ALLIEVIATING INSECURITIES WHEN REPORTING UNLAWFUL ACTIVITIES IN SECURITIES: WHISTLEBLOWER REPORTING REQUIREMENTS UNDER DODD-FRANK.

Transcription

1 ALLIEVIATING INSECURITIES WHEN REPORTING UNLAWFUL ACTIVITIES IN SECURITIES: WHISTLEBLOWER REPORTING REQUIREMENTS UNDER DODD-FRANK Frank Urbanic * I. INTRODUCTION II. DODD-FRANK S WHISTLEBLOWER-PROTECTION PROVISION A. Evolution of Securities Whistleblower Protections B. Components of Dodd-Frank s Whistleblower-Protection Provision C. The SEC s Regulation Implementing Dodd-Frank s Whistleblower-Protection Provision D. Relationship Between SOX s and Dodd-Frank s Whistleblower Protection III. COMPETING INTERPRETATIONS OF DODD-FRANK S WHISTLEBLOWER REPORTING REQUIREMENTS A. Overview B. Initial Interpretation: Whistleblower Protection in Dodd-Frank Is Either Conflicting or Ambiguous C. On Second Thought, Whistleblower Protections in Dodd-Frank Are Unambiguous IV. ANALYSIS OF COMPETING INTERPRETATIONS A. Which Comes First, Being a Whistleblower or Violating an SEC Rule? B. Congressional Intent C. Intent of SEC Regulation V. IMPACT ON WHISTLEBLOWING A. Dodd-Frank s Effect on Private Company Employees Who Report Securities Violations B. Effect of Expansive Reading of Whistleblower-Protection Provision C. Effect of Narrow Reading of Whistleblower-Protection Provision VI. LEGISLATIVE FIX A. Previously Proposed Legislation B. Legislative Proposal to Standardize Dodd-Frank s Whistleblower Protections VII. CONCLUSION * The author is a 2015 candidate for a Doctorate of Jurisprudence at Texas Tech School of Law and is also the incoming Business Manager for Volume 2 of this journal.

2 2014] ALLEVIATING INSECURITIES 153 I. INTRODUCTION In the wake of the 2008 financial crisis, Congress passed the Dodd- Frank Wall Street Reform and Consumer Protection Act commonly known as Dodd-Frank. 1 President Obama signed Dodd-Frank into law in In addition to attempt to prevent another financial crisis, Dodd-Frank contained provisions to encourage individuals to report suspected violations of U.S. securities laws. 3 Individuals who take this action are commonly known as whistleblowers. 4 Black s Law Dictionary defines a whistleblower as [a]n employee who reports employer wrongdoing to a governmental or law-enforcement agency. 5 Over the years, Congress has tried to incentivize whistleblowing. In 2002, President Bush signed Sarbanes-Oxley (SOX) into law. 6 This was in response to the corporate scandals involving Enron. 7 SOX was the first modern step aimed to encourage whistleblowing. 8 Dodd-Frank amended SOX and added new provisions to the Securities and Exchange Act to further encourage whistleblowing. 9 Unfortunately, there is not uniform agreement on how to define a whistleblower in Dodd-Frank. 10 The focus of this Comment is the situation in which an individual reports a suspected securities violation to their employer, who then terminates the individual prior to that individual notifying the Securities and Exchange Commission (SEC) of the suspected violation. 11 May that individual benefit from Dodd-Frank s whistleblower anti-retaliation protection? The key issue to determine whether someone receives the benefits of Dodd-Frank s whistleblower protection is to ensure the person meets the requirements to receive protection under Dodd-Frank. 12 However, determining eligibility for Dodd-Frank s anti-retaliation protection has 1 Chelsea Hunt Overhuls, Unfinished Business: Dodd-Frank's Whistleblower Anti-Retaliation Protections Fall Short for Private Companies and Their Employees, 6 J. BUS. ENTREPRENEURSHIP & L. 1, 3 (2012). 2 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No , July 21, 2010; 124 Stat Id. 4 See 15 U.S.C. 78u-6(a)(6) (2014). 5 Black's Law Dictionary 1734 (9th ed. 2009). 6 Overhuls, supra note 1, at Id. 8 Megan Foscaldi, Whistleblower Provisions of the Dodd-Frank Act, 31 REV. BANKING & FIN. L. 486, 486 (2012). 9 Id. at Compare Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013) (holding that the statute unambiguously defines whistleblower for every use of whistleblower in the statute), with Rosenblum v. Thomson Reuters (Mkts.) LLC, No. 13 Civ. 2219(SAS), 2013 WL , at *5 (S.D.N.Y. Oct. 25, 2013) (finding ambiguity in the statute due to a conflict between the SEC reporting requirement and anti-retaliation provision). 11 See infra Part III. 12 See infra Part IV.

