High Court Considers Whether Whistle-Blowers Must Report to SEC

Employers are concerned that ruling might undermine internal reporting programs

Allen Smith, J.D. By Allen Smith, J.D. December 5, 2017
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The U.S. Supreme Court heard arguments Nov. 28 in a case that will undermine internal whistle-blowing reporting programs if the high court decides that the Dodd-Frank Act requires whistle-blowers to report securities violations to the Securities and Exchange Commission (SEC), according to Greg Keating, an attorney with Choate, Hall & Stewart in Boston.

The Dodd-Frank Act was signed into law on July 21, 2010, following the financial crisis of 2008 and was intended to encourage whistle-blowers to report securities violations. "The plain language of the definition section on who is a whistle-blower is narrow and only includes individuals who actually go to the SEC and does not include internal complaints," Keating told SHRM Online.

Paul Somers, a vice president at Digital Realty Trust in San Francisco, was fired after telling senior management that his supervisor allegedly eliminated internal controls in violation of securities laws. Somers sued, claiming he was retaliated against in violation of Dodd-Frank. Digital Realty Trust said he wasn't eligible for protection because he only reported internally and not to the SEC.

The 9th U.S. Circuit Court of Appeals held that a whistle-blower is protected from retaliation for reporting internally, but Digital Realty Trust appealed to the Supreme Court to resolve a split among the appeals courts on this issue.

Supreme Court Arguments

Kannon Shanmugam, an attorney with Williams & Connolly in Washington, D.C., argued on behalf of Digital Realty Trust that the high court should not defer to the SEC's final rule stating that Dodd-Frank protects whistle-blowers who report internally. The rule should not be followed because it contradicts Dodd-Frank's definition of whistle-blower, which refers only to those who report violations to the SEC, he maintained.

However, Daniel Geyser, an attorney with Stris & Maher in Dallas who represented Somers, said, "The entire point that Congress had made in this statute, and consistent again with every piece of modern, major whistle-blowing legislation, is to protect internal whistle-blowing."

Justice Neil Gorsuch replied that the plain language of the statute defined whistle-blower as someone who reports to the SEC. He asked why the commission's rule should be given deference when there wasn't a direct reference to defining a whistle-blower as someone who reports internally in the proposed rule.

Shanmugam asserted during the arguments that "Where Congress provides a specific statutory definition, that ought to be given effect." He added, "The SEC's interpretation here was procedurally improper, as well as substantively invalid."

Justice Elena Kagan suggested that Digital Realty Trust's interpretation of the statute would lead to an anomalous result. She presented the following hypothetical: Two employees report internally, and both are fired. "One of them, tough luck, but the other one is going to get protection because he's filed a report with the SEC about some different matter entirely 10 years earlier. Why does he get extra protection?" she asked.

Congress was trying to create incentives for reporting to the SEC, Shanmugam answered.

Justice Stephen Breyer noted that Dodd-Frank strengthens the whistle-blowing remedies in Sarbanes-Oxley, which clearly does protect internal whistle-blowers. "So what's the big deal?" he asked.

Justice Ruth Bader Ginsburg asked whether Somers sued under Sarbanes-Oxley or just Dodd-Frank.

Geyser noted that Somers sued only under Dodd-Frank. "He missed the limitations period for Sarbanes-Oxley, which will happen frequently because not everyone who's not a lawyer is aware of all their rights under federal law," he said.

Despite Congress' language in Dodd-Frank, it wanted to first give corporations a chance for self-governance, according to Geyser. If companies refuse to address the problem, then whistle-blowers go to the government, he said.

"We need to make sure that people first report internally and give corporations a chance to fix the problem," he said. "The necessary counterpart to that is people have to be protected when they internally report."

Practical Impact of Case

Keating noted that if the Supreme Court rules for Digital Realty Trust, employers will benefit from reduced liability exposure because Dodd-Frank has a much longer statute of limitations than Sarbanes-Oxley—up to six years as opposed to 180 days. In addition, Dodd-Frank imposes harsher remedies, such as double back pay for retaliation.

"On the other hand, employers understandably prefer that employees raise concerns internally through HR," he noted. The practical import of this decision could mean that some individuals decide to bypass internal processes and go directly to the SEC, "which would clearly undermine internal compliance programs."

[SHRM members-only online discussion platform: SHRM Connect]

Employers should understand that employees will be understandably skeptical of the value of internal reporting when companies have litigated to eliminate retaliation protections for internal reports, predicted Sean McKessy, an attorney with Phillips & Cohen in Washington, D.C., and the former chief of the SEC Office of the Whistleblower. "If a company truly wants to encourage internal reporting, it should make clear in its programs that it will not retaliate against those who report internally and it will not litigate against employees who do so," he said.

David Marshall, an attorney with Katz, Marshall & Banks in Washington, D.C., also said that HR should:

  • Respond quickly to whistle-blowers.
  • Let them know the company has heard their complaints and takes them seriously.
  • Keep the whistle-blower informed of the progress of an investigation to the extent consistent with privacy concerns.
  • Redouble efforts to strengthen anti-retaliation policies.

 

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