A Nebraska federal Judge recently ruled that the whistleblower protections set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) apply to employees who make securities law-related disclosures to entities other than the Securities and Exchange Commission (“SEC”) in contrast to a recent Fifth Circuit holding. Bussing v. COR Clearing, LLC, No. 8:12-CV-00238, 2014 WL 2111207, D. Neb., May 21, 2014. Further, in dicta, the Judge suggested that the protections may extend  to employees who make only an internal disclosure.

The Plaintiff in this case alleges that she was induced to join a company providing clearing services to brokerage clients (the “Clearing Company”) as executive vice president through assurances that she would be allowed to implement a plan to ameliorate the company’s “troubling regulatory history,” which included several regulatory investigations and examinations that led to sanctions by FINRA. Several  months after she began working for the Clearing Company, FINRA instituted formal proceedings against   the Company alleging failure to comply with the Bank Secrecy Act and various anti-money laundering provisions and financial reporting responsibilities imposed by FINRA and SEC rules. Plaintiff alleges that while investigating these obligations to comply with FINRA’s document and information requests, she identified potential or existing violations. Plaintiff reported her findings to company management but was told to cease her investigations and not respond to FINRA’s requests. Plaintiff continued her  investigations, issued an internal report detailing violations, and participated in FINRA’s on-site examination over the objections of Company management, after which she was put on leave and then notified that she had been terminated for cause. Plaintiff filed suit alleging twelve theories of recovery, including retaliation in violation of the whistleblower-protection provision of the Dodd-Frank Act.

In addition to creating a whistleblower incentive program, which we have discussed previously here, Dodd- Frank also created a private cause of action for retaliation for cooperating with the SEC under certain circumstances: (i) by providing certain information to the SEC; (ii) by working with the SEC in an investigation or other action; or (iii) by making disclosures required by the Sarbanes-Oxley Act. The Court found that Plaintiff’s disclosures to FINRA, as required by FINRA Rule 8210 and subject to the jurisdiction  of the SEC, qualify her for protection under subsection (iii).

In this case, U.S. District Judge John M. Gerrard recognized the potential conflict between subsection (iii), which does not require an individual to interact directly with the SEC, and the wording of Dodd-Frank’s anti-retaliation provision applicable to “whistleblowers,” a term defined elsewhere in the Act as those who provide information to the SEC. Judge Gerrard resolved this tension by determining that the term “whistleblower” as used in the anti-retaliation provision must be read in its “every-day sense” to avoid rendering subsection (iii) insignificant. In doing so, Judge Gerrard relied upon the tenet of statutory interpretation that courts should not insist upon reading a statutory definition into a word when it is apparent that Congress intended for the ordinary meaning of the word to be used. In this case, Judge Gerrard stated that to read the statute otherwise would thwart the purpose of subsection (iii), which was designed to protect individuals who make disclosures required under the jurisdiction of the SEC but that are made to entities other than the SEC. The Court stressed that, as worded, subsection (iii) also could include employee disclosures in internal reports to company officials. (See fn 9).

The Court’s decision in this case is in direct conflict with the Fifth Circuit’s decision in Asadi v. G.E.  Energy (USA) LLC, 720 F.3d 620, 625 (5th Cir. 2013), in which that court determined that subsection (iii)  was intended to cover only those individuals who made required or protected disclosures for which they were retaliated against only after making initial disclosures to the SEC. The District Court was not persuaded by the Fifth Circuit’s reasoning, stating that the Asadi reasoning would fail to protect the majority of whistleblowers, including those most vulnerable to retaliation, whom Dodd-Frank was designed to protect. The District Court further noted that its interpretation of Dodd-Frank would encourage employees to make internal reports as well as encourage companies to remedy improper conduct at early stages. The District Court stated that this was within the scope of Dodd-Frank, noting that, although the Act was intended to encourage whistleblowers to report to the SEC, it did not follow that Congress also must have intended to discourage internal reporting.

The District Court’s decision highlights the need for companies to ensure that they have appropriate policies prohibiting whistleblower retaliation and providing a complaint procedure for any employee who believes he or she has suffered from retaliation.