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1 WHISTLEBLOWER LAW DEVELOPMENTS Fifth Circuit Defines Whistleblower Narrowly Under Dodd-Frank Posted on July 18, 2013 by Renee Phillips and Mike Delikat On July 17, 2013, the Fifth Circuit issued the first circuit court decision interpreting Dodd-Frank s antiretaliation provision. In Asadi v. G.E. Energy (USA), L.L.C., the Fifth Circuit held that, to be protected under Dodd-Frank s anti-retaliation provision, an individual must be a whistleblower, which is defined by the statute as an individual who has made a report to the SEC. Notably, this holding directly conflicts with the SEC s regulations interpreting the Act, as well as five district court decisions that had all held that employees who make internal reports to company management are protected under Dodd-Frank even if they did not make reports to the SEC. Rejecting these analyses, the Fifth Circuit based its decision on the plain wording of the statute, which it found to be unambiguous in protecting only whistleblowers as defined by the Act. Notably, the Fifth Circuit decided the case on different grounds than the district court, which held that Dodd-Frank s anti-retaliation provision did not apply extraterritorially to Asadi, who worked in Jordan. The Fifth Circuit did not address that issue on appeal, resting its decision solely on the definition of whistleblower under the statute. The decision is spot on in its analysis, and is a welcome development for employers and defense side whistleblower attorneys who have all along argued that Dodd-Frank s anti-retaliation provisions were clear in only applying to whistleblowers who report concerns to the SEC. With hope, Asadi will stem the tide of decisions holding that Dodd-Frank s anti-retaliation provision covers internal reporting. Orrick s Employment Law and Litigation Blog Page 1

2 Tenth Circuit Issues its First Decision Interpreting SOX: Offers Broad Reading of the Act Posted on June 11, 2013 by Lisa Lupion, Renee Phillips, Jim McQuade and Joshua F. Naylor On Tuesday, June 4 th, the Tenth Circuit Court of Appeals issued its first decision interpreting the Sarbanes Oxley Act s whistleblower protection provision, affirming a decision by the U.S. Department of Labor s Administrative Review Board ( ARB ), which held that Lockheed Martin violated SOX by constructively discharging employee Andrea Brown after she had engaged in protected activity. The court applied Chevron deference to the ARB s employee-friendly interpretations of SOX s requirements. Ms. Brown alleged that she was subjected to a variety of negative employment actions shortly after she complained to Lockheed s Vice President of Human Resources that her supervisor had initiated sexual relationships with several soldiers using Lockheed s pen pal program, sent inappropriate s and sex toys to soldiers stationed in Iraq, and used company funds to purchase a laptop computer for one soldier and to travel[] to welcome-home ceremonies for soldiers on the pretext of business while actually taking soldiers to expensive hotels in limousines for intimate relations. The administrative law judge concluded that Ms. Brown reasonably believed that Ms. Owen s actions comprised mail and/or wire fraud and that Ms. Brown communicated this to Lockheed, which decision was affirmed by the ARB. The Tenth Circuit agreed and held that such complaints fell squarely within the protection of the Act. Rejecting Lockheed s contention that 1514A(a)(1) of SOX protected only employee complaints related to fraud against shareholders, the court held that: [t]he plain, unambiguous text of 1514A(a)(1) establishes six categories of employer conduct against which an employee is protected from retaliation for reporting: violations of 18 U.S.C (mail fraud), 1343 (wire fraud), 1344 (bank fraud), 1348 securities fraud), any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders. Further, the court emphasized that, even if the language of 1514A(a) were ambiguous as to scope of complaints that enjoy protection, the ARB s interpretation of the Act was entitled to deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 (1984). The Tenth Circuit s decision to apply Chevron deference to ARB decisions is a significant development for employers because the ARB has issued a number of decisions in the last two years interpreting protected activity under SOX extremely broadly. The Supreme Court will have the opportunity to weigh in on this issue soon, as it has granted certiorari in Lawson v. FMR LLC, in which the First Circuit issued an interpretation of SOX at odds with that of the ARB. Until the Supreme Court offers clarity in Lawson, employers should continue to carefully consider whether employee complaints could be deemed protected activity under the Act. Orrick s Employment Law and Litigation Blog Page 2

