Second Circuit Rules That Dodd-Frank Whistleblower Protections Protect … Whistleblowers

By Nathan Tankus, a writer from New York City. Follow him on Twitter at @NathanTankus

The Omnibus nature of Dodd-Frank has led many important provisions to go un or under-noticed even five years later. One of these provisions to my mind has been the whistleblower provisions in Dodd-Frank. Under Dodd-Frank “eligible” Whistleblowers can receive a percentage of the monetary fines charged for wrongdoing they uncover as long as the total fine equals or exceeds one million dollars. Additionally, the act explicitly forbids retaliation from employers and gives employees the right to sue their employers based on the law ( what is referred to as a “private cause of action”).

The “rub” so to speak is that the definition of “eligible whistleblower” can be interpreted narrowly or more broadly. The law itself refers to whistleblowers as reporting to the SEC. Does that mean that those who issue internal reports are not whistleblowers under Dodd Frank? On Thursday the Second Circuit court ruled on just such a case, claiming by a 2-1 vote that the definition of whistleblower is expansive in Dodd Frank.

Superficially this might look as a sort of non-issue. After all, how difficult is it to report to the Securities Exchange Commission rather than your boss? This framing is misleading. First it directly impacts the case itself. If a whistleblower discovers fraud and/or insufficient internal controls and decides to bypass their bosses and go directly to the SEC, his/her bosses could argue that the employee in question was part of their controls against fraud and had they acted “properly” it would never have been a court case. In other words, the obvious counterfactual of reporting internally creates reasonable doubt.

In practical terms, this narrow definition also means to get legal benefits conferred to you, you must alienate your employer even if it was an issue they would potentially be open to remedying. In other words, who wants to piss off their boss if it can be avoided and you are trying to build a career.The above also ignores that the people most likely to be whistleblowers, lawyers and accountants, have legal responsibilities to their employers that require them to report problems internally before seeking external remedy. In short, to be eligible for the legal benefit of being a whistleblower under a narrow interpretation of Dodd Frank would mean those most likely to be whistleblowers would be violating the law to fit the legal definition. This is obviously non-sensical.

So why did the second circuit rule for an expansive definition of whistleblowing in Dodd-Frank? It was an almost textbook case for the importance of regulatory rule writing in shaping legislation. The strongest rationale the judges who ruled in favor was that the SEC issued a rule that stated “The anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award”. In other words given textual ambiguity judges must defer to regulators interpretations of the legislation (what is referred to as Chevron Deference). Had the SEC’s rule-writing been in line with the “narrow” definition, it is at best unclear what legal basis the narrow definition could be subverted. Given that the fifth Circuit ruled differently this will likely go to the supreme court and will become an important issue to follow in the future.

So why does this ultimately matter? The dissent accidentally shows why with this throughly entertaining non-sense. His claim was that lawyers and accountants don’t need more incentives to blow the whistle: “Congress may well have considered that additional incentives should not be offered to get lawyers and auditors to fulfill existing professional duties, for the same reason reward posters often specify that the police are ineligible,”. It is bizarre to see such a claim after decades of widespread, and increasingly unpunished, accounting fraud. Lawyers, Accountants and the firms that contain them are a crucial part of both preventing accounting control fraud, and giving it a respectable stamp of approval. Encouraging dissent and lack of conformity among these officials is crucial to preventing fraud crime waves in the future. Contrary to the dissent, an expansive definition of a whistleblower is a necessary but not sufficient answer to these problems