Securities Regulation Daily High Court asked to clarify whether whistleblowers must complain to SEC
Thursday, February 2, 2017

High Court asked to clarify whether whistleblowers must complain to SEC

A petition for certiorari has been filed asking the Supreme Court to resolve a circuit conflict over the application of the Dodd-Frank Act's anti-retaliation provision. The petitioner seeks review of a Sixth Circuit decision finding that the complaint failed to allege sufficient facts as to its Dodd-Frank retaliation claim to state a plausible claim for relief (Verble v. Morgan Stanley Smith Barney, LLC, January 26, 2017).

Petitioner John Verble alleged that he was fired by Morgan Stanley Smith Barney, LLC because his colleagues suspected he was acting as a confidential source to the FBI. Verble had contacted the FBI with his concerns that his colleagues and management were engaging in insider trading and had also assisted in a client's perpetration of a fraud. He assisted in the investigation by wearing a wire, and the client's scheme was eventually revealed to the public. Soon afterwards, Verble was questioned about his cooperation with the government, placed on administrative leave, and eventually terminated.

Procedural history. Verble filed a complaint in the Eastern District of Tennessee for retaliation under SOX, Dodd-Frank, and the False Claims Act, as well as under state law. The district court dismissed all of Verble's claims, finding first that he did not meet the prerequisites for SOX and False Claims Act claims. The court took note of a circuit split on whether Dodd-Frank requires reporting to the SEC and ultimately sided with the Fifth Circuit's reasoning that the Dodd-Frank provision only protects whistleblowers who report misconduct to the SEC.

The Sixth Circuit, in an opinion not published in full-text, affirmed the dismissal of the Dodd-Frank retaliation claim on different grounds. The appellate panel opted not to delve into the circuit split and instead determined that Verble's claim suffered from a "fundamental defect." According to the panel, the complaint failed to allege sufficient facts as to the Dodd-Frank retaliation claim to state a plausible claim for relief, and dismissal was upheld on that basis. Specifically, the panel found that the complaint was devoid of factual material describing Verble's work with any law-enforcement agency, including the FBI or SEC.

The petition asks the Court to address a split between the Fifth and Second Circuits as to whether whistleblower protection is conditioned on reporting to the Commission. The petition argues that the Fifth Circuit's interpretation in Asadi v. G.E. Energy, which requires filing a complaint with the SEC before termination, guts the protections that Congress intended and discourages internal reporting; this argument was made in the Commission's amicus brief before the Sixth Circuit. The petition prefers the Second Circuit's interpretation in Berman v. [email protected], which applies Exchange Act Rule 21F-2, which provides that a person is a whistleblower entitled to protection from retaliation if that person reports misconduct to any law enforcement agency.

Procedural legerdemain. The bulk of the petition is spent arguing that the circuit court ducked the Dodd-Frank issue to dismiss the case based on "procedural legerdemain." According to the petition, developing the merits of this case would embarrass prominent citizens of Knoxville, Tennessee, and Cleveland, Ohio. Verble assisted in uncovering fraud at a company called "Pilot Flying J," the president of which was James Haslam, one of Knoxville's most prominent citizens and the owner of the Cleveland Browns football team (the petition notes that the appeal was heard in Cleveland). Other owners of Flying J are also among the Sixth Circuit's most prominent citizens, the petition says.

The petition accuses the panel of intentionally not following FRCP Rule 8(a) and dismissing the case based on the sufficiency of the pleading, an issue that was never raised below. The panel said that the complaint provided no facts about Verble's cooperation with the SEC or FBI. This holding makes no sense, the petition maintains, because, among other allegations, Verble specifically alleged that he wore a wire in the course of the FBI's investigation and was thus obviously involved as a confidential informant. This holding, the petition says, is "an extreme perversion of Twombly and Iqbal."

The petition is No. 16-946.

Attorneys: Richard Forlani Neely (Neely & Callaghan) for John S. Verble. Sarah E. Bouchard (Morgan, Lewis & Bockius LLP) for Morgan Stanley Smith Barney, LLC and Morgan Stanley & Co., Inc.

Companies: Morgan Stanley Smith Barney, LLC; Morgan Stanley & Co., Inc.

MainStory: TopStory DoddFrankAct KentuckyNews MichiganNews OhioNews SarbanesOxleyAct SupremeCtNews TennesseeNews WhistleblowerNews

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