Thursday, September 27, 2012

Federal Court Broadly Interprets Dodd-Frank Whistleblower Provision

A company human resources officer and member of the pension plan committee alleged sufficient facts about the underfunding of the pension plan to support a Dodd-Frank Act whistleblower claim based on his intra-corporate communications and external communications to the SEC, ruled a federal judge. The employee alleged sufficient facts to infer that he possessed a reasonable belief that he was reporting a possible securities law violation. In a letter to the SEC, the employee informed the Commission that the company had failed to submit its 2009 amendment to the pension plan to its board of directors for approval and had failed to file its amendment with the SEC. (Kramer v. Trans-Lux Corp, DC Conn., No. 3:11cv1424 (SRU), Sept 25, 2012).

Although the company argued that it actually filed a Form 10-K/A with the SEC on the date of the 2009 amendment to the plan and thus there had been no violation, the court noted that in order to qualify for whistleblower protection the employee need not demonstrate that there has been a violation, but only that he reasonably believed there had been such a violation. The court found that the language of the employee’s internal communication to the audit committee, and in the letter to the SEC, raising his concerns demonstrated that he may have reasonably believed the company to be committing violations of SEC rules or regulations.

In Section 922, the Dodd-Frank Act defines a "whistleblower" as any individual who provides information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission. In order to have provided information in the manner provided by the SEC, an individual would have either had to submit the information online, through the Commission's website, or by mailing or faxing a Form TCR. Mailing a regular letter is insufficient.

Thus, the company argued that the employee is not be entitled to sue under the retaliation provision of the Dodd-Frank whistleblower statute because he has not provided information to the SEC in the manner required by the SEC, and is therefore not a whistleblower. The court rejected this reading as inconsistent with the goal of the Dodd-Frank Act, which was to improve the accountability and transparency of the financial system, and create new incentives and protections for whistleblowers. The court did not believe that it is unambiguously clear that the Dodd-Frank Act's whistleblower retaliation provision only applies to those individuals who have provided information relating to a securities violation to the Commission, and have done so in a manner established by the Commission. In the court’s view, the company’s interpretation would dramatically narrow the available protections available to potential whistleblowers.

The court also rejected the company’s claim that the employee’s disclosures were not required by Sarbanes-Oxley, and thus not entitled to whistleblower protection Section 922 protects disclosures that are required or protected under the Sarbanes-Oxley Act, the Securities Exchange Act, and other rules or regulations that fall under the SEC's jurisdiction. The language of this section indicates that disclosures that are protected under Sarbanes-Oxley's whistleblower provision are also protected under the Section 922, the Dodd-Frank Act's whistleblower provision.

Sarbanes-Oxley protects persons who disclose information they reasonably believe constitutes a violation of SEC rules or regulations, when the information is provided to, among others, a person with supervisory authority over the employer or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct. The employee alleged that he internally provided information to a person with supervisory authority over him, and to the audit committee, which may have had the authority to investigate, discover, or terminate misconduct. Sarbanes-Oxley's whistleblower protections also extend to persons who disclose information to a federal regulatory agency.

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