Supreme Court Narrows Dodd-Frank SEC Whistleblower Protections

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

The Supreme Court last week in a unanimous 9-0 decision narrowly interpreted the scope of Dodd-Frank anti-retaliatory whistleblower protections to apply only to those who reported their concerns to the Securities and Exchange Commission (SEC).

In Digital Realty Trust v. Somers, the Court weighed in to resolve a split between the circuits as to whether the Dodd-Frank protections applied to whistleblowers who used their internal company complaint procedures, but failed to raise the problem with the SEC. Or, more precisely, as Justice Ruth Bader Ginsburg wrote in her majority opinion:

The question presented: Does the anti-retaliation provision of Dodd-Frank extend to an individual who has not reported a violation of the securities laws to the SEC and therefore falls outside the Act’s definition of “whistleblower”? We answer that question “No”: To sue under Dodd-Frank’s anti-retaliation provision, a person must first “provid[e] . . . information relating to a violation of the securities laws to the Commission.” (citations omitted; opinion).

Writing for the Scotusblog in an article headed,
Opinion analysis: Whistling while you work is whistling in the wind – Dodd-Frank whistleblowers do need to inform the SEC Theresa Gabaldon summarized the alternative arguments for a broader interpretation of who would qualify for whistleblower protection. In the interest of keeping this post short and accessible to non-lawyers, I’ll not repeat those arguments here, but refer interested readers to that analysis. Instead, I wish to focus on the consequences of the opinion rather than parsing the arguments the Court considered in reaching its decision..

I’ve previously written about the history of US financial incentives to encourage whistleblowers to spill the beans about fraudulent and corrupt practices. Such bounty systems date back to the US Civil War (as I discussed most recently New Dept of Justice Guidelines Will Stymie Whistleblowers). I’ve also written about the deficiencies in the SEC’s new highly-touted whistleblower program in SEC Takes Victory Lap for Pathetic Performance of Whistleblower Program— as with much of Dodd-Frank, these provisions represent a missed opportunity to create a whistleblower system that could have ferreted out more corporate corruption.

The Recent Decision: Not Good for Whistleblowers, Nor Companies Either

A potential whistleblower who opts to go the internal complaint route may still be protected from retaliation by choosing to bring a claim under the statutory provisions authorized by the 2002 Sarbanes-Oxley Act. But, as laid out by The Washington Post, there are significant differences between the Sarbanes-Oxley provisions and those allowed under Dodd-Frank:

People who report issues to their company’s management, to another federal agency or to Congress are still protected against retaliation but under an older law, the 2002 Sarbanes-Oxley Act. But the two laws differ in a number of ways, including how long people have to bring a lawsuit and how much money they can get in compensation. A person who wins a lawsuit under the Dodd-Frank Act’s whistleblower protection provision can get more money than someone who wins under the Sarbanes-Oxley Act’s provision.

While the ruling interprets the statute in a narrow way that reduces the potential whistleblowers who qualify to be protected by anti-retaliatory provisions, companies themselves may be the ones most harmed by it, as The Wall Street Journal reports:

Corporate America could find trouble in a recent Supreme Court ruling that limits protections for whistleblowers, lawyers say.

The unanimous decision was handed down Wednesday in the case Digital Realty Trust Inc. v. Somers. The ruling makes it clear antiretaliation protections for whistleblowers under the 2010 Dodd-Frank Act only cover people who report allegations of wrongdoing to the Securities and Exchange Commission. SEC rules enforcing Dodd-Frank protected in-house whistleblowers as well.

The ruling could reduce a company’s ability to handle allegations of wrongdoing internally, lawyers told Risk & Compliance Journal.

“I think for businesses, for companies, it’s a matter of ‘be careful what you wish for,’” said Thomas A. Zaccaro, vice chairman of the white-collar and investigations group at law firm Paul Hastings LLP and a former chief trial attorney at the SEC’s Los Angeles office.

“I think the consequence of the decision is whistleblowers are now made more likely to report to the SEC, and I think most companies would prefer that employees would report internally,” he said.

Oops! Cry me a river.

Writing for the Harvard Law School Forum on Corporate Governance and Financial Regulation, Cydney Posner reaches the same conclusion:

The result may have an ironic impact: while the win by Digital will limit the liability of companies under Dodd-Frank for retaliation against whistleblowers who do not report to the SEC, the holding that whistleblowers are not protected unless they report to the SEC may well drive all securities-law whistleblowers to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor.

The Bottom Line

All joking aside, this decision pleases no one: it hurts potential whistleblowers, and would make it less likely that corporations can deal with a whistleblower complaint in house rather than in response to a full bore SEC investigation. The obvious retort to that is that Congress could amend the statute to extend broader protections to whistleblowers. Yet given the current composition of Congress– not to mention who occupies the White House– that is not likely to happen. Instead, Dodd-Frank is clearly in Trump’s crosshairs. Notwithstanding that more general opposition, the Justice Department had promoted a broader interpretation of the statute, advancing the arguments mentioned in the Scotusblog post cited above.

Quoting again from the Washington Post:

The court’s ruling comes at a time when the Trump administration has already laid out changes it wants to make to the 2010 Dodd-Frank Act, which the administration believes went too far and has hurt economic growth. President Donald Trump has repeatedly attacked the law as a “disaster” and has promised to do “a big number” on it. The Trump administration had nonetheless argued that the law did provide broad protection. Businesses had opposed that reading of the law.

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  1. Jim Haygood

    Report to the SEC? Yeah, right …

    Around 2006 I sent news clippings to the SEC about so-called corporate money market funds that were spreading among unsophisticated investors thanks to their high yield.

    Unlike normal money market funds which are well diversified, these corporate funds held solely the commercial paper of their sponsor. One of the fund sponsors was General Motors, which went bankrupt a couple of years later after the commercial paper market froze solid in 2008.

    What did the SEC do about this clear and present danger to unsuspecting investors, which went on to cause them serious actual harm? They didn’t do squat. Prolly too busy watching PornHub … twats.

    1. lyman alpha blob

      Yeah I’m assuming that reporting a violation to the SEC doesn’t keep your company from firing you on some other trumped-up charge when they find out. And even if the SEC does do something, which is increasingly unlikely given the level of regulatory capture, the wheels of government grind slowly even on a good day (unless you’re a professional athlete who has taken drugs that allowed you to hit a few extra homers, then you’ll be hauled before Congress tout de suite, because priorities people!)

      Complain, and enjoy living in a cardboard box.

  2. perpetualWAR

    Report to the SEC? Yeah riiiight.

    This organization knows all about the non-existent REMICs, the notes that were double and triple pledged to the REMICs which many homeowners provided evidence regarding. Did the SEC investigate?

    What a joke our government’s become.

    1. Synoia

      Report to SEC = CYA.

      Send in the issue to Employer and SEC simultaneously. Cost: $6.25 for a USPS priority tracked letter.

  3. Anon

    At-will employment is the more significant issue here. A simple just-cause dismissal standard likely would have been helpful to the plaintiff, as it’s unlikely that reporting unlawful practices internally would be considered sufficient cause for dismissal. (That’s not to undermine the utility of specific whistleblower protections, which can provide for higher damages and protection against forms of retaliation other than outright dismissal.)

    1. ChrisPacific

      I started my career in the USA as an at-will employee. Now that I am working in a country with proper employment law and worker protections, I regularly notice people doing things that would set off screaming alarm bells for me, like asking their current manager to give them a reference.

      Usually this results in me quizzing people about workplace norms and accepted behavior for a bit, after which they are curious about why I want to know. I mention my history with at-will contracts and they nod sympathetically and say “yeah, those things are messed up.”

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