3 154 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 proved challenging. 13 Until recently, courts have generally held that an individual did not have to report suspected securities violations to the SEC under certain narrow circumstances. 14 In July 2012, the Fifth Circuit Court of Appeals went against that precedent and held that an individual must report a suspected securities violation to the SEC to benefit from Dodd-Frank s whistleblower-protection provision. 15 One other U.S. district court has since applied the Fifth Circuit s reasoning. 16 The varying interpretations of Dodd-Frank s whistleblowerprotection provision mean that a person eligible for protection in one circuit may not be eligible in another. 17 This lack of uniformity can lead to uncertainty when counseling potential whistleblowers and may encourage forum shopping by individuals terminated prior to notifying the SEC. 18 This Comment attempts to resolve the issues resulting from a lack of uniform interpretation by proposing a legislative fix to Dodd-Frank s whistleblower protection provision. 19 A clear legislative resolution to this issue is important because it allows Congress to clarify its intent rather than relying on judicial interpretation. 20 Dodd-Frank is still a relatively new law, and claims under Dodd-Frank s whistleblower protection provision are just now beginning to work their way through the courts. 21 A case involving this issue will likely make it to the Supreme Court soon. 22 Clarification of this law should occur in the branch of government closest to the people. Part II of this Comment examines Dodd-Frank s whistleblowerprotection provision and the SEC s interpretation of that provision. 23 This includes a discussion of the interrelationship between SOX s and Dodd- Frank s whistleblower protections. 24 Parts III and IV outline and analyze, respectively, the competing interpretations of Dodd-Frank s whistleblower- 13 See infra Part III.B C. 14 Mark J. Oberti, New Wave of Employment Retaliation and Whistleblowing, 38 T. Marshall L. Rev. 43, 92 (2012). 15 Asadi, 720 F.3d at Wagner v. Bank of Am. Corp., No. 12 cv RBJ, 2013 WL , at *6 (D. Colo. July 19, 2013) (agreeing with the Asadi opinion entirely). 17 See generally Asadi, 720 F.3d at 624 n.6 (noting that the plaintiff could be eligible for protection in a court interpreting statute differently). 18 See Tammy Marzigiliano & Jordan A. Thomas, Advocacy & Counsel for the SEC Whistleblower: A Primer for Employment Lawyers, BUREAU OF NAT L AFFAIRS DAILY LABOR REPORT, 2 (Oct. 11, 2011). 19 See infra note Gregory A. Brower & Brett W. Johnson, When Enough Is Not Enough: Two Court Rulings Complicate Corporate Compliance Efforts, 28 No. 11 WESTLAW J. DEL. CORP. 2, 4 (Dec. 19, 2013), available at 2013 WL ( The definition of whistle-blower in the statute should be clarified, thus removing the ambiguity that now arguably exists between the statute and the regulation. ). 21 See infra notes Part III.B C.. 22 Brower, supra note 16, at 4 ( Although appeals to the U.S. Supreme Court are likely, it is Congress that can have the last word. ). 23 See infra Part II. 24 See infra Part II.D.

