First decision under Dodd-Frank interprets its whistleblower anti-retaliation provisions broadly
June 13, 2011 - Comments Off
In the first decision interpreting the scope of Dodd-Frank’s whistleblower anti-retaliation provisions, a United States District Judge for the Southern District of New York found in favor of the whistleblower, reasoning that the anti-retaliation provisions of Dodd-Frank do not apply only to those who provide information to the SEC, but also to those whose disclosures are “required or protected” under the Sarbanes-Oxley Act, the Securities Exchange Act, or any other regulation falling under the SEC’s jurisdiction.
The case, Egan v. TradingScreen, involves a former head of U.S. sales for TradingScreen, Egan, who told the company’s President that he believed its Chief Executive Officer (“CEO”) was secretly diverting the company’s assets to another company owned by the CEO. After the President and the independent members of the Board of Directors initiated an independent formal investigation into the allegations which is said to have confirmed those allegations, the CEO gained control of the Board and fired Egan.
Egan brought suit against TradingScreen alleging retaliation in violation of Section 922 of the Dodd-Frank Act. TradingScreen moved to dismiss the claim arguing that the anti-retaliation provisions of Dodd-Frank define a whistleblower as “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,” and Egan had not directly reported a violation of securities laws to Securities and Exchange Commission, but only to the Company’s President. TradingScreen asserted that as a result, Egan was not covered by the Dodd-Frank law’s whistleblower protection provision.
While the court agreed with the defendants with respect to that argument, it reasoned that the Act also elsewhere protects whistleblower disclosures that are required or protected under the Sarbanes-Oxley Act (SOX), the Securities and Exchange Act, and any other law, rule, or regulation subject to the jurisdiction of the Commission, which may not necessarily require reporting to the SEC. The court reasoned that the statute was contradictory, explain that “a literal reading of the definition of the term ‘whistleblower’…requiring reporting to the SEC, would effectively invalidate…the protection of whistleblower disclosures that do not require reporting to the SEC.” The court concluded that this contradiction is best harmonized by reading these latter protections not requiring a report the SEC as authorizing a narrow exception to that requirement.
The court held that to assert a claim under the Dodd-Frank anti-retaliation provisions, a plaintiff must either “allege that his information was reported to the SEC, or that his disclosures fell under the four categories of disclosures…that do not require such reporting: those under the Sarbanes-Oxley Act, the Securities Exchange Act, 18 U.S.C. Sec.1513(e), or other laws and regulations subject to the jurisdiction of the SEC.” This exception does not apply to bounty provisions of Dodd-Frank whistleblower protections.
According to Debra S. Katz, a partner with Katz, Marshall & Banks, a D.C. based employment rights and whistleblower protection law firm, “should other courts follow this interpretation of the statute, the Dodd-Frank Act will serve as a powerful tool for whistleblowers – which is just what Congress intended.” The court’s interpretation of Dodd-Frank, which defines “providing information” to the SEC very broadly, “will clearly allow more activity to be protected from retaliation thus protecting whistleblowers and better protecting the investing public,” states Katz