N.Y.: Dodd-Frank Doesn’t Protect Internal Complaints of Securities Violations

By Rosemarie Lally Jan 20, 2015

An employee who complains internally about securities law violations but fails to report them to the Securities and Exchange Commission (SEC) is not protected by the Dodd-Frank Wall Street Reform and Consumer Protection Act because that law only protects individuals who report alleged violations to the SEC, a federal district court in New York held.

Interestingly, the court’s decision adopts the view of the 5th U.S. Circuit Court of Appeals, which has jurisdiction over Louisiana, Mississippi, and Texas, but diverges from earlier decisions issued by courts in its own district.

Daniel Berman alleged that he reported a number of transactions that he reasonably believed to be violations of “policy, law, and GAAP [Generally Accepted Accounting Principles]” as well as U.S. securities laws to his employer, Neo@Ogilvy LLC.

Berman claims that his employer fired him after he made his concerns known. Berman had not reported any of his concerns to the SEC before his employer took the allegedly retaliatory actions. His suit asserted that his employer’s actions violated the whistleblower protections provided by Dodd-Frank and that they also breached express and implied employment contracts.

The employer moved to dismiss, arguing that Berman was not a "whistleblower” under Dodd-Frank because that law defines "whistleblower" as “any individual who provides, or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”

However, Berman argued that the statute is ambiguous and that the court should defer to the SEC's expansive interpretation of "whistleblower." His argument relies on a provision that “no employer may retaliate against a ‘whistleblower’ because of any lawful act done by the ‘whistleblower’ . . . in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter, including section 78j–1 (m) of this title, section 1513 (e) of title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.” Berman contended that because the category of conduct protected includes disclosures to people other than the Commission, such as those with supervisory authority over the employee, the definition of “whistleblower” must be too narrow.

The court, noting that a number of district courts have carved out a "narrow exception" to Dodd-Frank's definition of whistleblower despite its "clear statutory language,” nonetheless followed the rationale laid out by the 5th Circuit in Asadi v. G.E. Energy, the only appellate court decision to address Dodd-Frank’s definition of "whistleblower.” In that case, the 5th Circuit “identified a harmonious interpretation of the statute that eliminates the purported contradiction in the Act that forms the basis of other district courts’ determination that the statute is ambiguous,” the district court said.

The court stressed that it does not question the value or importance of protecting whistleblowers from retaliation, but pointed out that the Sarbanes-Oxley Act of 2002 (SOX) protects individuals who have informed their employers of possible violations against retaliation, subject to the requirement that they first file a complaint with the Department of Labor before bringing a private right of action. In light of the protections offered by SOX, the court noted that what Berman is actually asking for is the right to file a private lawsuit without the need to first contact a government agency.

Since it is “the exception, not the rule, for Congress to grant an individual a private right of action to sue for damages arising from retaliation without requiring that individual to make contact with a federal agency first,” the district court applied the statutory language and granted the employer’s motion to dismiss.

Berman v. Neo@Ogilvy LLC, S.D.N.Y., 1:14-cv-523-GHW-SN (Dec. 4, 2014).

Rosemarie Lally, J.D., is a freelance legal writer and editor based in Washington, D.C.


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