Dodd-Frank

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On June 28, 2018, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) voted in an open meeting on several final rules and rule proposals that will have a material impact on the Commission’s whistleblower program. Most notably, the SEC approved a rule proposal that would modify its Rule 21F, which defines who is a whistleblower and establishes anti-retaliation protection, to comport with the U.S. Supreme Court’s holding in Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018).

As detailed on our blog, in February, the U.S. Supreme Court unanimously held that the anti-retaliation provision of the Dodd-Frank Act only applies to individuals who have provided information regarding a violation of the securities laws to the SEC. In so holding, the Court ruled that the SEC’s Rule 21F-2, which enabled an individual to gain anti-retaliation protection from complaints not made directly to the SEC (such as internal company complaints), was in clear contravention of Congress’s instruction that a “whistleblower” is a person who provides “information relating to a violation of the securities laws to the Commission.”

The SEC’s proposed rule will comport with the Court’s holding by requiring, inter alia, that an individual seeking anti-retaliation protection report, in writing, information about possible securities laws violations to the SEC itself. The proposed rule would apply uniformly: to the SEC’s whistleblower award program, the heightened confidentiality program, as well as for employment anti-retaliation protection.

On February 21, 2018, the U.S. Supreme Court unanimously ruled that an individual is not covered by the anti-retaliation provision of the Dodd-Frank Act unless they have provided information regarding a violation of law to the U.S. Securities and Exchange Commission. Digital Realty Trust, Inc. v. Somers, No. 10-1276…

Last week, the Seventh Circuit Court of Appeals held that a terminated CEO’s complaints about his board of directors’ managerial decisions did not qualify as protected whistleblowing under the Sarbanes-Oxley Act of 2002 (“SOX”) nor under the Dodd-Frank Act of 2010 (“DFA”).  Verfuerth v. Orion Energy Sys., Inc., No. 16-3502, 2018 WL 359814 (7th Cir. Jan. 11, 2018).

Background.  Plaintiff was the founder and former CEO of a company that specializes in energy-efficient lighting.  In November 2012, following a series of disputes between Plaintiff and the company’s board of directors, Plaintiff was terminated for incurable cause.  A year and a half after his termination, Plaintiff brought a lawsuit that alleged that he was retaliated against, in violation of SOX and DFA, for his complaints to various board members about the company’s business practices.  Practices about which Plaintiff alleged to have complained included attorney over-billing, intellectual property disputes, conflicts of interest, and violations of internal company protocol.  The Company moved for summary judgment, arguing in part that Plaintiff’s complaints did not qualify as whistleblowing entitled to protection from adverse employment actions.

Rulings.  Chief Judge Griesbach granted the Company’s Motion for Summary Judgment on Plaintiff’s SOX and DFA claims.  Chief Judge Griesbach held (1) that SOX protects complaints about securities fraud, not “run-of-the-mill corporate problems,” which is what he believed Plaintiff raised here, and (2) that Plaintiff’s complaints to various board members about what he thought they should be doing did not amount to whistleblowing, because “[s]imply telling a person he might be committing fraud is not whistleblowing” and “airing concerns is not whistleblowing.”  Verfuerth v. Orion Energy Sys., Inc., No. 14-CV-352, 2016 WL 4507317 (E.D. Wis. Aug. 25, 2016).

The Seventh Circuit Court of Appeals agreed, holding that “[a]n executive who advises board members to disclose a fact that the board already knows about has not ‘provide[d] information’ about fraud.  At most, he has provided an opinion.”  Verfuerth­ No. 16-3502, 2018 WL 359814 at *4.  The Court emphasized that nothing in SOX, or any other federal statute, prevents a company from firing its executives over differences of opinion.

The Southern District of Florida recently denied a Rule 12(b)(6) motion to dismiss a former employee’s Sarbanes-Oxley and Dodd-Frank whistleblower retaliation claims, finding that the plaintiff sufficiently alleged that she had an objectively reasonable belief regarding alleged securities violations.  Thomas v. Tyco Int’l Mgmt. Co., LLC, No. 16-cv-80501 (Mar. 31, 2017).  This case is noteworthy because it takes an expansive view of the scope of protected activity under SOX with respect to complaints involving internal controls and data security.

Background.  Plaintiff was a former Manager of Financial Reporting for the Company.  She allegedly learned during her employment that an applicant for a manager position misrepresented her educational qualifications in her resume.  Additionally, she allegedly believed that the applicant did not have sufficient training in generally accepted accounting principles (“GAAP”).  According to her complaint, despite raising these concerns with her direct supervisor, the Company hired the applicant for the new manager position.  Plaintiff claimed that the new manager was responsible for reporting $4 billion per year to the Company’s headquarters and ultimately to the SEC.  Plaintiff also allegedly began doubting the reliability of a new monthly “tie-out” process the Company used to ensure that the financial data in the Company’s ledger system was consistent with the consolidated financial data reported to the SEC.  In December 2013, Plaintiff filed a complaint with the internal ombudsman regarding the new manager’s credentials and the tie-out process.  The ombudsman found no wrongdoing.  In March 2014, Plaintiff filed a whistleblower retaliation complaint with OSHA.  In May 2014, her employment was terminated on the grounds that she allegedly improperly accessed another employee’s records.

The Northern District of New York recently denied a Rule 12(b)(6) motion to dismiss a former employee’s Dodd-Frank whistleblower retaliation claim, finding that the plaintiff sufficiently alleged that he had an objectively reasonable belief with respect to alleged securities violations and causation.  McManus v. Tetra Tech Construction, Inc., No. 16-cv-894 (May 11, 2017).

The U.S. District Court for the Eastern District of Virginia recently granted a Rule 12(b)(6) motion to dismiss a Dodd-Frank whistleblower retaliation claim brought by an ex-project manager, finding that Plaintiff failed to allege that her protected activity involved any disclosures to the SEC.  Smith v. Raytheon Co., No. 17-cv-00438 (E.D. Va. Aug. 11, 2017).

The Northern District of Illinois recently dismissed an Indiana-based employee’s claims for retaliatory discharge in violation of common law pursuant to Illinois public policy, focusing on the nature of the connection (or lack thereof) to Illinois and noting that the plaintiff possessed adequate statutory remedies under federal whistleblower laws.  O’Risky…

The Southern District of New York recently dismissed Dodd-Frank whistleblower retaliation claims brought by an employer’s ex-President and an ex-Director pursuant to Rule 12(b)(6) on res judicata grounds, determining that retaliation claims had already been decided in arbitration and that the Dodd-Frank claims filed in federal court for the first time were therefore barred. Wendt v. The BondFactor Co. LLC, No. 16-cv-7751 (S.D.N.Y. Aug. 2, 2017).