Let’s say you have an employee with information relating to a potential securities law violation who reports it internally but not to the SEC. Would that employee lose the anti-retaliation protection provided under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank)? A line of district court decisions around the country have said no, holding that the provisions were ambiguous and could apply to individuals who report internally, rather than to the SEC.1 However, in July of this year, the Fifth Circuit took a radically different position. In Asadi v. G.E. Energy (USA), L.L.C., 2 the Fifth Circuit dismissed an anti-retaliation claim in which Khaled Asadi reported suspected wrongdoing to his supervisor, not the SEC, concluding that Asadi was not a “whistleblower” under the Securities Exchange Act of 1934, as amended (Exchange Act), because that definition required reporting to the SEC.
Here’s a bit of background. In 2010, Dodd-Frank amended the Exchange Act to, among other things, direct the SEC to pay awards to whistleblowers who voluntarily provide the SEC with original information that leads to a successful SEC enforcement action in which more than $1 million is recovered. Awards under Dodd-Frank range from 10 to 30 percent of the total monetary sanctions recovered. Under the Exchange Act, a whistleblower is “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission [SEC]” in a manner established by SEC rule. Retaliation by employers against employee whistleblowers is prohibited – the Exchange Act provides that employers may not take adverse action against an employee who (i) reported alleged wrongdoing to the SEC, (ii) assisted an
SEC investigation or administrative action, or (iii) made certain internal disclosures required or protected by the Sarbanes-Oxley Act of 2002 (SOX). Whistleblowers who experience retaliation have the right under the Exchange Act to sue in district court for reinstatement, back pay and reasonable attorney fees.
Here’s what happened in Asadi. In 2006, Asadi accepted an offer from G.E. Energy (USA), LLC (GE Energy) to serve as the company’s Iraq Country Executive, and he relocated to Amman, Jordan. In 2010, while Asadi was serving in that capacity, Iraqi officials told him they believed GE Energy had hired a woman closely associated with a senior Iraqi official to curry favor with that official in negotiating a joint venture agreement. Asadi, concerned that the alleged conduct constituted a violation of the Foreign Corrupt Practices Act, reported the issue to his supervisor. He did not report the issue to the SEC. Not long after the internal report, Asadi received an adverse performance review, and GE Energy pressured him to step down from his role as Iraq Country Executive and accept a reduced role in the region. Asadi did not accept the lower role, and about one year after he made the internal report, GE Energy fired him.
Asadi filed a complaint in the U.S. District Court for the Southern District of Texas, alleging that GE Energy violated the anti-retaliation provisions of Dodd-Frank. The district court dismissed Asadi’s claim, holding that the anti-retaliation provisions did not extend to extraterritorial whistleblowing activity. The district court declined, however, to decide whether Asadi qualified as a whistleblower entitled to any protections of the statute. When the case got to the Fifth Circuit, the court affirmed the dismissal, but on the grounds that Asadi did not qualify as a whistleblower.
Asadi acknowledged to the Fifth Circuit that he was not a whistleblower as defined in the Exchange Act because he did not report alleged wrongdoing to the SEC. Nevertheless, citing support from the prior decisions of the other courts and the SEC’s regulatory definition of whistleblower, he argued to the Fifth Circuit that the statute should be construed to protect individuals like him whose actions fall within the third category of protected actions of persons who make internal disclosures to supervisors required under SOX, even if they do not report to the SEC.
The Fifth Circuit rejected his argument. The court reasoned that the plain language and structure of the whistleblower provision required a conclusion that “there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.” The categories of protected conduct, according to the court, do not define which individuals qualify as whistleblowers. Instead, the court reasoned that the categories describe certain conduct which, if undertaken by an individual who is a whistleblower to begin with, is entitled to the protection of the anti-retaliation provisions.
Because the Fifth Circuit’s decision limits those who might bring anti-retaliation claims, it may look like it favors employers. However, narrowing the scope of the definition of whistleblower may not be such good news for employers because employees may now be encouraged to dispense with internal reporting and go to the SEC directly with reports of alleged securities law violations. Without those internal reports, companies may not have the chance they otherwise would have to identify and correct suspected wrongdoing before a potential SEC investigation. Furthermore, the decision seems to undermine a key role of chief compliance officers, who, tasked with investigating and responding to instances of misconduct, may now find their jobs more difficult if employees are less willing to report violations internally.
The conflict between the Fifth Circuit and the various district courts illustrates that the law in this area is continuing to develop, and companies should by no means assume that an employee who reports internally will not be able to subsequently bring an anti-retaliation claim. And either way the law develops, companies should strive to build and maintain robust internal reporting and compliance programs that encourage employees to internally report suspected wrongdoing.
Note: This is an edited version of an article that ran in the December 2013 issue of The Investment Lawyer.