Dodd-Frank’s Whistleblowers

By: Jamie Haar

Last month, the U.S. Securities Exchange Commission (“SEC”) awarded its first payout under the new whistleblower program established last year under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).[1] Under Dodd-Frank,

“…in any covered judicial or administrative action, or related action, the Commission, under regulations prescribed by the Commission and subject to subsection (c), shall pay an award or awards to 1 or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action, in an aggregate equal to—(A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and (B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.”[2]

Proponents of the Dodd-Frank Act say the legislation was put in place in order to prevent another financial crisis from occurring as well as increase confidence in the financial market and protect consumers.[3] The whistleblower program does this by giving employees an incentive to report securities fraud to the SEC directly which in turn helps prevent investors and other individuals in the financial industry from being victimized.[4]

In addition, the whistleblower program includes more anti-retaliation safeguards than previously provided by the Section 806 of the Sarbanes Oxley Act (“SOX”) passed in 2002 by broadening protections to cover “any judicial or administrative action” or “related actions” instead of just allegations related to shareholder protections.[5] However, this broad application of whistleblower protections is questionable, given the recent district court decisions. In Egan v. TradingScreen, Inc., the plaintiff challenged the applicability of Dodd-Frank, stating that he fit under the definition of “whistleblower”, even though he utilized internal compliance programs instead of reporting directly to the SEC.[6] An employee qualifies as a “whistleblower” under the act if he reports directly to the Commission.[7] However, the whistleblower provision also protects disclosures made under SOX, which protects employees who utilize their internal compliance programs.[8] Given the contradiction, the Court held that the additional whistleblower protections served as an exception and if the plaintiff did not fall under the exception, he would have to show that the information he provided internally reached the SEC.[9]

Other recent decisions narrowed the scope of Dodd-Frank’s application in anti-retaliation claims. In Nollner v. Southern Baptist Convention, Inc., the issue before the court was whether the plaintiff was entitled to protections under Dodd-Frank despite her disclosure of violations of the Foreign Corrupt Practices Act (“FCPA”).[10] The Court held that because the defendants were not “issuers” under the FCPA, meaning that their company does not relate to the SEC, the SEC does not have federal jurisdiction over the FCPA claims, and, therefore, the plaintiff does not have a claim under Dodd-Frank.[11]

Another recent decision in a Texas district court heard a case in which the plaintiff attempted to challenge his termination abroad.[12] The court stated that because the anti-retaliation provision in Dodd-Frank is silent in regards to its application extraterritorially, it made the presumption that the provision does not cover terminations outside of the United States.[13]

The recent payout awarded under the Dodd-Frank whistleblower program has brought the Act back into the limelight and has people wondering what its effects will have on the financial market. In addition, whether or not judges will continue to restrict the scope of the Dodd-Frank whistleblower provisions is uncertain given the recent court decisions. A copious amount of litigation is anticipated and will hopefully develop of body of case law that will support Congress’ goals in passing Dodd-Frank.


[1] Joshua Gallu, SEC Pays First Dodd-Frank Whistleblower Reward: $50,000, BloombergBusinessweek, (Sept. 14, 2012, 2:20 PM),  http://www.businessweek.com/news/2012-08-21/sec-pays-50-000-in-first-dodd-frank-whistleblower-reward

[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376.

[3]Damian Palletta and Aaron Lucchetti, Law Remakes U.S. Financial Landscape, The Wall Street Journal, July 16, 2010, http://online.wsj.com/article/SB10001424052748704682604575369030061839958.html

[4] Gallu, supra note 1.

[5] Tom Devine, An Excellent Analysis of The Dodd-Frank Whistleblower Provisions, The Whistleblogger, (Sept. 14, 2012, 2:30 PM), http://www.whistleblower.org/blog/31-2010/1196-an-excellent-analysis-of-the-dodd-frank-whistleblower-provisions.

[6] Egan v. TradingScreen, Inc., 10 CIV. 8202 LBS, 2011 WL 1672066 (S.D.N.Y. May 4, 2011)

[7] Id. at 3.

[8] Id.

[9] Id.

[10] Nollner v. Southern Baptist Convention, Inc, 852 F. Supp. 2d 986, 990 (M.D. Tenn. 2012)

[11] Id. at 997.

[12] Asadi v. G.E. Energy (USA), LLC, CIV.A. 4:12-345, 2012 WL 2522599 (S.D. Tex. June 28, 2012)

[13] Id. at 4.

Advertisements
Tagged , , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: