Berman Is Good News For Whistleblowers And Their Counsel

Katz Banks Kumin partners Alison Asarnow and David Marshall published an article in Law360 entitled “Berman Is Good News For Whistleblowers And Their Counsel.”  The article explains the September 10 decision of the Second Circuit Court of Appeals in Berman v. Neo@Ogilvy LLC, which held that the Dodd-Frank Act‘s whistleblower protection provision should apply to employees who report securities violations internally.


Law360, New York (September 18, 2015, 10:03 AM ET) —

How should an attorney who represents employees advise a client who discovers that her employer may be engaged in securities law violations, and who wants to ensure that the violations cease? Should the attorney advise her to raise her concerns with her supervisors or other officials in her company? Or should the advice be to bypass internal reporting mechanisms and take the matter straight to the U.S. Securities and Exchange Commission? The SEC may take longer to resolve the problem, the employee has the option of reporting the violations to the SEC anonymously, and she may even qualify for a reward under the SEC Whistleblower Program. The employee may prefer to keep the issue within the company, allowing it the opportunity to correct any misconduct and to self-report to the SEC if warranted, but she may be worried about losing her job if she raises her concerns.

Until September 2015, the U.S. Court of Appeals for the Fifth Circuit was the only circuit court to have issued a published decision on whether internal reporting was protected by the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. That court held in 2013 that internal reporting was not protected.[1] In a Sept. 10, 2015, decision in Berman v. Neo@Ogilvy LLC, the Second Circuit Court of Appeals disagreed, holding that the Dodd-Frank Act prohibits retaliation for internal reporting of securities violations.[2] This means that employees working in the Second Circuit can breathe easier when they choose to address such concerns within the company rather than by contacting the SEC.

Employees of publicly traded companies, investment advisory firms and certain other entities face the question of whether to report internally or go straight to the SEC with suspected violations of securities laws every day. Plaintiffs counsel know from experience that the great majority of employees care deeply about the companies they work for, about those companies’ shareholders and about the general public, and that those employees want to do what it takes to fix any violations as quickly as possible to minimize harm to all three of these stakeholders. Many employees know by now that they are protected against retaliation if they report securities violations directly to the SEC. But as loyal employees who seek to minimize company liability, a large number of employees would prefer the option to first report potential securities violations up the chain of command internally so that the company has the chance to remedy the situation or seek appropriate legal advice.

For good reason, most employees fear some form of retaliation if they report wrongdoing within their companies. Those higher up the chain of command may not want to acknowledge such violations, particularly where addressing them might have an adverse effect on the business and its revenues. Many top executives prefer not to even hear about potential wrongdoing, especially where the whistleblowing creates records that might later come to light and show that the company took no action to address securities violations of which it was aware.

While the Dodd-Frank Act clearly prohibits employers from retaliating against employees who make reports directly to the SEC,[3] the statute’s language is less clear when it comes to protecting internal whistleblowers. Employees rightly fear, in many cases, that companies will “shoot the messenger” who brings reports of potential securities violations up the chain of command. Plaintiffs counsel sometimes have to advise their clients to keep quiet rather than risk their careers and livelihoods by speaking out, even through internal avenues that purport to protect against retaliation.

The Dodd-Frank Act itself extends protection against retaliation to “whistleblowers,” which it defines as individuals who provide information to the SEC.[4] But a separate anti-retaliation provision also claims to protect individuals who make disclosures that are “required or protected” under the Sarbanes-Oxley Act, the Securities Exchange Act of 1934, or any other law, rule or regulation subject to the jurisdiction of the SEC — laws that protect, or even require, employees to report securities violations internally.[5]

The SEC has consistently taken the position that the Dodd-Frank Act protects internal reporting. Its June 13, 2011, guidance on the issue states, “[T]he statutory anti-retaliation protections [of Dodd-Frank] apply to three different categories of whistleblowers, and the third category includes individuals who report to persons or governmental authorities other than the [SEC].”[6] The commission has submitted several amicus briefs asking courts to agree with its position, and in August 2015, the SEC issued new guidance stating “an individual who reports internally and suffers employment retaliation will be no less protected than an individual who comes immediately to the Commission.”[7]

The great majority of the federal district courts that have addressed the question have sided with the SEC’s position,[8] but the Fifth Circuit took a strong stand to the contrary in 2013 in Asadi v. G.E. Energy (USA) LLC. In that case, the Fifth Circuit held that the term “whistleblower” in the anti-retaliation provision of the Dodd-Frank Act does not extend to those who make internal reports, but only offers protection to employees who bring information directly to the SEC.[9] The Third Circuit, which was the only other Court of Appeals to rule on the issue before the Second Circuit’s ruling in Berman, sided with the Fifth Circuit in an unpublished decision.[10]

The Berman decision thus marks the emergence of a sharp split among the circuits on the issue of whether an individual’s reports of securities law violations are protected if the employee makes those allegations within the company, rather than directly to the SEC. The Second Circuit held that Dodd-Frank protects employees from retaliation when they choose to report potential securities violations internally.[11] In Berman, the Second Circuit held that the plaintiff, a finance director, could qualify for protection under the anti-retaliation provisions of the Dodd-Frank Act even though he made his reports of alleged accounting fraud only within the company, and did not approach the SEC until some time after the company terminated him, allegedly in retaliation for raising his concerns. The court concluded that the provisions of the Dodd-Frank Act described above were sufficiently ambiguous to warrant deference to the SEC’s interpretative rule.[12] The court also pointed out that some categories of employees who were the most likely to learn of potential securities violations, such as auditors and attorneys, are not permitted to bring the information to the SEC without first reporting it to the company.[13]

In light of Berman, and with the large majority of district courts issuing similar holdings in such cases, attorneys may now more confidently advise clients that employees who make internal reports of wrongdoing are likely to be protected under the Dodd-Frank Act. Of course, until the U.S. Supreme Court resolves the circuit split or Congress amends the language of the Dodd-Frank Act to remove the ambiguity, attorneys who advise employees must remain mindful of the jurisdiction in which their clients’ retaliation claims under the statute would be heard. Employees in the Second Circuit are protected, but employees in the Fifth Circuit are not protected, and those in the Third Circuit are unlikely to be.

