FCPA Compliance and Ethics Blog

October 18, 2011

Who Ya Gonna Call?

Filed under: Dodd-Frank,Russ Berland,SEC,Whistle-Blower — tfoxlaw @ 1:06 am
Tags: ,

BerlandR_web.jpgEd. Note-today we have a guest post from our colleague Russ Berland.

The Dodd-Frank whistleblower law enables the SEC to pay out between 10 percent and 30 percent of any recovery from a violation of a securities law to a whistleblower.  Under Dodd-Frank, a whistleblower is an eligible person who provides original information or original analysis to the SEC about a violation of federal securities laws that leads to a successful enforcement action with monetary sanctions of at least $1,000,000.  As you can imagine, there are a lot of “magic words” in this definition that courts will be sorting out for a long time.  The law also provides substantial protections for whistleblowers, including reinstatement, double back wages, attorneys fees and litigation costs.  But it is still early in the common law life of the Dodd-Frank whistleblower law and rules.  The final regulations became effective on August 12, 2011, and we are just now beginning to see case law interpreting its requirements.

One of the first issues to surface is retaliation for whistleblowing.  What if a person clearly experiences retaliation, but may not fit the legal definition of a whistleblower?   Imagine this situation:

An employee of a company discovers that the CEO is embezzling funds from the company by paying money to a firm that is solely owned by the CEO.  This employee reports his findings to the company’s president, who in turn reports it to the company’s independent directors.  The independent directors hire a prestigious law firm to investigate the alleged embezzlement. The attorneys discover that the CEO was in fact embezzling money through his solely owned vendor.  Later, the CEO stages a coup to override the independent directors.  Instead of losing his own job, the CEO fires the employee and denies severance.

In this scenario, is the fired employee — who blew the whistle on his CEO and later experienced retaliation — a whistleblower under Dodd-Frank?   One court has said “No.”  Patrick Egan sued Tradingscreen, Inc. (10-cv-08202-LBS S.D.N.Y. Sept 12, 2011) and alleged this set of facts.  But when the U.S. Court for the Southern District of New York was presented with his complaint, they said that even if everything Egan said in his complaint was taken to be true, he still could not sue as a whistleblower under Dodd-Frank.

What had he done wrong?  What was his fatal flaw?  According to the Court, his mistake was that he had not reported his concerns directly to the SEC.  That was it.  Even if Egan had reported this to his management and the independent directors, believing that they would have to disclose it to the SEC, that was not enough.  Even if Egan had cooperated with the prestigious law firm in its investigation of the CEO, believing that they would have worked with the independent directors in reporting it to the SEC, that was not enough.  Even if the media became aware of the issues and through them, ultimately the SEC became aware of Egan’s concerns, that is not enough (but that’s another case –  Tides v. Boeing Co., 644 F.3d 809, 815 (9th Cir. 2011)).  Mr. Egan had to report directly to the SEC or hire a lawyer to go to them on his behalf.  When Egan could not say in his complaint that he had called the SEC, he was done: no lawsuit, no reinstatement, no double back wages, no litigation costs and no attorneys fees.

So the lesson here is simple.  If a whistleblower wants to be a “real” whistleblower under Dodd-Frank, they have to call somebody, specifically the SEC.  And in these Internet-friendly days, the SEC even has a website that Mr. Egan could use to easily file his whistleblower report with the SEC if he ever finds himself in this situation again.

Russ Berland is Of Counsel at the law firm of Stinson Morrison Hecker LLP and can be reached at via phone at 816.691.3180 and via email at rberland@stinson.com. 

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. 

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