secOn March 28, 2016, the U.S. Securities and Exchange Commission (“SEC”) filed an amicus brief in a whistleblower lawsuit brought by a former in-house attorney against Vanguard Group (the “Company”).  The case is Danon v. Vanguard Group, Inc., Civ. A. No. 15-6864 (E.D. Pa.).

Plaintiff, who served as the Company’s in-house counsel between 2008 and 2013, alleges that he was fired in retaliation for raising concerns about certain tax practices.  The Company has moved to dismiss the complaint because, among other things, Plaintiff did not report his concerns to the SEC until after he was told he was going to be terminated.  The Company also asserts that because Plaintiff formerly served as the Company’s in-house counsel, “more should be required” of him to establish that he engaged in protected conduct, especially because expressing his opinions about the Company’s tax practices was part of Plaintiff’s job duties.

In its 73-page amicus brief, the SEC argues against dismissal.  The SEC contends that employees are not required by Dodd-Frank’s whistleblower provisions to report matters to the SEC first in order to pursue a whistleblower claim.  Rather, the SEC argues that Dodd-Frank’s provisions were “carefully calibrated” to ensure that individuals “were not dissuaded from reporting internally due to the possibility of a monetary award.”  “By establishing parity between individuals who first report to the Commission and those who first report internally,” the SEC asserts, “the Commission’s rule avoids a two-tiered structure of anti-retaliation protections that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the benefits that can result from internal reporting.”  Notably, the SEC in a footnote adds that it “does not take a position” on Plaintiff’s complaint or any other arguments asserted by the Company in its motion to dismiss.

The SEC’s brief, which is substantially similar to prior amicus briefs it has filed in other whistleblower suits, comes at a time when district and circuit courts are split on whether whistleblowers must report matters internally before raising matters with regulators.  Last fall, the Second Circuit held that internal complaints are protected under Dodd-Frank thereby creating a split with the Fifth Circuit, which held in Asadi v. G.E. Energy (USA) LLC, that the statute’s definition of whistleblower requires that reports be made to the SEC.

In addition to highlighting the split regarding Dodd-Frank’s definition of “whistleblower,” this case also raises the question of whether an in-house lawyer may be a whistleblower under Dodd-Frank.  Under the SEC’s rules, attorneys generally cannot recover a whistleblower bounty because the rules deny whistleblower status to attorneys whose knowledge originated as a result of the “legal representation of a client.”  17 CFR 240.21F-4(b)(iv).  Still, the rules provide for a limited exception for attorneys who reasonably believe disclosure is necessary  (1) to prevent the issuer from committing a material violation of securities laws which is likely to cause substantial financial injury to the interests or property of the issuer or investors; (2) to rectify the consequences of a material violation of securities laws in which the attorney’s services have been used; or (3) to prevent the issuer from committing or suborning perjury in an SEC proceeding.  SEC Rule 205.3(d)(2).  Notably, the SEC did not take a position on this issue in its amicus brief.  We will be monitoring this case closely and will report on future developments, including the court’s decision on the Company’s motion to dismiss.

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Photo of Lloyd B. Chinn Lloyd B. Chinn

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative…

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd’s practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media, education and technology, he focuses a substantial portion of his practice on the financial services sector. He has tried to final verdict or arbitration award substantial disputes in this area.

Due to Lloyd’s litigation experience, clients regularly turn to him for advice regarding the full range of employment matters, including terminations, whistleblower policy and procedure, reductions in force, employment agreements, and employment policies. For example, in the wake of the financial crisis, he has counseled a number of firms through reductions in force and related bonus and deferred compensation disputes. Lloyd has also been retained to conduct internal investigations of allegations of workplace misconduct, including claims leveled against senior executives.

Lloyd has represented global businesses in matters involving Sarbanes-Oxley and Dodd-Frank whistleblower claims. He has taken an active role in the American Bar Association on these issues, currently serving as Co-Chair of the Whistleblower subcommittee of the ABA Employee Rights and Responsibilities Committee. Lloyd has spoken on whistleblowing topics before a numerous organizations, including the American Bar Association, ALI-ABA, Association of the Bar of the City of New York, and New York University School of Law. He has testified twice before Congressional subcommittees regarding whistleblower legislation and has also published blog postings, articles and client alerts on a variety of topics in this area, including the Dodd-Frank Act’s whistleblower provisions. Lloyd is a co-editor of Proskauer’s Whistleblower Defense Blog, and he has been widely quoted by on whistleblower topics by a number of publications, including the New York Times, the Wall Street Journal, the National Law Journal and Law 360.

Lloyd has also become active in the International Bar Association, presenting on a variety of subjects, including: the #MeToo movement, the COVID-19 pandemic and employment law, and cross-border harmonization of employment provisions in transactions. Lloyd also hosts a quarterly roundtable discussion among financial services industry in-house employment lawyers. He has also published articles and given speeches on a variety of other employment-law topics, including non-solicitation provisions, FINRA arbitration rules, cross-border discovery, e-discovery, and the use of experts.