The Dodd-Frank Act prohibits retaliation against whistleblowers, specifically providing that “No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower” because of certain whistleblowing activities.  15 U.S.C. §78u-6(h)(1).  The regulations (specifically, 17 C.F.R. §240.21F-2(b)(2)) provide for enforcement in an action brought by the SEC.

Although Dodd-Frank was enacted in 2010, the June 16, 2014 Order marks the first time the SEC has pursued an employer for retaliation.

Specifically, the SEC found that the hedge fund advisory firm out of New York and its principal were making prohibited trades, including by failing to provide proper disclosures and obtain appropriate consents. The SEC also found that Paradigm’s Form ADV was materially misleading because it failed to disclose the principal’s conflict as a member of the conflicts committee.

The firm’s head trader reported the violations in March of 2012, and alleged that, after he notified Paradigm’s principal of his report, he was removed from his position and supervisory role and otherwise marginalized at the firm.  Ultimately, the whistleblower resigned.

In anticipation of the action the SEC was poised to file, Paradigm and its principal made an offer to settle.  The respondents, without admission, agreed to pay $2.2M to settle the claims (including a $300,000 penalty) and retain an independent compliance consultant.

In the case before the high Court, employee of a contractor mutual fund advisor, Jackie Lawson felt forced to resign in 2007 after notifying the SEC about irregularities on the books of a Fidelity mutual-fund group.  According to her, the irregularities likely affected the fees that the company was charging its clients.  Two years before Lawson’s claim, Jonathan Zang resigned under similar circumstances after he notified the SEC of statements made by the same company that he found were misleading to clients and to the public.

The U.S. Court of Appeals for the First Circuit found that both whistleblowers were not covered under whistleblower protections because they were not employees of the defendant (mutual fund) company, but employees of (mutual fund advisor) subcontractors of the company. In a 6-3 decision, the Supreme Court concluded that both the text of §1514A and the legislative history of SOX make clear that the whistleblower provision “shelters employees of private contractors and subcontractors just as it shelters employees of the public company.”

Assessing the import of § 1514A, the Supreme Court found that “[t] he ordinary meaning of ‘an employee’ in this proscription is the contractor’s own employee.” The Court noted that “[i]f, as we hold, ‘an employee’ includes employees of contractors, then grammatically, the term also includes employees of public company officers and employees.” But, the Court observed that as a practical matter, “[f]ew housekeepers or gardeners . . . are likely to come upon and comprehend evidence of their employer’s complicity in fraud.”

Finding that the text of SOX itself, along with its purpose, favored such interpretation, SCOTUS ultimately held that SOX extends protection to private companies and contractors that work with publicly traded companies.

The Court rejected defendant employers’ argument that the language of SOX was intended to apply only to outside contractors engaged to administer retaliation in avoidance of the SOX provision à la George Clooney’s character as an “ax-wielding specialist” in the movie Up in the Air.

The ruling could have a ripple effect on the mutual-fund industry since most public mutual-fund companies do not employ their own personnel, instead opting for the use of contractors.  The attorney for the whistleblowers expressed satisfaction with the ruling, stating that a loophole in the Act was closed by SCOTUS’ ruling.

In dissent, Justice Sotomayor (joined by Justices Kennedy and Alito), described the ruling as “a stunning reach,” and criticized the majority decision as not reflective of “the statute Congress wrote.”

In Lawson, SCOTUS focused on the meaning of the version of § 1514A(a) in effect in 2002.  Subsequently, the section has been amended by Congress, most recently in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Dodd-Frank added a whistleblowing bounty program as well as new provisions prohibiting any employer from retaliating against “a whistleblower” for providing information to the SEC or making disclosures required or protected by Sarbanes-Oxley and other securities laws.