3 Will the Latest Opinion by A District Court Adopting a Broad Definition of Who is a Whistleblower Encourage More Internal Reporting? Posted on May 24, 2013 by Rachel Muoio, Renee Phillips and Mike Delikat In May, another New York federal district court ruled that an employee need not report a disclosure directly to the Securities and Exchange Commission ( SEC ) to be afforded the protections under the anti-retaliation provisions of the Dodd-Frank Act, but that internal disclosures within a company are covered. In Murray v. UBS Securities, LLC, Judge Furman of the Southern District of New York adopted the reasoning of several recent district court decisions addressing the relationship between Dodd-Frank s anti-retaliation provision and its provision defining whistleblower. In Murray, the defendants contended that the protections under Dodd-Frank applied exclusively to whistleblowers who provided information to the SEC; thus, the plaintiff was not a covered whistleblower for purposes of Dodd-Frank. Rejecting this argument, the court concluded that the Dodd-Frank Act requires that a plaintiff show that he or she either provided information to the SEC or that his or her disclosures fell under one of the four categories listed under 15 U.S.C. 78u-6(h)(1)(A)(iii) including internal disclosures to company management made under the Sarbanes-Oxley Act ( SOX ). In so holding, the court applied Chevron deference to the SEC s interpretation of the Dodd-Frank Act, reasoning that the SEC s final rule clarified an otherwise ambiguous statutory scheme. The court denied UBS s motion to dismiss, allowing the plaintiff s whistleblower retaliation suit to proceed. Murray v. UBS is the latest in a recent string of federal district court cases interpreting Dodd-Frank s anti-retaliation provisions broadly to include protection for internal reporting. While this decision may open up the doors to more claims by putative whistleblowers under Dodd-Frank, at least this broad view of Dodd-Frank s anti-retaliation provision may encourage employees to report wrongdoing internally through hotlines or other compliance channels, thereby allowing companies an opportunity to investigate and remedy potential wrongdoing expeditiously. Although these decisions may ultimately increase exposure to whistleblower retaliation suits, employers should be cognizant of the opportunity to strengthen their current policies and procedures to encourage internal reporting while promptly and thoroughly investigating claims of wrongdoing. At the same time, companies must take proactive steps to ensure that there will be no retaliation against those who come forward and report wrongdoing, thereby avoiding potential liability under the anti-retaliation provisions of Dodd-Frank. Orrick s Employment Law and Litigation Blog Page 3

4 Federal Court Decisions Permit Two Dodd-Frank Whistleblower Cases to Proceed Posted on October 11, 2012 by Jim McQuade, Renee Phillips and Mike Delikat Two federal district courts recently issued decisions adopting a broad interpretation of the anti-retaliation provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ) and allowed Dodd-Frank whistleblower claims to proceed past motions to dismiss. Significantly, these cases stand for the proposition that to be protected as a whistleblower under the retaliation provision of Dodd-Frank, an individual does not have to meet the definition of a whistleblower for purposes of obtaining a bounty under Dodd-Frank and in particular, does not necessarily have to make a disclosure to the Securities and Exchange Commission (the SEC ) in the manner required in connection with the bounty provision of the statute. While the issue is far from settled as Dodd-Frank retaliation cases are just beginning to work their way through the federal courts, these decisions could contribute to further increases in the number of Dodd-Frank whistleblower retaliation claims filed against employers. Kramer v. Trans-Lux Corp., No. 3:11-cv SRU, 2012 WL (D. Conn. Sept. 25, 2012) In Kramer v. Trans-Lux Corp., the plaintiff commenced an action against his employer in the U.S. District Court for the District of Connecticut, claiming that his employment had been terminated in violation of the Dodd-Frank anti-retaliation provision after he reported to his employer s board of directors and the SEC that he believed that his supervisors had violated the company s pension plan WL , at *1. The defendant moved to dismiss the Dodd-Frank claim, arguing that the plaintiff had failed to make a disclosure to the SEC in a manner required by the SEC, and therefore, the plaintiff had failed to satisfy the definition of a whistleblower under the Dodd-Frank anti-retaliation provision. Id. at *3. More specifically, the defendant argued that the SEC s regulations require that a whistleblower must report issues to the SEC in a specified manner, and the plaintiff had failed to report to the SEC in that manner. Id. at *5. The plaintiff argued in response that the Dodd-Frank anti-retaliation provision covers any individual who makes a disclosure required or protected by the Sarbanes-Oxley Act ( SOX ) or the Securities and Exchange Act of 1934 (the 1934 Act ), even if the individual had not made the disclosure in a manner required under the definition of a whistleblower. Id. at *4. The court accepted the plaintiff s argument, which was consistent with a recentlypromulgated SEC rule; explained that the defendant s proposed interpretation of Dodd-Frank would dramatically narrow the available protections available to potential whistleblowers; and held that the Dodd-Frank anti-retaliation provision protects individuals who make disclosures that are required or protected under SOX or the 1934 Act. Id. at *5. The court, therefore, denied the defendant s motion to dismiss. Orrick s Employment Law and Litigation Blog Page 4

