Thursday, February 22, 2018

Skip Your Compliance Department and Go Directly to the SEC

The Supreme Court just released its opinion in Digital Realty Trust, Inc. v. Somers.  The case resolves a controversy over whether employees making internal reports of securities law violations qualify for Dodd-Frank's whistleblower protections. The Court ruled that internal reporters do not qualify because they are not "whistleblowers" under the statutory definition.  Writing for the Court, Justice Ginsberg focused on the the statutory provision specifically defining whistleblowers as persons that provide "information relating to a violation of the securities laws to the Commission."  Under this strict reading, a person that called a company's ethics hotline to blow the whistle on misconduct in their office would not qualify as a whistleblower unless she also went to the SEC with the information.

The Court read the definition and the Dodd-Frank provision in light of existing whistleblower protections.  Sarbanes-Oxley already protects internal reporters from retaliation.  Yet pursuing a Sarbanes-Oxley claim requires a whistleblower to jump through some quick procedural hoops.  The first step is filing a complaint with the Department of Labor within 180 days of the retaliation.  If Labor does not issue a decision within 180 days of the whistleblower's filing, the whistleblower can go to court for reinstatement, backpay with interest, and litigation costs. In contrast, Dodd-Frank provides a better remedy.  A qualifying whistleblower can go directly to federal court anytime within six years and seek double back pay plus interest.  

There is another piece to this puzzle.  Dodd-Frank also contains a bounty program. Whistleblowers that report information to the SEC may qualify for awards if the SEC recovers significant funds because of the information provided by a whistleblower's tip.  News reports indicate that the SEC may soon announce an eye-popping $48 million award for a whistleblower under that program.

A statutory definition limiting "whistleblowers" as persons that provide information to the SEC makes sense for the bounty program.  It makes less sense for the anti-retaliation provision.  To protect internal reporters from retaliation, the SEC had used its rule-making authority to craft a different definition for purposes of the anti-retaliation provision, covering persons that make internal reports.  The Supreme Court rejected that contextual definition and limited Dodd-Frank's more generous protections to persons that "tell the SEC" about their concerns.

What does this mean in practical terms?  It means that employees with concerns about actual or potential securities law violations should make reports to the SEC before (or in lieu of) reporting their concerns internally. If they do not report to the SEC, they'll lose the more significant Dodd-Frank protections.  

If reporting behavior shifts in the wake of this decision, the SEC's bounty program may receive more noise than signal.  If persons report to the SEC simply to secure protection from retaliation, the SEC may not receive as much targeted and useful information as it would otherwise. Increased volume may diminish the SEC's ability to focus on the most useful tips.

There is room to be skeptical about whether tip volume will materially increase after this decision.  A potentially culpable potential whistleblower faces a dilemma.  She has to consider whether blowing the whistle to the SEC would somehow serve as an admission of wrongdoing.  It'll be interesting to see if the SEC receives an increased volume of tips in the wake of this decision.

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