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SCOTUS Blows the Whistle: Internal Whistleblowers Take Note

A whistleblower is not a whistleblower unless he reports suspected securities law violations to the SEC.  And, if the whistleblower does not report suspected misconduct to the SEC, the whistleblower is not protected against retaliation by the employer.  So said the Supreme Court on February 21, 2018, in Digital Realty Trust, Inc. v. Somers; the Supreme Court ruled that the Dodd-Frank Act’s whistleblower anti-retaliation provisions apply only to individuals who have reported possible securities law violations to the U.S. Securities and Exchange Commission (“SEC”).1

The Dodd-Frank Act created new financial incentives for whistleblowers who provide the SEC with original information about possible securities law violations, as well as enhanced protections from retaliation. Among these protections, the Dodd-Frank Act expressly prohibits an employer from retaliating against a whistleblower and provides a private cause of action for an individual to bring a lawsuit for retaliation against his or her employer. Although the statute defines the term “whistleblower” to mean an individual who provides information relating to securities law violations to the SEC,3 the SEC took the position in its final rulemaking that the anti-retaliation provision also protects individuals who report to persons or governmental authorities other than the SEC.4

Since then, a federal circuit split developed: the Second and Ninth Circuits accepted the SEC’s position—applying the anti-retaliation provision to employees who reported possible securities violations internally but never to the SEC5—while the Fifth Circuit held that the provision protected only those who report possible violations to the SEC.6  The Supreme Court resolved this split in its unanimous decision in Digital Realty, whereby it agreed with the Fifth Circuit and disagreed with the SEC. In the opinion, written by Justice Ginsberg, the Court relied on what it found to be clear statutory language, and held that the Dodd-Frank Act’s anti-retaliation provision does not extend to individuals who have not reported securities law violations to the SEC.

The Court’s ruling that internal whistleblowers are not afforded anti-retaliation protection under the Dodd-Frank Act may be a victory for employers facing anti-retaliation claims by internal whistleblowers, but the practical effect of this ruling may be the exact opposite for most companies. A large majority of the individuals who have received whistleblower awards from the SEC, to date, first reported their concerns internally. By reporting internally before approaching the SEC, employers have the opportunity to investigate the claims first, assess their legitimacy, and take pro-active remedial action where necessary—possibly even making self-disclosures to the SEC. However, the Court’s ruling instead incentivizes employees to go directly to the SEC.

In recent years, many companies have rewritten their compliance programs to address whistleblower issues in a fair and legal manner that encourages internal reporting. A comprehensive internal reporting mechanism benefitted both the company, which had the advantage of a first look at the violation and an attempt to remedy, if necessary, and the SEC, which was not forced to act as the sole investigator of every single perceived violation.

Unless Congress intervenes, the Court’s decision will likely undermine these benefits. Given the SEC’s belief that its whistleblower program has proven to be a “game-changer,”7it would not be surprising to see a push for Congress to amend the language of the statute to change the definition of “whistleblower” to include individuals who only report potential violations to their employers.

For more information on this subject please see the following articles by Cadwalader partners: SEC Enforcement Under the Trump Administration or 2017 Securities Year in Review.


1   Digital Realty Trust, Inc. v. Somers, ––– U.S. –––, (U.S. Feb. 21, 2018) (No. 16-1276).

2   15 U.S.C. § 78u-6(h)(1).

3   § 78u-6(a)(6).

4   Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, Release No. 34-64545, at 17 (Aug. 12, 2011).

5   Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015); Somers v. Digital Realty Tr. Inc., 850 F.3d 1045 (9th Cir. 2017).

6   Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013). See also Martensen v. Chicago Stock Exchange, Case No. 17-cv-1494 (N.D. Ill. 2017), aff’d Case No. 17-2660 (7th Cir. Feb. 20, 2018) (Easterbrook, J.).

7   See SEC Press Release No. 2016-173, “SEC Whistleblower Program surpasses $100 Million in Awards,” available online at https://www.sec.gov/news/pressrelease/2016-173.html.

© Copyright 2019 Cadwalader, Wickersham & Taft LLP

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About this Author

Jodi L. Avergun, Cadwalader, Criminal regulatory Matters Lawyer, Foreign Corrupt Practices Attorney
Partner

Jodi Avergun’s practice focuses on representing corporations and individuals in criminal and regulatory matters involving, among other things, the Foreign Corrupt Practices Act, securities enforcement, health care, and general white collar matters. Jodi has successfully represented both companies and senior executives in internal investigations, matters before regulatory bodies including the SEC and the U.S. Drug Enforcement Administration, and in civil and criminal matters in federal court. She has also designed and implemented compliance programs for a variety of her...

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Kyle DeYoung, Cadwalader Law Firm, Washington, Corporate and Financial Services Litigation Attorney
Partner

Kyle DeYoung is a partner in Cadwalader’s White Collar Defense and Investigations practice as well as the firm’s Corporate and Financial Services Litigation and Regulation practice. He focuses his practice on representing corporations and individuals in regulatory investigations and providing clients with strategic counseling when facing corporate crises, potential enforcement action, and other complex regulatory issues.  Kyle has extensive experience handling regulatory investigations, both in private practice and at the U.S. Securities and Exchange Commission, and is an experienced litigator who has tried cases in federal court and in administrative proceedings.

Prior to joining Cadwalader, Kyle spent seven years at the SEC.  Most recently, he was Senior Counsel to the Director of Enforcement , where he advised and assisted in the overall management of the SEC’s enforcement program and helped devise and implement policy and strategies to effectively enforce to federal securities laws. He also served as Assistant Chief Litigation Counsel in the SEC’s Trial Unit, where he worked with enforcement staff to investigate potential violations of the federal securities laws and represented the SEC in enforcement actions in federal court and administrative proceedings. 

Kyle has investigated and litigated alleged violations of the securities laws in a broad range of areas, including insider trading, market manipulation, broker-dealer and investment adviser regulations, failure to supervise, the Foreign Corrupt Practices Act, financial disclosure, accounting fraud, the auditor independence rules, tender offer fraud,  and structured financial products. He has significant experience with legislative and regulatory issues and has provided subject matter expertise to Congressional staff on a variety of topics including insider trading, market manipulation, stock buy-backs, activist investors, foreign companies listed on U.S. exchanges, administrative proceedings, public company disclosure requirements, the Electronic Communication Privacy Act, the Financial CHOICE Act and other issues.

Kyle clerked for the Honorable Suzanne B. Conlon of the U.S. District Court for the Northern District of Illinois. Before joining the SEC, he was a counsel in the Litigation and Regulatory and Government Affairs groups at WilmerHale.

Kyle received his undergraduate degree from the University of Michigan and graduated cum laude from the University of Michigan Law School.

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Lex Urban, Cadwalader Law Firm, Anti-Money Laundering Attorney
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Kendra Wharton, Washington, Associate
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Kendra Clayton is an associate in Cadwalader's Washington, D.C. office, where she is a member of the White Collar Defense and Investigations Group. She advises clients in white collar criminal, regulatory, and compliance matters, including alleged violations of the federal securities laws and the Foreign Corrupt Practices Act. Prior to pursuing a legal career, Kendra worked as a legislative aide in the United States Senate.

Kendra received her J.D. from the Georgetown University Law Center, and her B.S., magna cum laude, from the...

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