5 Ott v. Fred Alger Mgmt., Inc., 11 Civ LAP (S.D.N.Y. Sept. 22, 2012) In Ott v. Fred Alger Management, Inc., the plaintiff alleged, among other things, that her employer and related individuals and entities had violated the Dodd-Frank anti-retaliation provision by terminating her employment for reporting her employer s allegedly unlawful trading policy to the SEC. The defendants moved to dismiss the Dodd-Frank whistleblower claim, arguing that the plaintiff s disclosures to the SEC were not protected because: (1) she first reported these issues to the SEC before Dodd-Frank s effective date; (2) the plaintiff s disclosure to the SEC after Dodd-Frank s effective date did not disclose new information; and (3) the SEC previously had stated in a comment that the Dodd-Frank anti-retaliation provision applies only to new information as opposed to information previously disclosed to the SEC. Id. at 7-8. The court rejected the defendants arguments, pointing out that the SEC s comments were made in the context of the bounty provision of Dodd-Frank, and holding that the anti-retaliation provision of Dodd Frank does not require an individual to provide original information. Id. at 8. The court also went on to hold that the plaintiff had alleged sufficient facts, for purposes of the motion to dismiss, to establish that she had a reasonable belief that her firm s trading policy violated the securities laws. Id. at SEC Pays First Ever Dodd-Frank Whistleblower Bounty Award Posted on August 21, 2012 by Mike Delikat, Renee Phillips and Rachel Muoio On August 21, 2012, the Securities and Exchange Commission (SEC) announced that it has awarded its first whistleblower bounty, just over one year after the SEC s Dodd-Frank whistleblower rules became effective. The SEC s Claims Review Staff issued a short order, Release No , granting the whistleblower s award, which notes that the SEC declined to award a claim to a second whistleblower involved in the action. According to the SEC, the whistleblower receiving the award, who wished to remain anonymous, provided the SEC with documents and other relevant information that allowed the SEC to rapidly complete its investigation. The SEC did not provide any further details or information regarding the company that was fined or the type of financial fraud involved with the whistleblower s tip. The SEC stated that the information provided by the whistleblower ultimately resulted in a court ordering over $1 million in sanctions, and the whistleblower will receive the maximum award of 30 percent of the monetary sanctions collected in the action. Since the SEC has only collected $150,000 of the total sanctions thus far, the whistleblower will receive approximately $50,000 initially, but the whistleblower s award will increase significantly as the SEC continues to collect sanctions. Orrick s Employment Law and Litigation Blog Page 5

6 The SEC s Director of Enforcement Robert Khuzami said the whistleblower provided the exact kind of information and cooperation that [the Commission] was hoping the whistleblower program would attract. SEC Chairman Mary L. Schapiro, a major proponent for the whistleblower program, said the whistleblower program is already becoming a success and noted that the agency has seen high-quality tips that are saving time and resources for investigators. As part of the whistleblower initiative, the SEC developed the Office of the Whistleblower, through which individuals may submit a whistleblower tip. The Chief of the SEC s Whistleblower Office, Sean McKessy, said that the whistleblower program receives about eight tips per day. The SEC did not approve a claim from a second individual seeking an award in this matter because the information provided did not lead to or significantly contribute to the SEC s enforcement action, as required for an award. The SEC s press release announcing the award is available here. What this Means to Companies and Proactive Steps to Consider After months of multiple statements by senior SEC officials that the first bounties under the Dodd-Frank whistleblower provisions would be paid any day, this first award and the substantial publicity that will no doubt follow will likely lead to additional tips being filed with the SEC. Securities class action plaintiff lawyers, False Claims Act lawyers, and traditional employment lawyers have all jumped headlong into the SEC whistleblower program, often urging their clients to bypass internal reporting and compliance programs that companies have put in place since the passage of the Sarbanes-Oxley Act of In this regard, the SEC press release does not reveal whether the whistleblower was an employee of the sanctioned entity and/or whether the issue had been reported internally to the company. Under the Dodd-Frank regulations, whistleblowers who do report internally can receive an enhancement of their bounty percentage up to the maximum of 30 percent of the sanctions collected. Given the real incentives available to Dodd-Frank whistleblowers and their attorneys who report to the SEC, companies need to review their internal compliance and reporting policies and potentially revise these policies to stress the importance of internal reporting, and also to encourage employees to come forward and report suspected fraud without fear of retaliation. However, taking into consideration the SEC s unwillingness to mandate internal reporting as a condition of receiving a Dodd-Frank bounty award, the likelihood that such effort undertaken by companies to encourage internal reporting will yield positive results remains to be seen. Orrick s Employment Law and Litigation Blog Page 6

