The U.S. Supreme Court recently announced that it will review the application of the Dodd-Frank Act to whistleblowing activity in the financial sector. The vice president of a San Francisco-based company was fired when he told senior management at his firm that his supervisor had apparently done away with some internal controls, which violated securities law.
He sued for unlawful retaliation under Dodd-Frank, which encourages people to blow the whistle on securities law violations. His employer countered that he wasn’t eligible for whistleblower protection because he hadn’t reported his claim to the Securities and Exchange Commission.
The problem is that the Dodd-Frank Act is confusingly — some would say poorly — drafted. It defines the term “whistle-blower” as someone who reports a violation to the SEC. However, later on in the statute there is a list of examples of prohibited retaliation, and that list indicates that it is forbidden to retaliate against people who report violations of the Sarbanes-Oxley Act, or SOX. And yes, the SOX prohibits retaliation against people who expose fraudulent behavior at a publicly traded company, which applies in this case.
The Supreme Court is taking the case, in part, based on a circuit split. The Second and Ninth Circuits ruled that SOX-style whistleblowers are protected even if they don’t report their claims to the SEC. The Fifth Circuit, however, ruled that the definition of “whistle-blower,” not the list of examples, prevails, so a whistleblower would have to go to the SEC in order to obtain protection.
What difference does it make? As one attorney pointed out, “Even if the Supreme Court holds that Dodd-Frank only protects external whistle-blowing, the whistle-blower protection provisions in Sarbanes-Oxley will still protect internal whistle-blowing.”
One difference is procedural. If the high court goes along with the Fifth Circuit, whistleblowers are likely to avoid their companies’ internal systems and head straight over to the SEC to make their reports. Another is that the broader vision of the Second and Ninth circuits could create broader exposure for companies who behave in a retaliatory fashion.
For the whistleblower, the Dodd-Frank Act offers a longer statute of limitations than the SOX. It also offers double back pay to compensate those who are fired in retaliation for blowing the whistle.