4 2014] ALLEVIATING INSECURITIES 155 protection provision. 25 Next, Part V describes the impact on whistleblowing that each interpretation would have. 26 Finally, Part VI proposes legislation that clarifies the ambiguities in Dodd-Frank s anti-retaliation protection. 27 Under the proposed legislation, which follows the Fifth Circuit s reasoning, it would be clear that Dodd-Frank protects only those individuals who report the suspected violation to the SEC prior to their termination. 28 II. DODD-FRANK S WHISTLEBLOWER-PROTECTION PROVISION A. Evolution of Securities Whistleblower Protections Prior to Dodd-Frank, SOX was the most revolutionary piece of legislation affecting whistleblowers of securities violations. 29 SOX introduced anti-retaliation protections for corporate whistleblowers by permitting monetary and non-monetary remedies. 30 Remedies available to whistleblowers under SOX included reinstatement, monetary damages, compensatory damages, and special damages. 31 However, SOX s biggest limitation was that it applied only to employees of public companies. 32 Although broadly defined, SOX s definition of employee did not include employees of subsidiaries and affiliates of public companies. 33 Congress again transformed securities law whistleblowing when it passed Dodd- Frank in Dodd-Frank s main goal is to improve the accountability and transparency of the [U.S.] financial system. 35 Section 922(a) of Dodd- Frank, titled Securities Whistleblower Incentives and Protection, is commonly referred to as the Dodd-Frank whistleblower-protection provision. 36 Adding 21F amended 922(a) of the Securities Exchange 25 See infra Part III IV. 26 See infra Part V. 27 See infra Part VI. 28 See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 629 (5th Cir. 2013). 29 Matt A. Vega, Beyond Incentives: Making Corporate Whistleblowing Moral in the New Era of Dodd-Frank Act "Bounty Hunting," 45 CONN. L. REV. 483, 502 (2012). 30 Foscaldi, supra note 8, at Id. 32 Overhuls, supra note 1, at 10; see 18 U.S.C. 1514A(a) (2012) (affording protection currently to only employees of publicly traded companies). 33 Foscaldi, supra note 8, at 486 (noting that employee was defined as current and former employees, those who applied for employment,... individuals whose employment could be impacted by the company or its representatives... [and] contractors ). 34 Overhuls, supra note 1, at Lonnie E. Griffith Jr., Annotation, Construction and Application of Whistleblower Provisions of Dodd-Frank Wall Street and Consumer Protection Act (Dodd-Frank Act), 15 U.S.C. 78u-6(h)(1), 77 A.L.R. FED. 2d 275, 285 (2013). 36 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No , 922, 124 Stat (2010) (codified at 15 U.S.C. 78u 6); Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 621 (5th Cir. 2013).

5 156 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 Act of This statute defines terms, provides for awards to whistleblowers, and protects whistleblowers against retaliation. 38 Dodd- Frank s most notable expansions of whistleblower protections are the monetary awards to whistleblowers and enhanced protection against retaliation. 39 The monetary award section of 78u-6 is commonly referred to as the SEC s bounty program. 40 The goal for the SEC s bounty program is to incentivize those close to a fraud to come forward and provide information to the [Securities and Exchange] Commission. 41 The bounty allowed by Dodd-Frank provides a significant incentive for individuals to bring their claims under Dodd-Frank. 42 The SEC must pay at least ten percent of the monetary sanctions to the whistleblower, but the bounty cannot exceed thirty percent of the monetary sanctions collected. 43 Dodd-Frank s anti-retaliation protections strengthened some provisions of SOX and added protections that did not previously exist. 44 A whistleblower now has 180 days, rather than 90, to file a complaint under SOX. 45 The definition of employee under SOX expanded to include employees of all subsidiaries and affiliates of public companies. 46 Dodd- Frank extended whistleblower protection to employees of private companies and created a new private right of action to combat retaliation. 47 Whereas SOX required a whistleblower to file a complaint alleging retaliation with the Department of Labor, an individual alleging retaliation under Dodd-Frank may bring an action in a U.S. district court. 48 These new protections and incentives will shed light on corrupt practices and help achieve the goals of Dodd-Frank. 49 B. Components of Dodd-Frank s Whistleblower-Protection Provision This Comment focuses on two sections in the Dodd-Frank whistleblower-protection provision 78u-6(a) and 78u-6(h)(1)(A). 37 Griffith, supra note 35, at U.S.C. 78u-6 (2012). 39 Id. 40 Vega, supra note 29, at Mary L. Schapiro, SEC Speech: Opening Statement at SEC Open Meeting: Item 2 Whistleblower Program, U.S. SECURITIES AND EXCHANGE COMMISSION (May 25, 2011), 42 See 15 U.S.C. 78u-6(b)(1). 43 Id. 44 Foscaldi, supra note 8, at Overhuls, supra note 1, at 11; see also Foscaldi, supra note 8, at 489 (noting that a whistleblower has 180 days to file a claim after the violation occurs or the whistleblower becomes aware of the violation ). 46 Foscaldi, supra note 8, at Overhuls, supra note 1, at U.S.C. 78u-6(h)(1)(B). 49 See Griffith, supra note 35.

