The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 included a whistleblower program allowing individuals who report original information to the SEC leading to a recovery exceeding $1 million to obtain between 10 percent and 30 percent of the recovery. It also included a prohibition on retaliation.
It has been about one year since the SEC established its Office of the Whistleblower, and according to Sean X. McKessy, the chief of that office, the SEC has received almost 3,000 securities law violation tips, or about eight tips per day. .
But the most hotly litigated issue with Dodd-Frank whistleblowers isn’t the bounty they receive or the tips they provide, but the scope of protection they have against retaliation. Specifically, the Dodd-Frank Act defines a whistleblower as “any individual who provides . . . information relating to a violation of the securities laws to the [SEC]. . . .” [15 U.S.C. § 78u-6(a)(6)]. But the anti-retaliation provision prohibits adverse action against a whistleblower arising out of disclosures protected under Sarbanes-Oxley; the Securities Exchange Act of 1934; and any other law, rule, or regulation subject to the jurisdiction of the SEC. Id. at § 78u-6(h)(1)(A).
There is therefore a tension between these provisions. Specifically, the statute defines whistleblowers as those who report violations to the SEC, while the anti-retaliation section protects whistleblowers against retaliation for much broader conduct, including internal reporting.
In one recent decision, Kramer v. Trans-Lux Corp., the court resolved this tension in favor of the employee. Kramer, the plaintiff in that case, was the vice president of human resources and administration, and he claimed that he was fired after telling his company’s board of directors and the SEC that his supervisors were violating the company’s pension plan requirements.
Specifically, Kramer was supervised by the company’s CFO and CEO and, according to him, he repeatedly advised them that the pension plan committee did not have the required number of members. He also advised the CFO that her position on the pension plan committee while acting as trustee of the pension plan presented a conflict of interest, particularly in light of the fact that she had inside knowledge of the company’s financial situation and continued to hold company bonds as a pension investment even though the bonds had lost their value. Kramer also alleged that the company amended its pension plan, but did not present the amendments to the board of directors and failed to file the amendments with the SEC as he believed was required.
Kramer claimed that he sent an email to the CEO and CFO expressing all of his concerns, but they took no action.
Kramer then sent a letter to the SEC about the company’s failure to submit the pension plan amendments to the board or the SEC. Soon afterwards, the defendants allegedly began retaliating against him. The CEO allegedly began reprimanding Kramer and instructed in-house counsel to launch an investigation into whether he failed to report issues regarding payroll problems to senior management. The CEO also started stripping him of his responsibilities and ultimately fired him. Kramer then brought a claim for retaliation under the Dodd-Frank Act.
The defendant company argued that the retaliation provision in the Dodd-Frank Act did not apply to Kramer because he did not provide information to the SEC in the manner required by the SEC – the letter he sent by regular mail was not one of the permissible methods for reporting violations. The court, however, held that this interpretation would “dramatically narrow the available protections available to potential whistleblowers,” and instead found that the definition of whistleblower is broader with respect to the anti-retaliation section than it is for the rest of the statute. In other words, the broader protection in the anti-retaliation provision is an exception to the definition of “whistleblower” as one who reports to the SEC.
The implications of this decision could be important, and terminated employees should consider bringing claims for retaliation in cases where they internally reported wrongful conduct, even if they did not become technical whistleblowers by going directly to the SEC.