7 Dodd-Frank Anti-Retaliation Provision Does Not Apply Extraterritorially Posted on July 18, 2012 by Rachel Muoio, Renee Phillips and Mike Delikat On June 28, 2012, a Texas District Court held that the Dodd-Frank s anti-retaliation provision per se does not apply extraterritorially. In Asadi v. G.E. Energy (USA), LLC, Case No. 4:12-cv (S.D. Tex. June 28, 2012), the district court determined that Dodd-Frank s anti-retaliation provision did not extend to or protect the plaintiff s extraterritorial whistleblowing activity. Note that this decision does not apply to Dodd-Frank s whistleblower bounty provisions, pursuant to which whistleblowers outside of the U.S. may be eligible for bounties for making reports of violations to the SEC. The complaint alleged that Asadi was a U.S.-based employee who was working from an office in Jordan to secure and manage energy contracts with the Iraqi government. Asadi alleged that he notified his supervisors and a company ombudsperson of a potential violation of the Foreign Corrupt Practices Act ( FCPA ), whereupon GE Energy pressured him to step down, attempted to negotiate a severance, and eventually terminated his employment. Applying the Supreme Court s 2010 decision in Morrison v. National Australia Bank, Ltd., 130 S. Ct (2010), the district court held that the absence of language regarding the extraterritoriality of Dodd-Frank s anti-retaliation provision led to a presumption that it did not apply extraterritorially. The district court noted that Section 929P(b) of Dodd-Frank gave extraterritorial jurisdiction over specific enforcement actions brought by the SEC or the DOJ, but not to private actions such as the plaintiff s. The district court also found persuasive a Department of Labor Administrative Review Board en banc holding that, because Dodd Frank s amendments to SOX were silent as to extraterritoriality, the amendments could not be construed to extend the reach of SOX extraterritorially. See Villanueva v. Core Labs, NV, 2001 WL , ARB Case No , ALJ Case No SOX-6 (ARB Dec. 22, 2011). Thus, the district court concluded that Dodd-Frank s anti-retaliation provision did not protect Asadi from alleged retaliation and granted GE Energy s motion to dismiss. Orrick s Employment Law and Litigation Blog Page 7

8 Dodd-Frank Amendment Applies Retroactively, Clarifies SOX Section 806 Posted on July 18, 2012 by Rachel Muoio, Renee Phillips and Mike Delikat On July 9, 2012, a Southern District of New York court held that the Dodd-Frank Act applies retroactively to protect whistleblowers employed by subsidiaries of publicly-traded companies. In Leshinsky v. Telvent GIT, S.A., Case No. 1:10-cv JPO (S.D.N.Y. July 9, 2012), the plaintiff, an employee of a non-publicly-traded subsidiary of a public company, brought a retaliation claim under Sarbanes-Oxley ( SOX ) Section 806. The plaintiff s claims arose prior to Dodd-Frank s amendments to Section 806 providing that no public company, including any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company, may retaliate against a whistleblowing employee. In analyzing whether the Dodd-Frank amendment to SOX applied to the plaintiff s claims, the court explained that generally speaking, a statute does not apply retroactively to conduct that occurred prior to a statute s enactment; there is a presumption against retroactive legislation. When an amendment merely clarifies existing law, rather than substantively changing existing law, however, retroactivity may be appropriate. The court applied three factors to determine whether Dodd-Frank clarified Section 806: (1) whether Congress expressed legislative intent that Dodd-Frank Section 929A was a clarification that should be applied retroactively; (2) whether there was a conflict or ambiguity in the pre-amendment statutory text; and (3) whether the amendment was consistent with a reasonable interpretation of the original statute. The court determined that the Dodd-Frank amendment clarified the legislative intent of Dodd-Frank s predecessor retaliation provision under SOX. The court noted that the First Circuit s April decision in Lawson v. FMR LLC, 690 F.3d 61 (1 st Cir. 2012), did not preclude its holding and arguably supported its conclusion that the Dodd-Frank amendments were a necessary clarification to prevent an improper reading of the statute s protections. See previous blog entry. Orrick s Employment Law and Litigation Blog Page 8