6 2014] ALLEVIATING INSECURITIES 157 Section 78u-6(a) contains definitions that apply throughout the section. 50 It defines a whistleblower as any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission. 51 Section 78u-6(h)(1)(A) contains actions that employers may not retaliate against. 52 This is commonly known as the anti-retaliation provision. 53 It provides in its entirety: No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower (i) in providing information to the Commission in accordance with this section; (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or (iii) in making disclosures that are required or protected under the Sarbanes Oxley Act of 2002 (15 U.S.C et seq.), this chapter, including section 78j- 1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission. 54 These two provisions are interrelated because 78u- 6(h)(1)(A) uses the word whistleblower to describe an individual an employer cannot retaliate against. 55 Use of whistleblower is important because the term is defined in 78u-6(a), which states that the definitions contained therein shall apply in the section. 56 Courts are in conflict on how to apply the definition of whistleblower in 78u-6(a) to 78u-6(h)(1)(A). 57 The SEC s regulation implementing Dodd-Frank s whistleblowerprotection provision adds to the conflict U.S.C. 78u-6(a) u-6(a)(6) u-6(h)(1)(A). 53 Rosenblum v. Thomson Reuters (Mkts.) LLC, No. 13 Civ. 2219(SAS), 2013 WL , at *4 (S.D.N.Y. Oct. 25, 2013) U.S.C. 78u-6(h)(1)(A). 55 Id u-6(a). 57 See infra notes C.F.R F-2(b) (2013).

7 158 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 C. The SEC s Regulation Implementing Dodd-Frank s Whistleblower- Protection Provision On November 17, 2010, the SEC proposed rules for implementing Dodd-Frank s whistleblower-protection provisions. 59 The SEC published its final rules on the whistleblower-protection program on June 13, 2011, and those rules took effect on August 12, The SEC s proposed rule gave the impression that individuals should report suspected violations to the SEC to benefit from Dodd-Frank s anti-retaliation protections. 61 Accordingly, the SEC s proposed rule stated, You are a whistleblower if, alone or jointly with others, you provide the Commission with information relating to a potential violation of the securities laws. 62 The SEC explained clearly in its reasoning that whistleblowers are to provide information to the SEC. 63 After receiving comments, the SEC changed the definition of whistleblower significantly. 64 The final rule states: Prohibition against retaliation. (1) For purposes of the anti-retaliation protections afforded by Section 21F(h)(1) of the Exchange Act (15 U.S.C. 78u 6(h)(1)), you are a whistleblower if: (i) You possess a reasonable belief that the information you are providing relates to a possible securities law violation (or, where applicable, to a possible violation of the provisions set forth in 18 U.S.C. 1514A(a)) that has occurred, is ongoing, or is about to occur, and; (ii) You provide that information in a manner described in Section 21F(h)(1)(A) of the Exchange Act (15 U.S.C. 78u 6(h)(1)(A)). 65 The proposed rule required an individual to report to the SEC; the 59 Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, 75 FED. REG , 70,488 (Proposed Nov. 17, 2010) (to be codified at 17 C.F.R. pts. 240 & 249). 60 Securities Whistleblower Incentives and Protections, 76 FED. REG , 34,300 (June 13, 2011) (to be codified at 17 C.F.R. pts. 240 & 249). 61 Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, 75 FED. REG. at 70,489 ( We believe the statute extends the protections against employment retaliation in Section 21F(h)(1) to any individual who provides information to the Commission about potential violations of the securities laws regardless of whether the whistleblower fails to satisfy all of the requirements for award consideration set forth in the Commission's rules. ) (emphasis added). 62 Id. at 70, Id. at 70,489 (noting how closely it followed the statutory definition of whistleblower and stating that the only proposed deviation was to insert the term potential before violation ). 64 Securities Whistleblower Incentives and Protections, 76 FED. REG. at 34, C.F.R F-2(b) (2013).

