Internal Reporting to Compliance Officer Deemed Protected Activity Under Dodd-Frank Act Anti-Retaliation Provision
On October 16, 2013, the U.S. District Court for the District of Massachusetts issued an important order denying a registered investment advisor’s motion for judgment on the pleadings, holding that a whistleblowing employee’s internal report of potential violations of securities laws is sufficient to trigger protections under the anti-retaliation provisions of the Dodd-Frank Act.
In Ellington v. Giacoumakis, Case No. 1:13-vc-11791-RGS (D. Mass.) the court was faced with claims by Richard Ellington against his former employer, New England Investment & Retirement Group. Mr. Ellington alleged that he had reported the inappropriate distribution of misleading investment reports to prospective and current clients to the individual owner of the company. Mr. Ellington also alleged that following his report to the owner, he drafted a lengthy memorandum on the distribution of misleading investment information and submitted this memo to the company’s compliance officer. Less than two weeks after his submission of the memo to the compliance officer, Mr. Ellington alleged that the owner of the company called him “the whistleblower” and requested that Mr. Ellington return all company property. Mr. Ellington then forwarded himself various confidential emails relating to the company’s distribution of misleading information. Predictably, Mr. Ellington was terminated on the basis that he had violated company policy by forwarding confidential information to his personal email account.
Importantly, it was only after the company’s termination of his employment that Mr. Ellington reported the company’s distribution of misleading information to the SEC.
Mr. Ellington then filed a lawsuit under the Securities Whistleblower Incentives and Protection provisions of the Dodd-Frank Act, which provide that
[n]o employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower-
(i) in providing information to the Commission in accordance with this section;
(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15U.S.C. 7201 et seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), including section 10A(m) of such Act (15 U.S.C. 78f(m)), section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.
15 U.S.C. § 78u-6(h)(1)(A); see also 15 U.S.C. § 78u-6(h)(1)(B)(i) (providing a private right of action for an individual “who alleges discharge or other discrimination in violation of subparagraph (A)”).
The defendant former employer’s motion for judgment on the pleadings was based entirely on the Dodd-Frank Act’s somewhat internally inconsistent definition of a “whistleblower.” While § 78u-6(h)(1)(A) of the Dodd-Frank Act prohibits an employer from retaliating against a “whistleblower,” the Act defines 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.” 15 U.S.C. § 78u-6(a)(6). Consequently, the defendant argued, Mr. Ellington could not qualify for protection under the Dodd-Frank Act because he only reported his concerns internally prior to his termination, and his report to the SEC only occurred once he was already terminated.
The defendant former employer relied extensively on the Fifth Circuit’s decision in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 625-628 (5th Cir. 2013), holding that the § 78u-6(a)(6) definition of “whistleblower” subsumes the separate types of protected activity under § 78u-6(h)(1)(A), thereby limiting the anti-retaliation provisions of the Dodd-Frank Act to persons who fall within the restrictive “whistleblower” definition.
The District Court bluntly responded to the defendant’s argument and to the Asadi opinion, stating that “[t]his court respectfully disagrees…” Instead, the District Court adopted the SEC’s definition and interpretation of the Dodd-Frank Act’s anti-retaliation provisions. In particular, the court cited to the language of 17 C.F.R. § 240.21F-2(b)(1), which provides that the third category of protected activity under § 78u-6(h)(1)(A) includes reports to persons or governmental authorities other than the SEC.
The court ultimately concluded that “It is apparent from the wording and positioning of § 78u-6(h)(1)(B)(i) that Congress intended that an employee terminated for reporting Sarbanes-Oxley violations to a supervisor or an outside compliance officer, and ultimately to the SEC, have a private right of action under Dodd-Frank whether or not the employer wins the race to the SEC’s door with a termination notice.” (emphasis added).
The District Court’s decision is welcome news to whistleblowers and their attorneys. The inclusion of internal reporting within the scope of protected activity is a necessary component of any effective whistleblower statutory scheme. Such protection encourages potential whistleblowers to use internal processes in an effort to remedy any perceived problems, before being forced to report to governmental authorities. Further, once the offending employer ultimately does nothing to remedy the problem and retaliates against the whistleblower to whitewash the situation, the courageous employee is afford significant protections and an avenue for relief.