On July 21, 2021, the U.S. District Court for the Southern District of New York held that the whistleblower protections established in SOX are not restricted to employee whistleblowers, but also extend to shareholders.  SEC v. Collector’s Coffee Inc., No. 19-cv-4355.

Background

As we previously reported, in 2019 the SEC sued online auction portal Collectors Coffee and its CEO, alleging in an amended complaint that the CEO attempted to prevent investors from communicating with the SEC in violation of Rule 21F-17.  Rule 21F-17, which was adopted by the SEC after the passage of the Dodd-Frank Act, prohibits company actions that impede individuals from reporting a possible securities law violation to the SEC.  Although the Obama-era SEC brought multiple enforcement actions to enforce Rule 21F-17, this action was notable as it was the SEC’s first public attempt to enforce Rule 21F-17 during the Trump administration.

The SEC alleged in its lawsuit that the CEO and Collectors Coffee attempted to enforce a settlement agreement they had reached with two investors who had accused the CEO of making material misrepresentations and omissions, which contained a provision prohibiting communications with regulatory agencies like the SEC.

On June 26, 2020, Defendants filed a motion to dismiss, and on May 17, 2021, Magistrate Judge Gabriel Gorenstein issued a Report & Recommendation recommending that the District Court deny their motion because SOX is not restricted to employee whistleblowers.  Collectors Coffee and the CEO objected to the Magistrate Judge’s Report, arguing that the SEC exceeded its rulemaking authority in promulgating Rule 21F-17, and that the Rule violates the First Amendment of the United States Constitution.

Ruling

District Judge Victor Marrero adopted the Magistrate Judge’s Report and Recommendation in its entirety.  Defendants argued that Rule 21F-17 exceeded the SEC’s rulemaking authority because Rule 21F-17 applies to any “person,” while Section 21F of the Exchange Act applies only to whistleblower-employees.  The court rejected this argument, holding that the broad definition of the term “whistleblower” in Section 21F—which includes “any individual who provides … information relating to a violation of the securities laws to the [SEC]”—is not restricted to the employer-employee context.  The court also relied on the Congressional intent behind Section 21F, which was to encourage whistleblowing activity and protect whistleblowers generally.

The court also rejected Defendants’ First Amendment argument, holding that because the contractual provisions they sought to enforce would be illegal and unenforceable under Rule 21F-17, no First Amendment right was abridged.

Implications

This decision provides for a broad reach of Rule 21F-17.  Companies should ensure that their internal investigation protocols and settlement agreements include language making clear that whistleblowers may report concerns to the SEC.

Posted in Rule 21F-17, SEC
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Photo of Steven J. Pearlman Steven J. Pearlman

Steven J. Pearlman is a partner in the Labor & Employment Law Department, where he is Head of the Restrictive Covenants, Trade Secrets & Unfair Competition Group and Co-Head of the Whistleblowing & Retaliation Group.

Employment, Whistleblower, Restrictive Covenant and Trade Secret Practice.…

Steven J. Pearlman is a partner in the Labor & Employment Law Department, where he is Head of the Restrictive Covenants, Trade Secrets & Unfair Competition Group and Co-Head of the Whistleblowing & Retaliation Group.

Employment, Whistleblower, Restrictive Covenant and Trade Secret Practice. Steven’s national practice focuses on defending companies in federal and state courts and arbitration against claims of: discrimination, retaliation and harassment, including claims brought by high-level executives; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations (including class, collective and PAGA actions).

Illustrating his versatility, Steven has successfully handled bench and jury trials in multiple jurisdictions (e.g., Illinois, California, Florida and Texas); defended one of the largest Illinois-only class actions in the history of the federal courts in Chicago; and prevailed following his oral arguments before the Seventh Circuit and state appellate courts. Steven brings his litigation experience to bear in counseling clients to minimize risk and avoid or prepare for success in litigation.

Investigations. Reporting to boards of directors, their audit committees, CEOs and in-house counsel, Steven conducts sensitive investigations and has testified in federal court. His investigations have involved complaints of sexual harassment involving C-suite officers; systemic violations of employment laws and company policies; and fraud, compliance failures and unethical conduct.

Thought Leadership and Accolades. Steven was named Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He was also named as One of the Top 10 Impactful Labor & Employment Lawyers in Illinois for 2023 by Business Today. He is a Fellow of the College of Labor and Employment Lawyers. Chambers describes Steven as an “outstanding lawyer” who is “very sharp and very responsive,” a “strong advocate,” and an “expert in his field.” Chambers also reports that “He is someone who can navigate the twists and turns of litigation without difficulty. Steven is great with brief-writing, crafting arguments, and making sure the client is always happy.”

Steven was 1 of 12 individuals selected by Compliance Week as a “Top Mind.” Earlier in his career, he was 1 of 5 U.S. lawyers selected by Law360 as a “Rising Star Under 40” in the area of employment law and 1 of “40 Illinois Attorneys Under Forty to Watch” selected by Law Bulletin Publishing Company. Steven is a Burton Award Winner (U.S. Library of Congress) for “Distinguished Legal Writing.”

Steven was appointed to Law360’s Employment Editorial Advisory Board and selected as a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is often quoted in leading publications such as The Wall Street Journal.

The U.S. Chamber of Commerce has engaged Steven to serve as lead counsel on amicus briefs to the U.S. Supreme Court and federal circuit courts of appeal. He was appointed to serve as a Special Assistant Attorney General for the State of Illinois in employment litigation matters. He has presented with the Solicitor of the DOL, the Acting Chair of the EEOC, an EEOC Commissioner, Legal Counsel to the EEOC, and heads of the SEC, CFTC and OSHA whistleblower programs. He is also a member of the Sedona Conference, focusing on trade secret matters.

In 2024, Steven received the Excellence in Pro Bono Service Award from the United States District Court for the Northern District of Illinois and the Chicago Chapter of the Federal Bar Association.

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