8 2014] ALLEVIATING INSECURITIES 159 promulgated rule requires an individual to provide information in a manner described in 78u 6(h)(1)(A). 66 The release finalizing the rule cites numerous submitted comments and the SEC s opinion of those comments. 67 Considering the magnitude of a change removing the requirement that a whistleblower report a suspected violation to the SEC, it is noteworthy that the SEC did not cite a single comment suggesting whistleblowers get protection despite not reporting to the SEC under certain circumstances. 68 Instead, the SEC discussed this change when describing the final rule. 69 The SEC clearly states that an individual can be protected against retaliation despite having never reported a suspected violation to the SEC. 70 It cites SOX s reporting requirements as primary reasons for making this change. 71 D. Relationship Between SOX s and Dodd-Frank s Whistleblower Protection The relationship between Dodd-Frank s definition of whistleblower, Dodd-Frank s anti-retaliation provision, and SOX s whistleblower protections is critical to resolve the issue in this Comment. It is important to understand how someone qualifies as a whistleblower under SOX because individuals have tried to use their compliance with SOX to bootstrap their way into the benefits of Dodd-Frank s whistleblower protections. 72 The whistleblower protections in SOX and Dodd-Frank differ. 73 First, they have different reporting requirements. 74 SOX clearly gives whistleblower protection to employees who only report violations internally. 75 Dodd-Frank does not contain this clear language, however Dodd-Frank affords whistleblower protection to certain individuals who 66 Securities Whistleblower Incentives and Protections, 76 FED. REG. at 34, Id. at 34,302 (discussing, inter alia, the term potential violation, reporting violations of laws by another person, and exempting a company s adverse action against an employee based on factors other than whistleblower status ). 68 Id. 69 Id. at 34, (breaking up the definition now into two prongs ). 70 Id. at 34,304 ( This change to the rule reflects the fact that the statutory anti-retaliation protections apply to three different categories of whistleblowers, and the third category includes individuals who report to persons or governmental authorities other than the Commission. ) (emphasis original). 71 Id. (citing SOX and noting how SOX protects employees of public companies who report suspected violations to all sorts of people other than the SEC). 72 Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 624 (5th Cir. 2013). 73 See infra notes and accompanying text. 74 Compare 18 U.S.C. 1514A(a) (2012) (prohibiting retaliation against an employee who reports a suspected securities violation to, inter alia, a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct) ), with 15 U.S.C. 78u-6(a)(6) (2012) (defining 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 ) U.S.C. 1514A.

9 160 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 make protected disclosures under SOX. 76 Second, SOX does not contain a private right of action against employers who retaliate, nor does it have a program analogous to the bounty program. 77 Therefore, it is to the whistleblower s benefit to make a claim under Dodd-Frank rather than SOX. 78 This would require compliance with all the requirements of Dodd- Frank. 79 The varying interpretations of Dodd-Frank s reporting requirements could create a sticky situation for employees who first report a suspected violation internally. 80 Courts that adhere to a strict interpretation allow an individual to benefit from Dodd-Frank s anti-retaliation protections only if that individual reports the reported securities violation to the SEC prior to termination. 81 The other interpretation held by a majority of U.S. district courts carves out a narrow exception for employees who disclose information subject to the jurisdiction of the SEC (typically under SOX) but do not report that violation to the SEC prior to termination. 82 Individuals in that situation are using the language in 78u-6(h)(1)(A)(iii) to bootstrap their SOX claim into a Dodd-Frank claim so they can benefit from Dodd- Frank s anti-retaliation protections. 83 The key distinction courts must make is whether the definition of whistleblower in 78u-6(a)(6) strictly applies in the context of whistleblower in 78u-6(h)(1)(A). 84 Courts are sharply divided over this issue, and it will likely be resolved through either legislative action or a decision by the Supreme Court. 85 III. COMPETING INTERPRETATIONS OF DODD-FRANK S WHISTLEBLOWER REPORTING REQUIREMENTS A. Overview There are two competing views on whether the SEC requires a report in every anti-retaliation protection claim under Dodd-Frank. 86 The first view is that the whistleblower-protection provision is either conflicting U.S.C. 78u-6(h)(1)(A) U.S.C. 1514A. 78 Overhuls, supra note 1, at 11 (describing the enhancements to SOX by Dodd-Frank). 79 See supra notes See infra notes and accompanying text. 81 Wagner v. Bank of Am. Corp., No. 12 cv RBJ, 2013 WL , at *5 (D. Colo. July 19, 2013); Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013). 82 Egan v. TradingScreen, Inc., No. 10 Civ. 8202(LBS), 2011 WL , at *5 (S.D.N.Y. May 4, 2011). 83 See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 624 n.5 (5th Cir. 2013) (plaintiff asserting that individuals who take actions that fall within [ 78u-6(h)(1)(A)(iii)] are protected whether or not they qualify as a whistleblower as defined in 78u-6(a)(6) ). 84 See generally id. at (noting the significance of the use of whistleblower rather than terms such as individual or employee in 78u-6(h)(1)(A)). 85 Brower, supra note 20, at See infra notes

