In new amicus brief, SEC wants to protect whistleblowers – and itself

By Alison Frankel
February 21, 2014

In 2012 and 2013, when the 5th Circuit Court of Appeals was considering the question of whether Dodd-Frank’s anti-retaliation provisions protect whistleblowers who report their concerns internally, rather than to the Securities and Exchange Commission, the SEC stayed out of the fray. The case, Khaled Asadi v. G.E. Energy, centered on the tension between two sections of Dodd-Frank, one of which seemed to define whistleblowers only as those who tip the SEC about potential misconduct by their employers. In its Dodd-Frank implementation process, the SEC attempted to resolve the tension, issuing rules to clarify that whistleblowers are protected from retaliation regardless of whether they report concerns to the agency or up the chain of command through internal compliance programs, as the older Sarbanes-Oxley Act had encouraged. The SEC’s rules have convinced most of the federal trial judges who have considered the scope of Dodd-Frank whistleblower protections; courts have typically cited the deference due to the agency’s interpretation of a law it is responsible for enforcing.

Not the 5th Circuit, however. Last July, the appeals court dismissed Asadi’s retaliation suit against G.E., holding that he is not a Dodd-Frank whistleblower because he first informed his boss, and not the SEC, about possible Foreign Corrupt Practices Act violations in G.E. Energy’s dealings with Iraqi officials. The 5th Circuit said it didn’t need to reach the SEC’s interpretation because the statutory language of Dodd-Frank is unambiguous: Whistleblowers are defined as those who report suspicions to the SEC.

The same issue of the scope of protection for whistleblowers who have reported internally is now before the 2nd Circuit, in a Dodd-Frank retaliation case brought by Meng-Lin Liu, a former Taiwanese compliance officer for a Chinese subsidiary of Siemens. And this time, the SEC isn’t taking any chances that the appeals court will ignore the agency’s prerogatives. On Thursday, the SEC filed an amicus brief explaining its position – and explaining why the courts owe deference to the agency’s statutory interpretation.

It’s certainly no surprise that the SEC argues whistleblowers are permitted to bring Dodd-Frank retaliation claims regardless of whether they reported internally or to the commission. That has been the SEC’s position since Dodd-Frank rulemaking began. In the amicus brief, as it has before, the agency contends that it was anxious to preserve the viability of internal compliance programs companies that adopted after Sarbanes-Oxley was enacted in 2002. Those internal controls are an essential component of securities enforcement, the SEC brief said, so its final Dodd-Frank rules “were carefully calibrated to (provide) ‘strong incentives’ for individuals in appropriate circumstances to report internally in the first instance.”

I’ll skip the nitty-gritty details of the regulatory language by which the SEC attempted to clarify the scope of Dodd-Frank whistleblower protection, since the commission’s intentions are perfectly clear. But the big question for the 2nd Circuit, after the 5th Circuit ruling in the Asadi case, is whether courts must defer to the SEC’s interpretation. That requires a two-step analysis: Was the statute ambiguous and did the SEC adopt a reasonable interpretation of the law? The 5th Circuit stopped at the first question because it found the statute unambiguous. So the SEC’s amicus brief devotes several pages to demonstrating the confusion in the statutory language. Part of its argument, in fact, is the “bizarre consequences” of the 5th Circuit’s holding to the contrary. It simply cannot be, the brief said, that Congress meant to add anti-retaliation protection for whistleblowers who report both internally and to the SEC while leaving those who report only internally without any cause of action if they’re fired.

It’s hard to argue with the brief’s explanation of why broad protection makes sense. “The commission’s interpretation is reasonable because it resolves the statutory ambiguity in a manner that effectuates the broad employment antiretaliation protections that (Dodd-Frank’s protection provision) contemplates,” the SEC said. “By ensuring that individuals who report internally first will not be potentially disadvantaged by losing employment antiretaliation protection…it better supports a core overall objective of the whistleblower rulemaking – avoiding disincentivizing individuals from reporting internally first in appropriate circumstances. By establishing parity between individuals who first report to the commission and those individuals who first report internally, the commission’s rule avoids a two-tiered structure of anti-retaliation protections.”

Moreover, the SEC argues persuasively that if the 2nd Circuit does not heed the commission’s interpretation, it will be harming the cause of securities enforcement. It’s up to the SEC to regulate compliance with the securities laws, the brief said, and the SEC believes its enforcement regime relies in part on internal controls that encourage whistleblowers in some circumstances to report concerns internally. To that end, it has implemented Dodd-Frank rules to protect whistleblowers who choose that route. If its rules are invalidated by courts that refuse to pay them deference, the brief said, “the commission’s authority to pursue enforcement actions against employers that retaliate against individuals who report internally would be substantially weakened.”

As I mentioned at the top of this post, the 5th Circuit is an outlier on the scope of Dodd-Frank protection for whistleblowers who report internally. Just about every other judge who has decided that issue has sided with the SEC’s interpretation. In the Liu case at the 2nd Circuit, U.S. District Judge William Pauley of Manhattan sidestepped the question, instead dismissing Liu’s suit because he found Dodd-Frank whistleblower provisions don’t apply outside the bounds of the United States. Pauley did, however, say he found the 5th Circuit’s definition of a Dodd-Frank whistleblower to be “appealing in that it avoids rewriting the statute.” The SEC’s amicus brief to the 2nd Circuit is intended to warn the appellate court off any such “appealing” conclusion.

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