Tuesday, February 10, 2015

SEC Advances New Argument to Bolster Whistleblower Rule

[This story previously appeared in Securities Regulation Daily.]

By Anne Sherry, J.D.

The SEC has added a new argument to its amicus briefing urging Chevron deference to its rule implementing Dodd-Frank’s whistleblower protections. Unlike the statute, the SEC rule does not require that a whistleblower report misconduct to the SEC. The brief is significantly duplicative of the amicus briefs the Commission has filed in other whistleblower appeals, but additionally argues that a failure to defer to the rule could arbitrarily and irrationally deny Dodd-Frank protections to whistleblowers who first report potential securities law violations to the Department of Justice (DOJ) or FINRA (Berman v. Neo@Ogilvy LLC, February 6, 2015).

Underlying allegations. As finance director of Neo@Ogilvy North America (Neo), Daniel Berman was responsible for financial reporting and compliance with GAAP and the accounting policies of Neo’s parent. Berman alleged that he detected accounting irregularities, fraud, and material compliance failures and attempted to correct these issues, in some cases by reporting the transactions to his supervisors and having them canceled, and in other cases by correcting the company’s books. After he was terminated on April 30, 2013, he reported the violations to senior management, to Neo’s counsel, and to the parent company’s audit committee. Finally, on October 31, 2013, Berman reported the violations to the SEC. He later sued his employer for, among other things, violating Dodd-Frank’s provisions against retaliation.

Southern District ruling. Although the magistrate judge had concluded that deference to the SEC rule was appropriate in light of an ambiguity in the statute, the Southern District of New York disagreed and declined to adopt the recommendations. Instead, the district court adopted the Fifth Circuit’s reasoning in Asadi v. G.E. Energy (USA), L.L.C., the leading case to hold that Dodd-Frank’s anti-retaliation provisions are limited to a whistleblower who provided information to the SEC.

Amicus brief. The first 30 pages of the brief are substantially identical to amicus briefs the SEC has filed in other whistleblower appeals, including another in the Second Circuit. The SEC argues that Dodd-Frank is ambiguous in part because, although the defined term “whistleblower” means an individual who reports wrongdoing to the SEC, one of the protected categories of reporting seems to include internal reporting. Under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. (U.S. 1984), the SEC urges, because of this ambiguity, the court should defer to the SEC’s rule as long as it is a reasonable interpretation of the statute. The rule intentionally omits to require that a whistleblower have reported misconduct to the SEC.

Defending its rulemaking in its amicus brief, the agency stresses the importance of internal company reporting in deterring, detecting, and stopping unlawful conduct that may harm investors. It argues that its rulemaking implementing Dodd-Frank’s monetary award provisions was carefully calibrated not to disincentivize employees from reporting internally, and the agency likewise clarified the statute’s anti-retaliation prohibition to protect an employee who engages in whistleblowing whether or not the employee separately reports to the Commission.

New argument. The latest iteration of the agency’s brief argues that a failure to defer to the rule could arbitrarily and irrationally deny the Dodd-Frank anti-retaliation protections to individuals who first report misconduct to the DOJ or to self-regulatory organizations (SROs) such as FINRA. The SEC points out that Dodd-Frank’s whistleblower award program directs the Commission to pay an informant an award based on the monetary sanctions collected in a “related action,” which includes a judicial or administrative action brought by the Justice Department, federal banking regulators, and self-regulatory organizations. The anti-retaliation protections are generally coextensive with the award provision, the agency argues, and there is no basis to believe that Congress had intended for “disparate treatment based purely on the happenstance of which agency the individual reported to first,” given the SEC and DOJ’s dual responsibility for enforcing the securities laws.

Furthermore, endorsing the Asadi viewpoint would deny any legal recourse under either Dodd-Frank or Sarbanes-Oxley to an individual making a covered disclosure to an SRO, such as FINRA, who is fired before being able to make a similar report to the SEC. This is “deeply problematic,” the SEC urges, because SROs were congressionally designed to have a role in regulating the securities industry by enforcing compliance by their members and persons associated with their members. Given this role, the Commission concludes, individuals frequently report violations to the SROs in the first instance.

The case is No. 14-4626.