10 2014] ALLEVIATING INSECURITIES 161 or ambiguous. 87 Courts following this view believe the wording in 78u- 6(h)(1)(A)(iii) protects whistleblower disclosures that do not require reporting to the SEC. 88 Courts and commentators generally refer to this section as the catch-all provision. 89 The second view is that the whistleblower-protection provision unambiguously articulates whom it protects. 90 Courts adhering to this interpretation believe that 78u-6(a)(6) defines whistleblower for the entirety of the statute. 91 The former view widens the field of potential claimants under Dodd-Frank s whistleblowerprotection provision, whereas the latter would protect less people under Dodd-Frank. 92 B. Initial Interpretation: Whistleblower Protection in Dodd-Frank Is Either Conflicting or Ambiguous The U.S. District Court for the Southern District of New York was the first to address this issue, and it established a precedent that most courts have followed. 93 In Egan v. TradingScreen, Inc., the plaintiff reported suspected securities violations only to his employer. 94 The employer subsequently fired him, and he filed suit under the anti-retaliation provisions of 78u 6(h)(1). 95 The court ultimately held that the plaintiff was not a whistleblower entitled to protection under Dodd-Frank because he could neither show that his disclosures fell under the categories listed in 78u (h)(1)(a)(iii) nor show that he provided information to the SEC. 96 However, the court reasoned that the: [P]laintiff must either allege that his information was reported to the SEC, or that his disclosures fell under the four categories of disclosures delineated by 15 U.S.C. 78u 6(h)(1)(A) (iii) that do not require such reporting: those under the Sarbanes Oxley Act, the Securities Exchange Act, 18 U.S.C. 1513(e), or other laws and regulations subject to the jurisdiction of the SEC Egan, at *4. 88 Id. 89 Griffith, supra note Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013). 91 Id. at 630 (believing that individuals must report to the SEC to be protected under Dodd-Frank). 92 See Joel D. Hesch, Whistleblower Rights and Protections: Critiquing Federal Whistleblower Laws and Recommending Filling in Missing Pieces to Form A Beautiful Patchwork Quilt, 6 LIBERTY U.L. REV. 51, 105 (2011) (acknowledging that Dodd-Frank does not protect persons who only report internally and discussing the impact that has on those who report internally). 93 Egan, 2011 WL , at *3. 94 Id. at *2. 95 Id. at *2. 96 Id. at *4, *7. 97 Id. at *5.

