Tuesday, November 01, 2016

SEC backs Vanguard whistleblower’s appeal

By Anne Sherry, J.D.

The SEC filed an amicus brief supporting a former Vanguard attorney's right to sue for retaliation after blowing the whistle internally, but not to the SEC. The brief asks the Third Circuit to defer to the Commission’s rulemaking, which implements the Dodd-Frank Act to protect internal whistleblowing. Ambiguity in the statute warrants deference to the SEC’s rule under Chevron, the agency argues (Danon v. Vanguard Group, Inc., October 26, 2016).

Attorney whistleblowing. As an in-house tax attorney in Vanguard's Pennsylvania offices, David Danon allegedly discovered that Vanguard was filing false reports with the SEC and false tax returns with the IRS and raised these concerns internally. According to his complaint filed in the Eastern District of Pennsylvania, Vanguard told him to stop reporting the conduct and not to put anything in writing, and transferred him to another department. He was terminated after he refused to further the alleged fraud.

Danon's role as an attorney distinguishes this whistleblower case from others. Although he received a $117,000 whistleblower bounty from the state of Texas, a New York court dismissed his qui tam suit there, in part because he violated the attorney ethics rules by unnecessarily including privileged information in his complaint. (An article by Dennis J. Ventry Jr., a law professor at the University of California, Davis, challenges this conclusion.) The district court, however, dismissed Danon’s case there, holding that the New York ruling collaterally estopped similar retaliation claims under Dodd-Frank, the Sarbanes-Oxley Act, and Philadelphia’s whistleblower law.

SEC leverages previous briefing. Danon is appealing to the Third Circuit, and the SEC supports the position that he qualifies as a “whistleblower” under Dodd-Frank despite not having reported misconduct to the agency. The Commission has filed a version of this brief in multiple whistleblower appeals, including in the high-profile Berman v. Neo@Ogilvy case. When the Second Circuit ruled there, it came down in the SEC’s favor, creating a circuit split on the issue.

Statute is ambiguous; rule is reasonable. The amicus brief argues that Dodd-Frank’s anti-retaliation provision is ambiguous. Although the statute defines “whistleblower” as 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 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.

Contrary interpretation would interfere with DOJ, SROs’ roles. The SEC also argues that a failure to defer to the rule could arbitrarily and irrationally deny the protection to individuals who first report misconduct to the Department of Justice 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, 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 that viewpoint would deny any legal recourse under 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. 16-2881.

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