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SEC Sides With Whistleblowers On Important Issue

Do the anti-retaliation provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Act”) protect whistleblowers who report violations internally or only to the SEC?

This important and commonly arising issue is now before the Second Circuit Court of Appeals in the case of Liu v. Siemens, in which Liu claims that Siemens fired him for internally reporting securities law violations.

In an amicus curiae (friend of the court) brief, the SEC urged the Court to hold that the Act protects whistleblowers from retaliation for both internal and external reporting of wrongdoing, consistent with SEC regulations passed to implement the Act.

The Act was passed after the 2008 financial crisis, and offers rewards to whistleblowers (up to 30% of any fine collected by the SEC from the tip) and protects them by creating a robust federal right of action for retaliation.  Before the Act, whistleblowers were protected by a patchwork of ineffective state laws and, even more ineffectively, by Sarbanes-Oxley.

By offering the same incentives to whistleblowers that drives the wrongdoer — lots of money — the whistleblower provisions have the potential to be remarkably effective in avoiding another fraud-fueled financial meltdown.

In the numerous anti-retaliation actions that were filed, however, a common issue arose: the plaintiff was fired for reporting the problem internally to their superiors or compliance personnel, not to the SEC.  Corporations argued that the Act does not protect internal whistleblowing, only whistleblowing to the SEC.

To date, district courts have agreed with both sides, some finding for the defense, others for the plaintiff. In July 2013, the Fifth Circuit Court of Appeals ruled for the defense, marking the first appellate decision on the issue.  That case was Asahi v. General Electric.  The Fifth Circuit covers district courts in Texas, Louisiana and Mississippi.

The current case is before the Second Circuit Court of Appeals, which covers federal appeals from New York, Connecticut, and Vermont, and, accordingly, has an outsized impact on securities laws.

According to the SEC’s amicus submission, the language of the Act itself is ambiguous on the internal/external reporting issue; one section clearly prohibits retaliation against whistleblowers for disclosing information internally, while another arguably defines “whistleblower” as someone that reports to the SEC.  In order to clarify the ambiguity, the SEC issued a regulation that sides with the first section.

In addition to the statutory interpretation/regulation arguments, the SEC argues that its interpretation of the rule would preserve the favorable public policy of maintaining robust internal compliance programs.

Indeed, the defense argument that there should be no protection for internal whistleblowing should seem odd to anyone that followed the corporate lobbying of Congress and the SEC.  The lobbyists argued that the sky would fall if whistleblower protections were passed because they would motivate employees to silently witness violations so they could run to the SEC for their reward.  Such an outcome, they argued, would turn corporations into Stasi states where employee is pitted against coworker for government gold.

Mindful that internal compliance programs could serve a useful purpose, the SEC struck a smart regulatory balance by considering SEC reporting made after internal reporting as having been made at the earlier, internal-reporting date (without this, an internal whistleblower would risk losing a reward to someone that went to the SEC first).

However, corporations have, in their court arguments, taken a position that completely undermines the internal compliance programs they made such a show of wishing to preserve — they argued that anyone reporting internally can be retaliated against without triggering the anti-retaliation provisions of Dodd-Frank.  This, of course, motivates employees to bypass internal reporting and run directly to the SEC.

Worse, if the defense arguments prevail, it would impel companies to retaliate promptly, before the internal whistleblower reaches the SEC and gains the protections of the law — perverting the letter and purpose of the Dodd-Frank whistleblower reward and protection provisions.

By advocating its position in Liu, the SEC seeks to protect whistleblowers and preserve the thoughtful balance of its regulations.

If you would like additional information, please contact the following attorney:

Andrei Rado, Esq.
Milberg LLP
One Pennsylvania Plaza, 49th Fl.
New York, NY 10119
(800) 320-5081


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