The 2007 great recession served as a peak moment in longtime calls for improvement to the American financial regulatory system.  In response to the outcry for system modification, the Obama Administration pushed for a sweeping large scale upheaval of the current regulatory procedure for numerous purposes.  Some of these purposes include, among others, the establishment of new regulatory agencies and increased transparency within regulation.  The final congressional product after over a year of back-and-forth proceedings was finally set into stone on July 21, 2010 and became known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, named after congressmen Christopher Dodd and Barney Frank (more commonly known as, simply, “Dodd-Frank”).  Dodd-Frank created numerous new agencies such as the Financial Stability Oversight council as well as the Bureau of Consumer Financial Protection.

Among others, Dodd-Frank serves as the new benchmark in whistleblower law.  Its primary mission in this area is stated clearly as to “create new incentives and protections for whistleblowers.”  The bill seeks to attract employees to report misdoings by their employers as well as to protect these whistleblowers from any backlash or discrimination once they have done so.  Under Dodd-Frank, the Securities and Exchange Commission was issued to create the Office of the Whistleblower, currently headed by Sean McKessy, to assist in the processing of all potential tips by whistleblowers.  New “bounty provisions,” which reward those who report to the government, have been instated along with amendments to existing whistleblower related statutes such as the False Claims Act and the Sarbanes-Oxley Act of 2002 (or “SOX”).

The overarching theme throughout Dodd-Frank with regard to the whistleblower statutes is to provide different authoritative committees with the means to properly perform a comprehensive investigation and address improper or unlawful activity.  This is to be done through the maximization of the cooperation of a whistleblower who is protected from any future employer discrimination.

Whistleblower Actions under the SEC and CFTC

The largest implementation by Dodd-Frank with regards to whistleblowing is, without doubt, section 922, which puts into place an expansive reward system for those who report Security and Exchange Commission violations straight to the SEC or to the US Commodity Futures Trading Commission (CFTC).  The section states that, in the event of a reported securities or commodity law violation that results in monetary sanctions exceeding one million dollars, a whistleblower who provides original and significant information to the investigation (to be determined based on specific requirements within the bill) will receive between 10 to 30 percent of the amount exceeding one million dollars.  The amount is determined by the commission on the case (based upon various guidelines used to measure the importance of the information) with input provided by the Office of the Whistleblower from the SEC.  While the mandates for determining the amount of the reward seem to vary a bit between the SEC and the CFTC, they remain relatively similar.

While the False Claims Act has long been effective in fighting fraud against government, it did not address many types of common securities fraud.  Dodd-Frank maintains many new provisions set to address this glaring issue in the False Claims Act.  Some of the instances in which Dodd-Frank applies to whistleblowing of securities and commodities law violations are as follows:

• Ponzi schemes
• Insider trading
• Accounting fraud
• Unauthorized trading
• Misleading statements or failure to make necessary statements in public filings
• Misrepresentations made in connection with sales of securities or commodities
• Bribery
• Market manipulation
• Improper promotion and sale of risky investments
• Skimming or other improper diversion of funds
• Illegal naked short selling of securities

All complaints relating to the above matters filed under Dodd-Frank are to be reported directly to the SEC or CFTC rather than in federal court.

Another additional provision which expands upon the False Claims Act allows for whistleblowers to now report fraud found based on the analysis of public information, rather than simply private information.  Dodd-Frank’s new protocols on the matter seek to expand the use of the whistleblower for the federal government.

New Anti-Retaliation Provisions

In the past, there have been many problems resulting from employer discrimination of employees who participated in whistleblowing. Many whistleblowers found themselves unprotected purely under SOX or with insufficient time to file a suit for retaliatory behavior by the employer.  Whistleblowers filing under SOX now maintain much more protection than ever before as a result of Dodd-Frank.  Whereas SOX established some protection for whistleblowers filing, Dodd-Frank acts as a major overhaul of then existing regulations in handling such instances.

First, Dodd-Frank broadly expands SOX in protecting employees of private subsidiaries and affiliates of public companies as well as “nationally recognized statistical rating organizations” who were not covered in the past.  Second, in the past a large issue existed with the statute of limitations in such instances of employees filing retaliation claims against their employers under SOX.  But Dodd-Frank has increased the 90 day statute of limitations to file a complaint with the Occupational Safety and Health Administration to 180 days.  Perhaps more significant, however, is that it permits a potential plaintiff to now proceed straight to federal district court, granting the employee a statute of limitations of up to six years.  This new protocol essentially lengthens the amount of time to file a complaint from 90 days to 6 years, a bold step forward in whistleblower protection.

