Securities Regulation Daily Do Dodd-Frank protections apply to whistleblowers who did not report to the SEC?
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Thursday, April 27, 2017

Do Dodd-Frank protections apply to whistleblowers who did not report to the SEC?

A petition has been filed asking the Supreme Court to address if the Dodd-Frank anti-retaliation provision extends to individuals who have not reported to the SEC. The case below turned on Dodd-Frank Act's definition of a "whistleblower." A divided Ninth Circuit panel held that the anti-retaliation provision applies to all who make internal reports under SOX and other federal laws. In so holding, the panel agreed with the Second Circuit's interpretation of the question, but conflicted with that of the Fifth Circuit (Digital Realty Trust, Inc. v. Somers, April 25, 2017).

Who is a whistleblower? Section 922 of the Dodd-Frank Act (Exchange Act Section 21F) defines a "whistleblower" as any individual who reports a violation of the securities laws to the Commission. The section provides further that retaliation is prohibited against whistleblowers who, inter alia make disclosures that are required or protected under SOX and other securities laws. The question then, is whether the anti-retaliation provision's protection extends to individuals who have not reported alleged misconduct to the SEC and thus fall outside of the statutory definition of a "whistleblower."

Paul Somers was a vice president of portfolio management at petitioner Digital Realty Trust. According to his complaint, Somers reported to senior management actions by his supervisor that eliminated internal controls over certain corporate actions in violation of the Sarbanes-Oxley Act and was fired shortly afterwards. Digital Realty moved to dismiss his complaint for employment retaliation for failure to report any of the alleged violations to the SEC. The district court denied the motion, holding that Dodd-Frank is ambiguous and that the SEC's Rule 21F-2(b)(1) interpreting the provision was reasonable under Chevron.

A divided Ninth Circuit panel affirmed, holding that the anti-retaliation provision applies to all individuals who make internal reports under SOX regardless of whether they qualify as a "whistleblower" under the statutory definition. The anti-retaliation provision, the panel said, unambiguously protects from retaliation both those who report to the SEC and those who report internally. To hold otherwise would narrow the meaning to the point of absurdity. The panel further stated that the SEC's rule reflected Congress's intent to provide broad whistleblower protections under Dodd-Frank.

Circuit conflict. The Ninth Circuit is now the third court of appeals to weigh in on this issue. The Fifth Circuit was the first to rule on this issue, holding in Asadi v. G.E. Energy that the plain language of Dodd-Frank unambiguously requires SEC reporting as a prerequisite to protection from retaliation. While the appeal in this case was pending, the Second Circuit created a split by holding in Berman v. [email protected] LLC that the statute is sufficiently ambiguous to warrant deference to the SEC’s rulemaking, which protects internal reporting under SOX. The Ninth Circuit sided with the Second Circuit's reasoning in Berman.

The petition remarks that, given the frequency with which employees allege misconduct, it is no surprise that the question presented here arises often, and numerous district courts nationwide have followed either the Fifth or Second Circuit. Numerous commentators have recognized the conflict and have called for the Supreme Court's intervention.

If allowed to stand, the Ninth Circuit's decision will have pernicious consequences for every traded company, the petition maintains. The Ninth Circuit's decision essentially renders obsolete the SOX anti-retaliation scheme because the Dodd-Frank Act affords whistleblowers several advantages not found in SOX, including the ability to bring a retaliation claim in the district court in the first instance, as Somers did here, the petition explains. Finally, this case is the ideal vehicle to settle the question because there was no other question addressed by the appellate court in its opinion and because the arguments for both sides have been exhaustively developed in three circuit courts and in more than two dozen district court decisions.

The petition is No. 16-1276.

Attorneys: Kannon K. Shanmugam (Williams & Connolly LLP) and Brian Tobin Ashe (Seyfarth Shaw LLP) for Digital Realty Trust, Inc. Stephen F. Henry (Stephen F. Henry, Attorney at Law) for Paul Somers.

Companies: Digital Realty Trust, Inc.

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