In Ellington v. Giacoumakis, et al., the United States District Court for the District of Massachusetts (Court) held that the federal Dodd-Frank Act (Dodd-Frank) prohibits employers from retaliating against employees who make internal complaints of securities laws violations. In so holding, the Court rejected the employer's argument that Dodd-Frank's whistleblower protections extend only to employees who complain directly to the SEC.
The plaintiff, Richard Ellington, was a financial advisor at New England Investment & Retirement Group (NEINV), a registered investment advisor whose products include reports evaluating publicly traded securities. According to the complaint, in July 2010, Ellington "came to believe" that NEINV was distributing misleading reports to clients. He shared his concerns with defendant Giacoumakis, NEINV's principal and sole shareholder. Several days later, Ellington submitted a report detailing his suspicions to NEINV's compliance officer, Commonwealth Financial Network (CFN), which began an investigation into Ellington's claims. Ellington alleged that several days later Giacoumakis approached him and accused him of being the whistleblower that instigated the investigation. In anticipation of being fired, Ellington emailed documents from NEINV files to himself using CFN's confidential email system. On August 3, 2013, Giacoumakis terminated Ellington, "ostensibly for emailing confidential NEINV information" outside of the company's networks to his personal email account.
After his termination, Ellington voluntarily assisted the SEC with an investigation of NEINV. The SEC found that NEINV violated several securities regulations and imposed civil penalties against the company. Ellington then sued NEINV and Giacoumakis, alleging that they terminated him in violation of Dodd-Frank's whistleblower provisions.
The defendants moved for judgment on the pleadings, arguing that Dodd-Frank's whistleblower protections apply only to employees who complain of securities violations to the SEC. Because Ellington did not complain to the SEC until after he was terminated, the defendants argued, he did not meet the statute's definition of a whistleblower. In the alternative, the defendants asserted that Dodd-Frank was not in effect when Ellington complained of the violations.
The Court rejected the defendants' arguments and found that Ellington's complaints to Giacoumakis and CFN qualified as protected activity under Dodd-Frank. The Court reasoned that although § 78u-6(a)(6) of Dodd-Frank defines a whistleblower as "any individual who provides . . . information relating to a violation of the securities laws to the Commission," Congress intended Dodd-Frank to protect employees who make complaints to supervisors or outside compliance officers. Indeed, § 78u-6(h)(1)(A)(iii) states that it protects employees from retaliation for "making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 . . ." Sarbanes-Oxley explicitly protects certain internal disclosures. According to the Court, if Dodd-Frank protected only those employees who report complaints to the SEC, then § 78u-6(h)(1)(A)(iii) would be invalid. Instead, the Court followed the SEC's own guidance and adopted a broader interpretation of whistleblower.
In reaching its conclusion, the Court declined to follow the Fifth Circuit Court of Appeals, which held that Dodd-Frank applies only to disclosures made to the SEC. This case puts employers on notice that an employee's internal complaints about potential securities laws violations may be considered protected activity under Dodd-Frank, at least within the District of Massachusetts. Employers should take precautions to ensure that any employment actions taken against an employee who has made an internal complaint are not retaliatory, or cannot be misconstrued as such.