For those employees who are interested in submitting information to the SEC in the form of a tip under the SEC’s Whistleblower Program, internal reporting has advantages that the commission built into the program to encourage employee participation in internal reporting mechanisms. For example, if there is concern that someone might beat the employee to the punch and become “first to file” with the SEC if the employee takes the time to report internally and gauge the company’s response, counsel should remember that the program rules allow the employee to reserve her “place in line” as first to file for 120 days after she makes her internal report.[14] The rules specifically require some employees, such as those in audit and compliance functions, to report internally and give the company 120 days to act before they submit their information to the SEC, if they want to be eligible for an award.[15] And in most cases, reporting internally is a factor that can enhance the amount of any award the whistleblower receives through the program.[16]

For these reasons, the Second Circuit’s Berman decision has the potential to cause a significant spike in internal reports of securities violations, as employees begin to feel more comfortable taking the risk of internal reporting. The Second Circuit’s holding also has the potential to give employees who have engaged in protected activity under Section 806 of the Sarbanes-Oxley Act a quicker and easier path to federal court: Rather than go through the administrative process at the U.S. Department of Labor, as required when pursuing a retaliation claim under the Sarbanes-Oxley Act, employees asserting claims under the Dodd-Frank Act can proceed directly to federal court, and they can do so for a full three-year limitations period rather than for the 180 days allowed by Sarbanes-Oxley. If they prevail, they are also entitled to double back pay instead of the single amount awardable under Sarbanes-Oxley. And because the Department of Labor’s administrative process is often lengthy, employees may be much more willing to make internal reports if they know that they could proceed directly to federal court should they then face retaliation — and employers may be less likely to retaliate in the face of a potential immediate federal lawsuit.

The Second Circuit’s decision in Berman is a welcome development for whistleblowers and their counsel. It not only extends added protection against retaliation directly to the large number of financial sector and investment industry employees who work in the states making up the Second Circuit, but it also sets up a circuit split that the Supreme Court or Congress will need to resolve soon if investors are to enjoy the full regulatory impact of the Dodd-Frank Act, which cannot be achieved without protection of internal whistleblowers.

—By Alison B. Asarnow and David J. Marshall, Katz Marshall & Banks LLP

Alison Asarnow is a partner in Katz Marshall’s Washington, D.C., office, specializing in the representation of whistleblowers.

David Marshall is a founding partner of the firm and also concentrates his practice on corporate whistleblower matters. Based in Washington, he is the whistleblower-side co-chairman of the American Bar Association Labor and Employment Section’s Subcommittee on the Sarbanes-Oxley Act of 2002.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See Asadi v. G.E. Energy (USA) LLC, 720 F.3d 620 (5th Cir. 2013).

[2] Berman v. Neo@Ogilvy LLC, No. 14-4626, 2015 WL 5254916 (2d Cir. Sept. 10, 2015).

[3] See 15 U.S.C. § 78u-6(h)(1)(A)(i).

[4] See id.; see also 15 U.S.C. §§ 78u-6(b), (h).

[5] See 15 U.S.C. § 78u-6(h)(1)(A)(iii).

[6] Securities and Exchange Commission, Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34300-01 (June 13, 2011) (codified at 17 C.F.R. pts. 240-49).

[7] See Interpretation of the SEC’s Whistleblower Rules Under Section 21F of the Securities Exchange Act of 1934, 80 Fed. Reg. 47, 829 (Aug. 10, 2015).

[8] See, e.g., Yang v. Navigators Group Inc., 18 F. Supp. 3d 519, 533–34 (S.D.N.Y. 2014); Rosenblum v. Thomson Reuters (Mkts.) LLC, 984 F. Supp. 2d 141, 146–59 (S.D.N.Y. 2013); Ellington v. Giacoumakis, 977 F. Supp. 2d 42, 44–46 (D. Mass. 2013); Genberg v. Porter, 935 F. Supp. 2d 1094, 1106–07 (D. Colo. 2013); Nollner v. Southern Baptist Convention Inc., 852 F. Supp. 2d 986, 992–95 (M.D. Tenn. 2012).

[9] 720 F.3d 620 (5th Cir. 2013).

[10] See Safarian v. American DG Energy Inc., No. 14-2734, 2015 WL 4430837 (3d Cir. July 21, 2015).

[11] Berman, 2015 WL 5254916 at *9.

[12] See id.

[13] See id. at *6 (citing 15 U.S.C. § 78j-1 (requiring auditors of public companies, under some circumstances, to bring illegal acts to the attention of management and the board of directors, and permitting auditors to report illegal acts to the SEC only if the board or management fails to take appropriate remedial action); 15 U.S.C. § 7245 (requiring attorneys to report material violations of securities laws to chief legal counsel or chief executive officer of a public company and to the board of directors in some circumstances); and 17 C.F.R. § 205.1-7 (contemplating an attorney’s reporting to the SEC only after internal reporting)).

[14] See 17 C.F.R. § 21F-4(b)(7).

[15] See 17 C.F.R. § 21F-4(b)(4)(v)(c).

[16] See 17 C.F.R. § 21F-6(a).

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