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Dodd-Frank Act Claims, Non-SEC Whistleblowers, False Claims Act Appeal: Review of Recent Whistleblower Developments April 2017

Whistleblower Developments is a periodic report covering significant cases, decisions, proposals, and legislation related to whistleblower statutes and how they may impact your business. Recent developments include:

  • Third Circuit Permits Former In-House Attorney to Pursue Dodd-Frank Act Claims

  • Ninth Circuit Rules that Dodd-Frank Act Protects Non-SEC Whistleblowers

  • Supreme Court Passes on Opportunity to Review Attempted Whistleblower’s Petition

  • Fifth Circuit Receives Amicus Brief From Advocacy Group in False Claims Act Appeal

  • Former UBS Executive Claims Company Fired him for FINRA Testimony

Third Circuit Permits Former In-House Attorney to Pursue Dodd-Frank Act Claims

The Third Circuit recently held that the trial court should not have dismissed an ex-Vanguard Group, Inc. in-house attorney’s wrongful termination lawsuit. In his lawsuit, the ex-employee, David Danon, claimed that he was terminated after attempting to blow the whistle on the company’s alleged violations of corporate and tax laws, in violation of the Dodd-Frank Act, the False Claims Act, the Sarbanes-Oxley Act, and Pennsylvania’s whistleblower protection law. However, in May of 2016, the trial court dismissed Danon’s lawsuit on the basis that Danon was barred from re-litigating claims that he previously filed in a similar New York False Claims Act lawsuit.

Danon appealed that decision to the Third Circuit, arguing that his Dodd-Frank Act claim should be permitted to proceed based on recent precedent holding that the Dodd-Frank Act’s anti-retaliation protections extend beyond allegations that a whistleblower makes directly to the United States Securities and Exchange Commission (SEC). Danon further argued that his lawsuit was not barred because the state court had not fully ruled on the matter. The SEC provided support to Danon’s arguments on appeal, arguing in separate amicus briefs that individuals are entitled to anti-retaliation protections if they make any of the disclosures identified in Section 21F of the Securities Exchange Act (covering parts of the SEC’s whistleblower program), regardless of whether they separately report to the SEC.

Ultimately, the Third Circuit agreed that Danon’s Dodd-Frank Act-based claim should be permitted to proceed at the trial court level. The Third Circuit based its decision on the fact that the issue of whether Danon adequately pleaded a violation had not been fully ruled upon in the previous state court action, so Danon was not prevented from bringing a new lawsuit on that basis. The Third Circuit, however, agreed that the remainder of Danon’s claims were properly dismissed.

The case is David Danon v. Vanguard Group, Inc., case number 16-2881, 2017 U.S. App. LEXIS 6260 (3d Cir. April 12, 2017).

Ninth Circuit Rules that Dodd-Frank Act Protects Non-SEC Whistleblowers

On March 8, 2017, a divided panel of the Ninth Circuit Court of Appeals held that the Dodd-Frank Act’s anti-retaliation protections extend to whistleblowers who have not reported to the SEC. By way of background, the Ninth Circuit’s decision affirmed the trial court’s denial of Digital Realty Trust’s motion to dismiss its former Vice President of Portfolio Management, Paul Somers’s claims that the company discriminated against him based on his sexual orientation, and then fired him in retaliation for complaining about his supervisor’s actions. The trial court also certified the issue of whether Somers qualified as a whistleblower under the Dodd-Frank Act for interlocutory appeal to the Ninth Circuit.

In its decision, the Ninth Circuit acknowledged that the Dodd-Frank Act defines a “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.” (emphasis added). The Ninth Circuit then considered that definition against the language of the Dodd-Frank Act’s anti-retaliation provision, which appears later in the statute. The anti-retaliation provision prohibits retaliation against individuals who make disclosures that are required or protected under the Sarbanes-Oxley Act. In reviewing the statute, the Ninth Circuit agreed with the reasoning of the Second Circuit that reading the Dodd-Frank Act’s definition of “whistleblower” into its anti-retaliation provision would create too narrow a scope of protection. The Ninth Circuit further reasoned that reading the statute in that way would only protect whistleblowers who report both internally and to the SEC.

