Sixth Circuit Sidesteps Whether Whistleblowers Need to Tip Off Regulators to Receive Protections Under Dodd-Frank

March 20, 2017
Matthew LaGarde

The Sixth Circuit recently had an opportunity to weigh in on a question that has vexed federal courts for almost six years: whether the protections against retaliation provided in the Dodd-Frank Act extend to whistleblowers who did not report their concerns to the U.S. Securities and Exchange Commission (SEC).  Unfortunately for whistleblowers subject to its jurisdiction, the court remains silent on where it stands in the contentious split over the interpretation of federal law.*

* Since the Sixth Circuit issued its opinion in Verble v. Morgan Stanley Smith Barney, the Ninth Circuit has also weighed in on the emerging circuit split over the application of Dodd-Frank whistleblower protections in Somers v. Digital Realty Trust Inc. Katz Banks Kumin’s Whistleblower Law Blog will cover the impact of Somers in a separate post to come.

Verble v. Morgan Stanley Smith Barney

In Verble v. Morgan Stanley Smith Barney, LLC, No. 15-6397, 2017 WL 129040 (6th Cir. Jan. 13, 2017), the Sixth Circuit reviewed a decision issued by the U.S. District Court for the Eastern District of Tennessee dismissing a former financial advisor’s Dodd-Frank retaliation claim after finding that Dodd-Frank’s anti-retaliation provision was limited to whistleblowers who reported their concerns directly to the SEC. See Verble v. Morgan Stanley Smith Barney, 148 F. Supp. 3d 644 (E.D. Tenn. 2015).  On appeal, the Sixth Circuit opted to avoid deciding whether that ruling was correct, and upheld the dismissal on the separate ground that the plaintiff had not plausibly alleged that he engaged in protected activity even under the more expansive reading of the statute.

Verble, a former Morgan Stanley Smith Barney (MSSB) financial advisor, alleged that MSSB terminated him after it discovered that he was assisting the FBI in its investigation into insider trading at the firm. Courts across the country have come to different conclusions about whether assisting the FBI with an investigation into insider trading constitutes protected activity under Dodd-Frank. These differing opinions arise from ambiguity within Dodd-Frank’s anti-retaliation provision, which is codified at 15 U.S.C. §78u-6(h). That provision prohibits an employer from taking an adverse employment action against a whistleblower because the whistleblower provided information to the SEC, assisted in an SEC investigation, or because the whistleblower made “disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.” The Sarbanes-Oxley Act of 2002 (SOX), in turn, protects employees who provide information “the employee reasonably believes constitutes a violation of . . . any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders” – including insider trading – if the employee provides the information to, among other things, a supervisor, a coworker with the authority to investigate or terminate misconduct, or “a Federal regulatory or law enforcement agency” – including the FBI. By incorporating SOX protections into its own whistleblower provision, Dodd-Frank appears to recognize Mr. Verble’s cooperation with the FBI’s insider-trading investigation as protected activity.

Who Is a Whistleblower Under Dodd-Frank?

Unfortunately, another provision in the Dodd-Frank statute raises doubts about this seemingly obvious conclusion. While Dodd-Frank protects “whistleblowers,” the term “whistleblower” is limited by definition elsewhere in the statute as “any individual who provides… information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” In other words, Dodd-Frank defines a whistleblower only as someone who provides information to the SEC, yet also states that its protections apply to SOX whistleblowers, who can engage in a broader range of protected activities.

The SEC, the agency charged with enforcing Dodd-Frank, has issued a rule clarifying that the broader anti-retaliation provisions control and the statute extends to whistleblowers who make SOX-protected disclosures. See 17 C.F.R. § 240.21F-2. Ordinarily, courts defer to an enforcing agency’s interpretation of an ambiguous statute, following the Supreme Court’s decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), and most courts have in fact deferred to the SEC’s interpretation of the statute and extended Dodd-Frank’s protections to SOX-protected disclosures. In 2013, however, the U.S. Court of Appeals for the Fifth Circuit – the first appellate court to confront the question – declined to defer to the SEC’s interpretation and held that Dodd-Frank’s protections were limited to whistleblowers who provided information to the SEC. See Asadi v. G.E. Energy (U.S.A.), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013). According to Fifth Circuit, the statute is not ambiguous about whom it protects because of the express definition of whistleblowers as individuals who report to the SEC.

