[author: Joseph G. Adams]
Federal courts are following the lead of the Securities and Exchange Commission (SEC) in adopting an expansive view of who can be a “whistleblower” under The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Recent decisions are treating employees as whistleblowers even if they raise issues that do not necessarily constitute a violation of the securities laws and even if they do not follow the formal processes set forth by the SEC.
Dodd-Frank was signed into law in 2010. Among other things, Section 922 of Dodd-Frank established a whistleblower program, with payments of cash bounties to whistleblowers who voluntarily provide information to the SEC if the information leads to a monetary sanction that exceeds $1 million. The amount of the bounty ranges from 10 to 30 percent of the overall sanction.
Section 922 of Dodd-Frank also protects whistleblowers from retaliation by their employers, and permits whistleblowers to sue their employers under Dodd-Frank to seek redress for negative actions taken against them for “any lawful act done by the whistleblower,” including any action to directly or indirectly “discharge, demote, suspend, threaten, harass,” or otherwise discriminate a whistleblower. 15 U.S.C. § 78u-6(h)(1)(A).
Since Dodd-Frank was enacted, there has been an open question as to whether the anti-retaliation provisions of Section 922 are broad or narrow. Many employers have contended that the anti-retaliation provisions only apply to whistleblowers who meet the specific definition in Section 922, which defines whistleblowers as individuals who provide “information relating to a violation of the securities laws to the [SEC], in a manner established by rule or regulation.” 15 U.S.C. § 78u-6(a)(6). Under the final rules adopted by the SEC to implement Section 922, whistleblowers must submit information through the SEC’s website or by submitting a Form TCR (Tip, Complaint or Referral) by mail or fax. 17 C.F.R. § 240.21F-9(a).
On the other hand, employees have contended that the anti-retaliation provisions of Section 922 are more expansive and apply to a broader group of employees. In particular, would-be whistleblowers assert that their claims need not constitute a “violation of the securities laws” and that they need not submit their information in the specific ways required by the SEC. In its final rules, the SEC has endorsed a broader construction of the anti-retaliation provisions of Section 922.
To date, the federal courts have followed the SEC and have allowed a broader class of employees to assert claims of retaliation under Section 922. Most recently, a federal district court in Connecticut allowed a claim of retaliation under Dodd-Frank to proceed and rejected the employer’s argument that the employee was not a whistleblower under Section 922. See Kramer v. Trans-Lux Corp., No. 3:11cv1424 (SRU) (D. Conn. Sept. 25, 2012). In Kramer, the plaintiff was a former vice president of human resources who asserted that the company was not following its pension plan. He initially reported his concerns to management, then to the audit committee of the board of directors and finally to the SEC. Following these events, the company allegedly stripped him of his responsibilities and eventually terminated his employment. He later sued and asserted, among other things, a violation of the anti-retaliation provisions of Section 922 of Dodd-Frank.
The employer sought to dismiss the Dodd-Frank claim on the grounds that the plaintiff did not report his concern to the SEC in the required manner (he sent a letter but did not use the required form), and that the conduct at issue did not actually constitute a violation of SEC rules or regulations. The court rejected these arguments and followed the SEC’s regulations, which provide that a whistleblower need only “possess a reasonable belief” that the information “relates to a possible securities law violation.” 17 C.F.R. § 240.21F-2(b). The court also noted that only two other courts had considered this issue and both had adopted the broader definition. The court concluded that the claims asserted by the plaintiff met this broader standard.
In light of these cases, companies should be cautious about relying on a narrow view of which employees can be considered whistleblowers under Dodd-Frank or other federal laws.