Judge Mary M. Schroeder, writing for the panel, summed up the court’s reasoning as follows: “[The Dodd-Frank Act’s] anti-retaliation provision unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally. Its terms should be enforced.” Judge John B. Owens, in a brief dissenting opinion, stated that he would agree with the Fifth Circuit’s reasoning on this issue. The Fifth Circuit previously held that the anti-retaliation provisions of the Dodd-Frank Act should be read using the same definition of “whistleblower” as stated earlier in the statute.

This decision from the Ninth Circuit widens the circuit split between the Fifth Circuit, which held in 2013 that only those who report to the SEC qualify as whistleblowers, and the Second Circuit, which held in 2015 that the anti-retaliation provision was ambiguous and that courts must defer to SEC guidance. The Sixth Circuit was faced with the issue in an appeal brought by a former Morgan Stanley employee, but avoided ruling on it because the underlying claims were too vague to qualify for whistleblower protection. The Third Circuit is currently considering the issue in an appeal brought by a former in-house tax attorney for Vanguard Group, Inc.

The case is Paul Somers v. Digital Realty Trust, Inc., case number 15-17352, 850 F.3d 1045 (9th Cir. 2017).

Supreme Court Passes on Opportunity to Review Attempted Whistleblower’s Petition

On March 20, 2017, the U.S. Supreme Court declined the invitation to review a former Morgan Stanley employee’s claims that he is entitled to whistleblower protection, despite his failure to report his complaints to the SEC. This decision follows the Sixth Circuit’s ruling that the plaintiff’s allegations that he worked with the FBI to investigate his claims were too vague to be actionable under the Dodd-Frank Act.

John S. Verble, the would-be whistleblower, submitted his petition for writ of certiorari to the Supreme Court in February, which sought guidance on whether the Dodd-Frank Act’s whistleblower protections extend to any employee that reports alleged wrongdoing. The trial court that originally dismissed Verble’s complaint had interpreted the Dodd-Frank Act’s whistleblower protections as inapplicable to employees who do not report to the SEC. In affirming the dismissal of Verble’s claims, the Sixth Circuit determined that it did not need to decide the question of whether Verble qualified as a whistleblower under the Dodd-Frank Act because Verble’s allegations did not state a cause of action. Consistent with its custom, the Supreme Court’s denial of the petition for writ of certiorari did not provide any information as to why it did not accept the case for further review.

The case is John S. Verble v. Morgan Stanley Smith Barney, LLC, case number 16-946, 2017 U.S. LEXIS 1909 (Mar. 20, 2017).

Fifth Circuit Receives Amicus Brief From Advocacy Group in False Claims Act Appeal

Taxpayers Against Fraud (TAF), an advocacy group whose stated mission is to combat fraud perpetrated against the government, submitted an amicus brief for the Fifth Circuit’s consideration in a would-be whistleblower’s pending appeal before that court. TAF’s amicus brief argues in support of the Fifth Circuit reversing and remanding a decision by a Texas district court that granted summary judgment to Northrop Grumman Systems Corp. and Lockheed Martin Corp., two federal government contractors. That summary judgment dismissed claims by a former Northrop Grumman employee alleging that both government contractors violated the False Claims Act by mismanaging the budgets for the F-35 Joint Strike Fighter program to hide cost overruns, thus resulting in false financial reporting.

In granting the contractors’ motion for summary judgment, the Texas district court deemed the former employee, Paul J. Solomon, a government employee for purposes of the False Claims Act. Government employees who are obligated to disclose fraudulent financial reporting as part of their job duties are generally barred from bringing claims under the False Claims Act based on those disclosures. In his own appellate briefing, Solomon argued that the False Claims Act’s voluntary disclosure requirement does not apply to him as he was neither (1) a government employee paid to detect fraud, nor was he (2) a private employee who made a disclosure only after being questioned or investigated by the federal government. Both kinds of whistleblowers are disqualified as False Claims Act whistleblowers (which are called “relators”).