Asadi stood as the only appellate decision to address this issue for two years.  When the Second Circuit took up the question in September 2015, however, a circuit split emerged. In Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015), the Second Circuit held that the Dodd-Frank’s provisions are ambiguous and therefore the SEC’s interpretation of the statute, extending protections to employees who made either internal or SEC disclosures, warranted deference. The current circuit split makes it nearly inevitable that the Supreme Court will eventually weigh in on this issue; in the meantime, however, every additional circuit to address the question has the potential to clarify the breadth of protections under the statute.

The Sixth Circuit’s Non-Decision

In Verble, the Sixth Circuit avoided taking sides on the split between its sister circuits and decided the case instead on the separate ground that Mr. Verble failed to meet the pleading standards set forth by the Supreme Court in the landmark cases Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The court noted that under Twombly and Iqbal, “[c]onclusory allegations or legal conclusions masquerading as factual allegations will not suffice to state a plausible claim for relief,” and ultimately found that “[m]ost of Verble’s allegations are ‘[c]onclusory allegations or legal conclusions masquerading as factual allegations,’…As for the few specific allegations in Verble’s complaint, none of them provide enough factual material to state a plausible claim.” Accordingly, the court held that Mr. Verble’s complaint “fails to meet the threshold requirement of providing enough facts to state a plausible claim for relief.”

The Sixth Circuit’s avoidance of the Dodd-Frank whistleblower definition issue is disappointing for whistleblower advocates and the defense bar alike, both of whom would like to see another victory on this contentious question. Recent decisions from the Eighth Circuit and the Third Circuit have declined to rule on the controversy, as well. See Beacom v. Oracle Am., Inc., 825 F.3d 376 (8th Cir. 2016); Safarian v. Am. DG Energy Inc., 622 F. App’x 149 (3d Cir. 2015). The fate of whistleblower claims remains inconsistent across the country while different interpretations of the law take root in different jurisdictions. In the roughly 18 months since the Second Circuit issued its whistleblower-friendly decision in Berman, three district courts have ruled on the question, and all three of them have sided with the Fifth Circuit’s more restrictive interpretation. See Puffenbarger v. Engility Corp., 151 F. Supp. 3d 651 (E.D. Va. 2015); Deykes v. Cooper-standard Auto., Inc., No. 2:16-CV-11828, 2016 WL 6873395 (E.D. Mich. Nov. 22, 2016); Lamb v. Rockwell Automation Inc., No. 15-CV-1415-JPS, 2016 WL 4273210 (E.D. Wis. Aug. 12, 2016).

Why the Issue Matters

While the question of whether to bring certain conduct within the scope of SOX or Dodd-Frank might seem insignificant, the outcome can have important consequences for individual whistleblowers because Dodd-Frank offers a significant expansion over the protections provided under SOX. For example, the statute of limitations for filing a SOX claim is just six months, as opposed to three years under Dodd-Frank. Moreover, a SOX claim must be first filed with the U.S. Occupational Safety and Health Administration (OSHA), and may only be “removed” from that administrative process and filed in federal court if the Labor Department fails to issue a final decision within 180 days after filing; Dodd-Frank provides for direct private action from the outset. Finally, Dodd-Frank offers more generous remedies for successful litigants, including double back pay. For these reasons, the interpretation of Dodd-Frank has significant impact on whistleblowers who have suffered retaliation for bringing misconduct to light.  For those whistleblowers who come within the jurisdiction of the Sixth Circuit – i.e., Michigan, Ohio, Kentucky and Tennessee – uncertainty remains as to the extent of their protections under federal law.

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