SOX was also amended in such a way by Dodd-Frank so that SOX plaintiffs are now entitled to a jury trial, which may also result in double pay back rather than just pay back as had been the rule.

Section 1057 of Dodd-Frank also establishes further coverage by protecting “employees of businesses that offer or provide consumer financial products or services primarily for personal, family or household purposes.”  Employees from the following types of businesses included in this section are those that

• extend credit or service loans or broker leases;
• provide real estate settlement services or perform real estate or personal property appraisals;
• engage in deposit-taking activities, transmit or exchange funds, or otherwise act as custodian of funds or any financial instrument used by or on behalf of consumers;
• sell, provide or issue stored value or payment instruments;
• provide check cashing, check collection, or check guaranty services;
• provide payments or other financial data processing products or services to a consumer by any technological means;
• provide financial advisory services to consumers on individual financial matters or relating to proprietary financial products or services;
• collect, analyze, maintain, or provide consumer report information or other account information to be used in connection with decisions regarding the offering or provision of a consumer financial product or service; and
• collect debt related to any consumer financial product or service.

Any employee falling into a category above who refers a potential violation to a federal government agency has 180 days from the date of any alleged discrimination to file a complaint with the U.S. Secretary of Labor.

The False Claims Act has also been amended to call for the protection of “lawful acts done by the employee, contractor, agent, or associated others in furtherance of other effort to stop 1 or more violations of this subchapter.”  All in all, Dodd-Frank collectively acts as an umbrella to provide more protection to many potential whistleblowers in an effort to ensure their cooperation and assistance in uncovering a variety of financial violations.

The all-encompassing question from the plethora of revisions and implementations made possible by Dodd-Frank is how it truly affects the potential whistleblower in a practical sense.  The most palpable result of Dodd-Frank will, in all likelihood, be a steep rise in the amount of tips seen by the SEC and the CFTC.  Some employers have speculated that the “bounty system” will lead to less internal notification of issues as whistleblowers spring straight to the federal government in an effort to collect reward compensation.  Dodd-Frank, however, intentionally lacks a provision requiring prior internal notification as a means to incentivize companies to improve their internal investigation procedures.  Furthermore, the SEC will make a note of those who first report a potential violation internally before reporting to the SEC, with the intention being that it would result in a positive impact on the potential reward.

Kramer v. Trans-Lux Corp.

In the 2012 case, Kramer v. Trans-Lux Corp., 3:11cv1424 (D. Conn. Sept. 25, 2012), the first Dodd-Frank claim to survive a motion to dismiss in federal court, Richard Kramer informed the SEC of a violation by Trans-Lux Corp. and, ultimately, was terminated by the company for doing so.  Kramer followed by filing a suit claiming that Trans-Lux had violated the Dodd-Frank anti-retaliation provision.  The company responded in saying that the report was not filed in the correct way, and therefore, Kramer was not to be protected under Dodd-Frank.  What makes this case so vital in defining how powerful Dodd-Frank is in protecting a whistleblower, is that the judge ruled that to read the bill so narrowly in not protecting Richard Kramer, was to undermine the purpose of Dodd-Frank.  Therefore, despite improper filing, Kramer was granted protection.  This case serves as a prime example of how, under Dodd-Frank, an honest whistleblower performing a just and legal action need not fear any discrimination or backlash for doing so.

Conclusion

The overall takeaway from Dodd-Frank is that it clearly stands as a benchmark in US financial regulation across the board.  With respect to whistleblowing, US employees have never had more protection from employers of violating companies or more incentive to report misdoing as they do now with Dodd-Frank in effect.  Whether it be through the easing of the process of persecuting employers who attempt to retaliate against whistleblowing employees or the encompassment of more workers under those protective standards, the bill, without a doubt, will result in many more reports moving forward.