The U.S. Securities and Exchange Commission (SEC) will take another crack this year at defending its regulation protecting internal whistleblowers against retaliation. In mid-December, it filed an amicus brief (available here) with the Third Circuit in Safarian v. American DG Energy, Inc., Civ. No. 10-6082, 2014 WL 1744989 (D.N.J. Apr. 29, 2014) to argue for its interpretation of the Dodd-Frank Act.
Congress defined a whistleblower to be “any individual who provides … information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. § 78u-6(a)(6). Businesses have argued that this definition is clear that only an individual reporting to the Commission can be a whistleblower protected against retaliation.
The SEC disagrees. It contends that Section 78u–6(h)(1)(A), which establishes the activities protected, includes certain internal reporting required or protected by the Sarbanes-Oxley Act. In order to resolve this ambiguity between Section 78u–6(h)(1)(A)(iii) and the definition of a whistleblower, it created Exchange Act Rule 21F-2(b)(1). Rule 21F-2(b)(1) defines a whistleblower for the purpose of the anti-retaliation section and does not include a requirement that the individual report to the SEC.
In Safarian, which is on appeal from the U.S. District Court for the District of New Jersey, the lower court skipped the debate over the definition of a whistleblower and determined that the employee was not engaged in protected activity within Section 78u–6(h)(1)(A)(iii). If, on appeal, it is determined that Safarian did engage in protected activity, the issue of whether a report to the SEC is required will once again be front and center in the motion to dismiss.
This has been one of the most frequently litigated issues to arise under the whistleblower programs created by the Dodd-Frank Act. The Third Circuit is the third appeals court to face the issue in the past two years.
The Fifth Circuit, the first appellate court to take up this issue, held that the Dodd-Frank whistleblower protections do not apply to employees making only internal reports in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013). The Fifth Circuit found the statutory text unambiguous and thought that the SEC interpretation rendered text superfluous.
The SEC also filed an amicus brief (available here) in the second appeal, Liu v. Siemens AG, 763 F. 3d 175 (2d. Cir. 2014). The Second Circuit ultimately did not address the issue in its opinion as it decided the case on other grounds. Liu involved an international whistleblower and the case was dismissed because of the doctrine of extraterritoriality.
The CFTC took the opposite approach from the SEC. According to CFTC regulations, an individual is protected against retaliation only after filing the initial tip with the government on Form TCR.
The SEC, on the other hand, did not want to disrupt the internal compliance procedures of businesses by creating a rule that only protects employees when they report to the government. The agency worried that more individuals would forgo corporate reporting options, requiring additional expenditure of government resources and perpetuating harm to investors.
The most recent lower court to decide the issue declared that the employee was not a whistleblower when he did not report to the SEC. Verfuerth v. Orion Energy Systems, Inc., No. 14-C-352, — F.Supp.3d —-, 2014 WL 5682514 (E.D. Wis. Nov. 4, 2014). However, several cases, including one argued by attorneys of our firm, have held otherwise.
For whistleblowers, the result of the ambiguity is clear. In order to ensure that an employee is protected from retaliation by Dodd-Frank, there must be a report to the SEC. Otherwise, the claim will require a favorable judicial interpretation of the statute.
Hopefully, the SEC will prevail and the dispute over the text of the law will ultimately be resolved. However, until that time, reporting is the only clear way to ensure that an employee can qualify for the protection the SEC whistleblower program allows. For additional information about the law’s anti-retaliation protections, please contact one of our SEC whistleblower attorneys.