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With decision, definition of whistleblower expands

USDC splits with 5th Circuit on issue

An employee who complained internally but did not take his claims to the Securities and Exchange Commission until after he was fired still qualifies as a whistleblower under the Dodd-Frank Act and can sue for retaliation, a U.S. District Court judge has determined.

The defendant employer cited a recently issued 5th U.S. Circuit Court of Appeals ruling in arguing that the 2010 Dodd-Frank law on financial reforms strictly defines “whistleblower” as someone “who provides … information relating to a violation of the securities laws to the [SEC].”

But Massachusetts Judge Richard G. Stearns joined a growing chorus of federal District Court judges who have rejected that reasoning, deferring instead to the SEC’s own interpretation of the statute it administers, which broadens the definition of a whistleblower who can sue for retaliation to include those who report alleged violations to other governmental authorities, or individuals.

“The SEC’s construction is the more persuasive,” Stearns wrote in denying the defendants’ motion for a judgment on the pleadings. “It is apparent … that Congress intended that an employee terminated for reporting … violations to a supervisor or an outside compliance officer, and ultimately the SEC, have a private right of action under Dodd-Frank whether or not the employer wins the race to the SEC’s door with a termination notice.”

The judge also rejected the defendants’ argument that Dodd-Frank should not apply because the plaintiff employee’s allegedly protected conduct occurred prior to the law’s enactment on July 22, 2010.

The nine-page decision is Ellington v. Giacoumakis.

‘A broad net’

Haverhill, Mass., lawyer Marsha V. Kazarosian, who represented the plaintiff employee, said she was apprehensive about her chances after the 5th Circuit considered a similar question in Asadi v. G.E. Energy (USA) and found for the employer.

“I was pleased because Asadi had just come down at the end of July,” she said. “That’s the only appellate case on [this question], and it says that the only way to interpret Dodd-Frank in that regard is, in order to avail yourself of whistleblower retaliation protection, you have to have made the disclosure directly to the SEC. It concerned me.”

Dodd-Frank anti-retaliation protections should not be reserved “only for people who march right up to the SEC,” Kazarosian added. “That chills anyone from ever talking to their supervisors and letting them do some kind of internal remedy first.”

Gregory C. Keating, chairman of the whistleblowing and retaliation practice group at Littler Mendelson in Boston, however, said Stearns should have employed a plain-language analysis of the Dodd-Frank Act, rather than deferring to the SEC’s interpretation.

“Unequivocally, I feel the 5th Circuit has it right,” Keating said. “This is a poorly written statute in some ways, but very clear on one front. The definition of a whistleblower could not be more clear that you have to go to the SEC first, before you go back to look at other things. Then you’re wrapped in a bubble, and you can’t be retaliated against.”

But David P. Angueira of Swartz & Swartz in Boston said that interpretation is flawed and that he does not believe Congress meant to leave employees without protection unless they have gone to the SEC first. Angueira said that could lead to troubling outcomes.

“If you penalize a whistleblower by doing that … that defeats the very purpose of any whistleblower statute,” he said. “It’s good for people to report fraud. And when they do, they shouldn’t be penalized. All they’re trying to do is obey the law. When you allow cases to be dismissed on issues like this, you’re basically just agreeing with employers’ wrongful conduct when they retaliate against whistleblowers. That creates a number of problems because most employers require or encourage that employees report [violations] internally to immediate supervisors.”

The confusion is created by the fact that while the Dodd-Frank Act defines a whistleblower as someone who provides information “to the Commission,” a later section spelling out the anti-retaliation provisions includes, as protected activity, “disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.”

SOX specifically protects disclosures provided to a broad range of players including any federal agency, members or committees of Congress, and “a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover or terminate misconduct).”

While many argue that the two sections create ambiguity, if not contradiction, within the law, Keating said the 5th Circuit did an excellent job of reconciling them.

“My strong contention is that there are two steps to the process,” he said. “One, you have to be a whistleblower. What that means is, you have to have gone to the SEC. If you check that box, then you start looking at the protected activity.”

The “Stearns view,” Keating said, is “we’re just going to ignore that and give you protection from retaliation if you report internally. A broad interpretation of Dodd-Frank such as this is going to cast a broad net for potential plaintiffs, and that’s an understatement.”

Christopher F. Robertson of Boston, co-chairman of Seyfarth Shaw’s national whistleblower team, said just because someone cannot bring a retaliation claim under Dodd-Frank does not mean he is without recourse, as Sarbanes-Oxley has anti-retaliation provisions as well.

Dodd-Frank would “swallow” Sarbanes-Oxley under Stearns’ reasoning, Robertson said, because retaliation claims are more attractive under Dodd-Frank. While Sarbanes-Oxley only provides for the award of back pay, Dodd-Frank allows for double back pay. The statute of limitations also is longer under Dodd-Frank, and claims can be taken directly to U.S. District Court, whereas Sarbanes-Oxley whistleblower retaliation claims must be filed with the Department of Labor.

“No plaintiff’s lawyer in their right mind would bring a SOX case instead of Dodd-Frank,” Robertson said. “If the District Court reasoning prevails, the old SOX regime is basically rendered meaningless. … That can’t be what Congress intended to do. … Dodd-Frank made amendments to SOX. Why make amendments to SOX if Dodd-Frank was meant to consume it?”

Given the numerous District Court splits with the 5th Circuit, Robertson said the issue likely will be settled by the U.S. Supreme Court at some point.

Michael L. Rosen and Lyndsey M. Kruzer of Foley Hoag in Boston represented the defendants. They declined to comment.

Misleading reports

Plaintiff Richard Ellington worked for New England Investment & Retirement Group, a registered investment advisor to individuals and corporations, from 2005 to 2010, primarily at an office in North Andover. His duties included managing the retirement plan practice, and he was a member of the firm’s investment committee.

Ellington came to believe that the company was sending deceptive investment reports to current and prospective clients. He raised his concerns with the owner of the business, Nicholas J. Giacoumakis, and later sent a 20-page report on the alleged violations to the company’s designated compliance officer, Commonwealth Financial Network, which began an investigation.

Within a month, Ellington was fired. He subsequently approached the SEC and volunteered to assist in an investigation of his former employer.

The company ultimately was fined $200,000 for willful violations of securities regulations.

The splits

The defendants pushed Stearns to adopt the 5th Circuit’s reasoning in Asadi.

“As there is no dispute of fact that Ellington did not provide information to the SEC until after he was terminated, defendants insist that the Amended Complaint is not viable,” Stearns wrote. “This court respectfully disagrees and instead adopts the SEC’s interpretation of the relevant provisions of Dodd-Frank. … This change to the rule reflects the fact that the statutory anti-retaliation protections apply to three different categories of whistleblowers, and the third category includes individuals who report to persons or governmental authorities other than the commission.”

Stearns noted that “numerous other district courts” reached the same conclusion.

The judge also rejected the defendants’ argument that Dodd-Frank should not apply because the plaintiff employee’s allegedly protected conduct occurred prior to the law’s enactment on July 22, 2010.

“NEINV fired Ellington on August 3, 2010,” Stearns wrote. “There is no dispute that after his termination, Ellington provided the SEC with a detailed report of NEINV’s alleged violations, assisted the SEC in its investigation of NEINV, and was the instigator of the SEC’s assessment of civil penalties against NEINV, all of which occurred after Dodd-Frank took effect.”

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