On March 28, 2016, the U.S. Securities and Exchange Commission (“SEC”) filed an amicus brief in a whistleblower lawsuit brought by a former in-house attorney against Vanguard Group (the “Company”). The case is Danon v. Vanguard Group, Inc., Civ. A. No. 15-6864 (E.D. Pa.).
Plaintiff, who served as the Company’s in-house counsel between 2008 and 2013, alleges that he was fired in retaliation for raising concerns about certain tax practices. The Company has moved to dismiss the complaint because, among other things, Plaintiff did not report his concerns to the SEC until after he was told he was going to be terminated. The Company also asserts that because Plaintiff formerly served as the Company’s in-house counsel, “more should be required” of him to establish that he engaged in protected conduct, especially because expressing his opinions about the Company’s tax practices was part of Plaintiff’s job duties.
In its 73-page amicus brief, the SEC argues against dismissal. The SEC contends that employees are not required by Dodd-Frank’s whistleblower provisions to report matters to the SEC first in order to pursue a whistleblower claim. Rather, the SEC argues that Dodd-Frank’s provisions were “carefully calibrated” to ensure that individuals “were not dissuaded from reporting internally due to the possibility of a monetary award.” “By establishing parity between individuals who first report to the Commission and those who first report internally,” the SEC asserts, “the Commission’s rule avoids a two-tiered structure of anti-retaliation protections that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the benefits that can result from internal reporting.” Notably, the SEC in a footnote adds that it “does not take a position” on Plaintiff’s complaint or any other arguments asserted by the Company in its motion to dismiss.
The SEC’s brief, which is substantially similar to prior amicus briefs it has filed in other whistleblower suits, comes at a time when district and circuit courts are split on whether whistleblowers must report matters internally before raising matters with regulators. Last fall, the Second Circuit held that internal complaints are protected under Dodd-Frank thereby creating a split with the Fifth Circuit, which held in Asadi v. G.E. Energy (USA) LLC, that the statute’s definition of whistleblower requires that reports be made to the SEC.
In addition to highlighting the split regarding Dodd-Frank’s definition of “whistleblower,” this case also raises the question of whether an in-house lawyer may be a whistleblower under Dodd-Frank. Under the SEC’s rules, attorneys generally cannot recover a whistleblower bounty because the rules deny whistleblower status to attorneys whose knowledge originated as a result of the “legal representation of a client.” 17 CFR 240.21F-4(b)(iv). Still, the rules provide for a limited exception for attorneys who reasonably believe disclosure is necessary (1) to prevent the issuer from committing a material violation of securities laws which is likely to cause substantial financial injury to the interests or property of the issuer or investors; (2) to rectify the consequences of a material violation of securities laws in which the attorney’s services have been used; or (3) to prevent the issuer from committing or suborning perjury in an SEC proceeding. SEC Rule 205.3(d)(2). Notably, the SEC did not take a position on this issue in its amicus brief. We will be monitoring this case closely and will report on future developments, including the court’s decision on the Company’s motion to dismiss.