxley Act and other federal and state antiretaliation laws.

[1]. Asadi v. G.E. Energy (USA), LLC, No. 12-20522 (5th Cir. July 17, 2013).

[2]. Id. at 2.

[3]. Id. at 2-3.

[4]. Id. at 5.

[5]. 15 U.S.C. § 78u-6(a)(6).

[6]. 15 U.S.C. § 78u-6(h)(1)(A)(iii).

[7]. Asadi, No. 12-20522, slip op. at 6.

[8]. Asadi, No. 12-20522, slip op. at 8.

[9]. 17 C.F.R. § 240.21F-2(b)(1).

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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