Supreme Court Ties SEC's Hands in Whistleblower Case

For this alleged retaliation, Somers sought recovery through the whistleblower protections provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, in which Congress provided protection from retaliation for whistleblowers who report “to the commission” their tips about employers who are violating securities laws. See, 15 U.S.C. 78u-6(h)(1). That protection, codified in 15 U.S.C. 78u-6(h)(1)(A), provides that, in three circumstances, “[n]o employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower.” One of those circumstances is when the tipster reports his concerns to the SEC.

SEC's Expansion of Law's Protections

Through the years, the SEC has interpreted the anti-retaliation provision of the Dodd-Frank Act broadly, extending its protections to those who report their concerns internally, even if they do not report them to the SEC. See, 80 Fed. Reg. 47,829 (Aug. 10, 2015). The federal government's amicus brief to the Court in support of Somers's claim clarified the SEC's rationale for this policy: “In adopting its rules, the Commission explained that encouraging reporting through internal compliance procedures, such as those required or protected by the laws cross-referenced in clause (iii), advances the purposes of Section 78u-6. Specifically, the Commission explained that internal reporting enables the private sector to screen out meritless claims, and thereby improves the quality of whistleblower tips later brought to the Commission; that internal reporting gives businesses the opportunity to self-correct without the need for intrusive Commission investigations; and that internal reporting thereby promotes efficient use of both corporate and government resources. See, 76 Fed. Reg. at 34,323-34,325, 34,359 & nn.449-450 (citing S. Rep. No. 176, 111th Cong., 2d Sess. 110 (2010)).”

Supreme Court Upholds the Letter of the Law

The Supreme Court's unanimous Digital Realty decision ends the SEC's expanded-application practice, leaving internal-only whistleblowers without recourse to the Dodd-Frank Act's protections.

Justice Ruth Bader Ginsberg, writing for the Court, reiterated that in order to sue under Dodd-Frank's anti-retaliation provision, a person must first provide “information relating to a violation of the securities laws to the commission.” Added Justice Neil Gorsuch in his concurrence, when Congress said a report had to be made “to the commission,” that's just what it meant: “How much clearer could [Congress] possibly have been?”

Jason Zuckerman, a Washington whistleblower attorney, said following the Digital Realty decision's publication that “[n]o doubt this is actually a very big loss for corporate America. They won on this issue, but if you look at the big picture, this is a huge loss.”

Congress will now need to act if it wants Dodd-Frank's whistleblower protections to go to tipsters who report their concerns only internally. Other, less generous damages are available through other laws, but without Congressional action, anyone who reports a securities violation only internally and then is fired or otherwise retaliated against before an SEC report can be made, will not be eligible to receive the extensive damages Dodd-Frank authorizes. And that is not what corporate America should want. As Zuckerman explained: “It is in the interest of large corporations to get employees to blow the whistle early, perform an investigation into the problem and halt it. As a result of this opinion, employees are likely to blow the whistle directly to the SEC because of the huge risk of reprisal and, because of the Dodd-Frank Act, there is a significant financial incentive to blow the whistle.”

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Janice G. Inman is Editor-in-Chief of this newsletter.