9 ARB Holds Private Firm Accountants Are Covered By SOX Posted on June 19, 2012 by Renee Phillips and Mike Delikat In Spinner v. David Landau and Associates, LLC, the Department of Labor s Administrative Review Board ( ARB ) held that an accountant for a private firm was a covered employee under SOX where the firm performed services for publicly traded clients. In so holding, the ARB rejected the First Circuit s contrary interpretation of SOX in Lawson v. FMR LLC. The Spinner decision provides new ammunition for employees of non-public companies seeking to bring SOX whistleblower claims against their firms and raises significant liability concerns for firms that have operated under the assumption that their employees were not covered by SOX s whistleblower provisions. Spinner was a CPA, Certified Internal Auditor, and Certified Fraud Examiner who worked for David Landau and Associates ( DLA ), a firm that provides internal audit, forensics, and advisory and management consulting services, including SOX audit and compliance services. DLA assigned Spinner to perform full-time auditing services for one of its publicly traded clients, S.L. Green Realty. DLA subsequently removed Spinner from this assignment and terminated his employment, upon which Spinner filed a SOX complaint, alleging that he was terminated because he reported internal control and reconciliation problems at S.L. Green. DLA sought dismissal of Spinner s SOX complaint in part on the ground that DLA was not a covered employer under SOX because it was not publicly traded. Spinner countered that he was covered by SOX as an employee of DLA because DLA was a contractor, subcontractor, or agent of S.L. Green and therefore covered by SOX. The Department of Labor Administrative Law Judge ( ALJ ) agreed with DLA and dismissed the case. On appeal, the ARB reversed and remanded, holding that Spinner was indeed a covered employee under SOX because he was employed by a contractor of a publicly traded company. Although the ARB appeared to limit its holding to accountants employed by private accounting firms, its reasoning appears applicable to all contractors working with public companies. The ARB looked to the language of SOX itself, which provides that no [publicly traded] company or any officer, employee contractor, subcontractor, or agent of such company, may discriminate against an employee and determined that this language does not explicitly limit coverage to employees of publicly traded companies. The ARB then turned to the DOL s regulations, which it explained it was bound to follow and which define SOX s protections as extending to employees of publicly traded companies as well as the employees of contractors, subcontractors, and agents of those publicly traded companies. The ARB opined that SOX s legislative history further confirmed the broad coverage of SOX, as Congress was clearly concerned about the role Arthur Anderson [sic] played in the Enron debacle and the retaliation exercised against one of its partners who attempted to blow the whistle. Orrick s Employment Law and Litigation Blog Page 9

10 In reaching the conclusion that Spinner was covered by SOX, the ARB rejected the First Circuit s contrary analysis of this issue in Lawson v. FMR LLC, 670 F.3d 61 (1st Cir. 2012). In Lawson, the First Circuit held that the term employee within the meaning of SOX section 806 included only employees of publicly traded companies, not the employees of contractors, subcontractors or agents of publicly traded companies. In that case, the plaintiffs were employees of Fidelity Investments, which was a non-publicly traded entity that acted as an investment advisor to the Fidelity family of mutual funds, which were publicly held investment funds required to file reports under section 15(d) of the Securities Exchange Act of The investment funds themselves had no employees, and Fidelity Investments performed a variety of administrative and executive tasks for the mutual funds, including deciding how the funds assets would be invested. The First Circuit determined that both the statutory title and caption of SOX section 806 ( Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud and Whistleblower protection for employees of publicly traded companies, respectively) were statements of congressional intent that militated against a more expansive interpretation of the scope of the term employee to include employees of contractors, subcontractors, or agents. The First Circuit also held that other textual provisions of SOX, its legislative history, the purpose of the legislation, and Congress rejection of a bill to amend the definition of employee, all provided further support for its interpretation of the Act. Notwithstanding the First Circuit s decision in Lawson, which is controlling for cases arising in the First Circuit, the ARB s decision in Spinner will impact DOL SOX cases arising in other jurisdictions until those circuits weigh in on this issue. Thus, we will likely see an uptick in SOX whistleblower cases brought by employees of non-public companies who contract with public companies in the wake of Spinner. Until the conflict between Spinner and Lawson is resolved, private accounting firms should treat employee reports of potential legal or regulatory violations as potentially covered by SOX and should reevaluate, and, if necessary, revise, their whistleblower and anti-retaliation policies and procedures to ensure that they reflect current best practices under SOX. Orrick s Employment Law and Litigation Blog Page 10