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In enacting the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), Congress provided a private right
of action for employees who claimed retaliatory discharge under
certain circumstances. The Act defined a "whistleblower"
in an apparently narrow manner — in particular, as
"any individual who provides, or 2 or more individuals acting
jointly who provide, information relating to a violation of the
Securities laws to [the SEC] in a manner established, by rule or
regulation, by [the SEC]." 15 U.S.C. § 78u-6(a)(6)
(2012). A narrow reading of this definition could lead to limited
recovery to circumstances in which an individual reported his
observations to the SEC. However, in three reported decisions,
including one reported last week, federal district courts have
interpreted Dodd-Frank to afford broad protections to
whistleblowers, and have not required that complaints be reported
to the SEC.
In Egan v. Tradescreen, Inc., et al., 2011 U.S.Dist.
LEXIS 47713 (S.D.N.Y. May 4, 2011), the plaintiff alleged he was
terminated after he made reports to his superiors of malfeasance,
witness interference, and violations of the Sarbanes-Oxley Act and
FINRA rules. In the first reported analysis of this provision of
the Dodd-Frank Act, the court ruled that to recover, the plaintiff
was not required to complain to the SEC prior to filing
his lawsuit. In Nollner v. Southern Baptist Convention, Inc.,
et al., 852 F.Supp.2d 986 (M.D.Tenn. 2012), plaintiffs alleged
their employment was terminated following a complaint that their
employer's conduct violated the FCPA. The court followed
Egan's reasoning, and also held that plaintiffs were
not required to report their concerns to the SEC.
Importantly, the Egan and Nollner courts
dismissed the plaintiffs' claims despite the plaintiffs having
properly followed procedures for reporting alleged misconduct.
Although the plaintiffs were not required to report directly to the
SEC, their complaints could only give rise to a private right of
action if the complaint fell into one of four categories: those
under the Sarbanes-Oxley Act, the Securities and Exchange Act, 18
U.S.C. § 1513(e), or other laws and regulations subject to the
jurisdiction of the SEC. See 15 U.S.C. §
78u-6(h)(1)(A). In both cases, the courts dismissed the
plaintiffs' complaints, finding that the allegations did not
fall into one of these specifically enumerated categories.
On September 25, 2012, another court not only reaffirmed that a
whistleblower is not required to report his claim directly to the
SEC, but also allowed the suit to proceed. In Kramer v.
Trans-Lux Corp., Case No. 3:11-cv-01424-SRU (D. Ct. Sept. 25,
2012), the plaintiff alleged the defendant terminated him after he
internally reported that the defendant had unlawfully deviated from
its pension plan rules. (The plaintiff also wrote to the SEC
directly about the same issue.) The court rejected the
defendant's arguments and denied its motion to dismiss the
complaint.
In Kramer, the court arguably broadened the
Egan and Nollner line of cases. First, the court
held that a whistleblower may pursue claims under both Dodd-Frank
and Sarbanes-Oxley; in fact, disclosures that are protected under
Sarbanes-Oxley also are protected under Dodd-Frank. Second, it
ruled that plaintiffs do not have to report a tip to the SEC in the
manner prescribed by the SEC in the Dodd-Frank Act. Instead, a
whistleblower must allege only that he had a reasonable belief that
the information relates to a possible violation of the securities
laws. Third, the court found that the plaintiff's complaint
about the mismanagement of the defendant's pension plan,
including potential conflicts of interest and failure to submit
plan amendments to the board or the SEC, satisfied
Sarbanes-Oxley's requirement that a plaintiff
"reasonably" believes there had been a violation of SEC
rules or regulations. Thus, the plaintiff's disclosures were
protected under Sarbanes-Oxley and Dodd Frank.
Kramer will now proceed to discovery, and the parties
will explore whether the plaintiff's belief that his employer
violated the securities laws was reasonable. However, the bar has
been lowered: to survive a motion to dismiss, Kramer holds
that a whistleblower need only allege he reasonably believed there
was a qualifying violation. This is the first reported decision
where a Dodd-Frank retaliation claim has survived a motion to
dismiss, and it likely will encourage other potential
whistleblowers to sue under Dodd-Frank.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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