The U.S. Court of Appeals for the Second Circuit recently ruled that whistleblower protections in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply to internal whistleblowers, not just those who report suspected securities law violations to the SEC. This conclusion conflicts with the Fifth Circuit’s view that the “antiretaliation” provision isn’t available to internal whistleblowers because of how Dodd-Frank defines “whistleblower.”
In Berman v. Neo@Ogilvy, LLC, the Second Circuit found the act to be ambiguous. On the one hand, the definition of “whistleblower” is limited to those who report suspected wrongdoing directly to the SEC. On the other hand, the act’s antiretaliation provision — which protects whistleblowers against termination or other retaliatory actions — applies to those who make disclosures to persons and government agencies other than the SEC. This includes disclosures to employers.
In light of this ambiguity, the court deferred to the SEC’s interpretation. The SEC’s rules — as well as its amicus curiae (“friend of the court”) briefs in federal cases — support a more inclusive definition of whistleblower for antiretaliation purposes. The Commission’s rules provide that, for purposes of Dodd-Frank’s antiretaliation provision, a person is a whistleblower if he or she provides specified information “in a manner described in” the provision, which protects employees who report internally without reporting to the SEC.
In addition, the SEC’s rules offer eligible whistleblowers several incentives to report suspected wrongdoing internally. For example, they:
- Authorize higher rewards to whistleblowers who voluntarily participate in a company’s internal reporting process,
- Allow whistleblowers who report misconduct internally to preserve their “place in line” for a reward, so long as they provide the same information to the SEC within 120 days, and
- Give credit for the “full iceberg” in determining the size of a reward — that is, they give an internal whistleblower credit for all wrongdoing uncovered by the company’s internal investigation and reported to the SEC as a result of his or her tip.
The Second Circuit adopted the SEC’s interpretation of Dodd-Frank, but it’s uncertain whether other federal courts will follow its lead or embrace the Fifth Circuit’s more restrictive interpretation. Ultimately, the U.S. Supreme Court may be called on to resolve this split among the appellate courts.
Regardless of the outcome, however, public companies should handle whistleblowers with care. Creating an environment that encourages people to report suspected securities law violations internally rather than going directly to the SEC typically is in a company’s best interests.