TAF’s amicus brief urges the Fifth Circuit to hold that an employee of a government contractor who voluntarily reports fraud to the federal government, despite the fact that the contractor is under a contractual duty to self-disclose such misconduct to the government, should qualify as a False Claims Act relator. If the Fifth Circuit agrees with Solomon and TAF, Solomon would be permitted to continue pursuing his claims in the trial court. Successful False Claims Act relators stand to recover a share of any financial recovery they obtain for the government on their claims.

Former UBS Executive Claims Company Fired him for FINRA Testimony

UBS Financial Services, Inc. has been served with a whistleblower lawsuit by former employee Craig D. Price, who was a Florida-based wealth adviser. Price alleges that UBS gave him a false reason for his termination, which occurred after he testified to the Financial Industry Regulatory Authority (FINRA) that a coworker facilitated the misuse of an elderly client’s funds. Price claims that, after his testimony to FINRA about that colleague’s alleged misdeeds, his superiors at UBS actively sabotaged his projects to manufacture a justification for firing him.

Price worked for UBS for over a decade. At the time of his firing, Price was a senior vice president of investments and also worked as a private wealth adviser out of the company’s Stuart, Florida offices. After Price discovered his colleague’s facilitation of the misuse of an elderly client’s funds, he alleges that he told his superiors at UBS, who conducted an internal investigation that resulted in that colleague’s termination in 2013. UBS never reported the matter to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, nor did UBS amend its FINRA disclosure regarding the terminated employee to reflect the misuse of the client’s funds.

Soon thereafter, in 2014, FINRA began its own investigation regarding Price’s former colleague’s conduct. In doing so, FINRA took extensive testimony from Price about the matter. In early 2016, Price claims UBS fired him for “various policy violations” related to a stock purchase that he handled for a client, even though the company denied the client’s complaints about the incident and stated Price and UBS committed no wrongdoing. Price’s lawsuit claims that UBS’s actions in terminating him violate the Dodd-Frank Act and the Florida Whistleblower Act. His lawsuit seeks double back pay, compensatory damages, and attorney’s fees and costs

© 2017 Foley & Lardner LLP

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About this Author

Bryan House, Litigation Attorney, Foley Lardner Law Firm
Partner

Bryan B. House is a partner with Foley & Lardner LLP and a member of the firm’s Securities Enforcement & Litigation and Government Enforcement, Compliance & White Collar Defense Practices. He is the chair of the Milwaukee Litigation Department. Mr. House’s particular focus area is securities litigation, securities enforcement proceedings and whistleblower matters.

414.297.5554
Lisa Noller, Trial Lawyer, Foley Lardner Law Firm
Partner

Lisa Noller is a trial lawyer and investigator with Foley & Lardner LLP, where she is chair of the Government Enforcement, Compliance & White Collar Defense Practice. She has spent almost 20 years investigating, litigating and trying complex criminal and civil cases, including responding to government investigations, conducting corporate internal investigations, and persuading the government not to pursue clients. When cases proceed to trial, Ms. Noller also has significant experience successfully trying a wide variety of over 30 civil and criminal matters in state and federal courts. She represents companies and individuals in parallel civil and criminal proceedings initiated by government agencies for alleged wrongdoing, and proactively counsels clients in enforcement and other litigation matters. Ms. Noller also is a member of the firm's Business Litigation & Dispute Resolution and Securities Enforcement & Litigation Practices as well as the Health Care, Medical Devices, Life Sciences, and Food & Beverage Industry Teams.

312.832.4363
Courtney Worcester, Litigation Attorney, Foley Lardner Law Firm
Partner

Courtney Worcester is a partner and litigation lawyer in the Boston office of Foley & Lardner LLP. Her practice focuses on complex commercial litigation involving corporations, venture capital and private equity firms, financial institutions and their directors and officers. She has represented clients in corporate governance, federal securities and shareholder litigation matters, including federal securities and consumer class actions, stockholder derivative litigations, and internal corporate investigations. In addition, she is experienced in diverse commercial...

617.502.3218