Financial Planner Dodges Dodd-Frank Whistleblower Dismissal

| Zuckerman Spaeder Team

The federal courts are drawing a clear battle line over the disclosures that an employee must make before bringing a whistleblower retaliation claim under the Dodd-Frank Act of 2010.  Leading the charge on the one side is the Fifth Circuit, which held in Asadi v. GE Energy (LLC) that a fired employee can’t bring a Dodd-Frank retaliation claim unless he reported corporate misconduct to the SEC prior to his firing.  On the other side, the SEC and judges in New York, Connecticut, and Tennessee are massing in support of allowing a plaintiff to bring a retaliation claim even if he only disclosed the misconduct internally prior to firing. 

Two months ago, Judge Richard Stearns of the U.S. District Court for the District of Massachusetts joined the SEC’s side of the battle.  He ruled that Richard Ellington could pursue a Dodd-Frank retaliation claim against his former employer, New England Investment & Retirement Group, Inc. (NEINV), and his boss, Giacoumakis, even though Ellington only reported concerns about wrongdoing to NEINV’s compliance officer prior to his termination, and did not go to the SEC until after he was fired. Ellington v. Giacoumakis, No. 13-11791-RGS (D. Mass. Oct. 16, 2013). 

NEINV and Giacoumakis asked Judge Stearns to grant judgment on the pleadings on Ellington’s claims based on Dodd-Frank’s definition of “whistleblower.”  As we’ve previously covered, the definitions section of Dodd-Frank states that a “whistleblower” is “any individual who provides . . . information relating to a violation of the securities laws to the Commission . . .”  15 U.S.C. § 78u-6(a)(6).  In Asadi, the Fifth Circuit relied on this language, affirming the dismissal of a similarly-situated whistleblower’s claim on the ground that he had not blown the whistle “to the Commission.” 

Although Judge Stearns recognized Asadi, he didn’t follow it, choosing instead to adopt the “SEC’s interpretation of the relevant provisions of Dodd-Frank,” on the ground that this construction was “more persuasive.”  According to Judge Stearns, the “words and positioning” of the specific anti-retaliation provision in Dodd Frank (15 U.S.C. § 78u-6(h)(1)(B)(i)) reveal that Congress intended to provide a private right of action to an employee who is terminated for reporting Sarbanes-Oxley violations to a supervisor “whether or not the employer wins the race to the SEC’s door with a termination notice.” 

NEINV and Giacoumakis also argued that Dodd-Frank didn’t apply because Ellington’s allegedly protected conduct occurred before Dodd-Frank was enacted.  However, Ellington was fired after Dodd-Frank became effective, and after his termination, he gave the SEC information that led to civil penalties against NEINV.  Based on these facts, Judge Stearns allowed his claim to proceed.

For employers and employees alike, the lesson of Ellington is that uncertainty remains as to whether an employee who only makes an internal report about concerns of misconduct is shielded by Dodd-Frank’s anti-retaliation protection.  This issue will continue to percolate as we wait to see whether other courts of appeals will join the Fifth Circuit or abide by the SEC’s interpretation of the law. 

An employee should strongly consider promptly reporting any concerns to the SEC as well as internally to ensure that if they later suffer adverse action - they can pursue retaliation claims under the favorable Dodd-Frank provision, which allows recovery of double back pay. 

As a matter of company policy, employers should continue to encourage internal reporting and address all reports promptly and adequately through an established protocol.  This will not only help ferret out potentially harmful misconduct, but may also have the beneficial side effect that employees do not complain to the SEC, which could embroil the company in an external investigation and allow a later Dodd-Frank claim even in a jurisdiction that follows Asadi.  Employers should instruct whistleblowers to report to a designated person immediately if they perceive that they are being retaliated against.  And if an employer decides to take adverse action against a whistleblowing employee – obviously, a dangerous proposition – it should have strong reasons for that action that are not related to the employee’s complaints, and should document those reasons fully.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

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