11 162 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 This opened the door to extend whistleblower protection under Dodd-Frank to individuals who did not report suspected violations to the SEC. 98 Since Egan, six U.S. district courts have affirmed the reasoning in it. 99 In Nollner v. Southern Baptist Convention, Inc., the U.S. District Court for the Middle District of Tennessee approvingly cited Egan and held 78u 6(h)(1)(A)(iii) to be a catch-all provision that allowed individuals to not report suspected securities violations to the SEC at certain times. 100 The U.S. District Court for the District of Connecticut in Kramer v. Trans-Lux Corp. did not find it unambiguously clear that the Dodd Frank Act's retaliation provision only applies to those individuals who have provided information relating to a securities violation to the Commission The U.S. District Court for the Southern District of New York in Murray v. UBS Securities, LLC sided with Egan and held that there is an exception to the SEC reporting requirement. 102 The Murray court deferred to the SEC rule to bolster its holding. 103 In Genberg v. Porter, the U.S. District Court for the District of Colorado stated that an individual could prevail on a Dodd-Frank claim by reporting the violation to the SEC or another entity, or internally to management. 104 The U.S. District Court for the District of Massachusetts in Ellington v. Giacoumakis confronted this issue, and it also sided with the reasoning in Egan. 105 Finally, the U.S. District Court for the Southern District of New York addressed this issue in Rosenblum v. Thomson Reuters (Markets) LLC. 106 The Rosenblum court relied entirely on the SEC s regulation and denied the employer s motion to dismiss because Rosenblum s report to the FBI and his employer satisfied the requirements under SOX, which in turn satisfied the requirements under Dodd-Frank. 107 The Rosenblum court applied the two-step process of statutory interpretation articulated in 98 See infra notes See infra notes Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 994 (M.D. Tenn. 2012). 101 Kramer v. Trans-Lux Corp., No. 3:11cv1424 (SRU), 2012 WL , at *4 (D. Conn. Sept. 25, 2012). 102 See generally Murray v. UBS Sec., No. 12 Civ. 5914(JMF), 2013 WL , at *3 5 (S.D.N.Y. May 21, 2013) (citing approvingly of Genberg, Kramer, Nollner, and Egan and then discussing the SEC s rule at length while giving a mere three sentences to the possibility that 78u 6(h)(1)(A) constrains the definition of whistleblower ). 103 Id. at *7 (deferring to the SEC s interpretation because the SEC's rule clarifies an ambiguous statutory scheme the SEC was charged with enforcing and reflects the considerable experience and expertise that the agency has acquired over time with respect to interpretation and enforcement of the securities laws... ). 104 Genberg v. Porter, 953 F.Supp 2d 1094, 1105 (D. Colo. 2013). 105 See Ellington v. Giacoumakis, CIV.A RGS, 2013 WL (D. Mass. Oct. 16, 2013) (rejecting the Fifth Circuit s reasoning in Asadi and finding the SEC s construction more persuasive). 106 Rosenblum v. Thomson Reuters (Mkts.) LLC, No. 13 Civ. 2219(SAS), 2013 WL , at *5 (S.D.N.Y. Oct. 25, 2013) (acknowledging a conflict between the portion of the statute requiring a report to the SEC and the anti-retaliation provision). 107 Id. at *5 ( the 2011 rule promulgated by the SEC, which was given authority by Congress to implement the DFA, does not require a report to the SEC in order to obtain whistleblower protection. ).

12 2014] ALLEVIATING INSECURITIES 163 Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc. to make this decision. 108 The first step is to inquire whether Congress has directly spoken to the precise question at issue. 109 The analysis is over whether Congress s intent is clear. 110 The court goes to step two only if the statute is silent or ambiguous with respect to the specific issue It will then determine whether the agency's answer is based on a permissible construction of the statute. 112 The Rosenblum court found the statute ambiguous, so it went to step two and deemed the SEC s interpretation appropriate. 113 The Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C. did not find the statute ambiguous, so it never reached step two. 114 C. On Second Thought, Whistleblower Protections in Dodd-Frank Are Unambiguous Until July 2013, all federal court decisions followed Egan s lead in finding a narrow exception to the SEC reporting requirement of 78u-6(a) via the catch-all provision. 115 The Fifth Circuit in Asadi rejected the expansive definition of whistleblower. 116 Asadi was an employee of GE Energy, a public company. 117 He reported suspected violations under the Foreign Corrupt Practices Act only through GE Energy s internal channels, and GE fired him one year later. 118 The U.S. District Court for the Southern District of Texas ruled against Asadi, but it did not address the validity of Asadi s claim against GE Energy under Dodd-Frank s whistleblowerprotection provision. 119 The Fifth Circuit addressed the Dodd-Frank issue and held that Asadi did not qualify as a whistleblower under Dodd-Frank s whistleblower-protection provision. 120 The Fifth Circuit declined to follow the reasoning of three district courts and did not find the terms in Dodd- Frank s whistleblower-protection provision ambiguous. 121 This caused a circuit split. Additionally, the Fifth Circuit held the SEC s final rule implementing Dodd-Frank s whistleblower-protection provision to be an 108 Id. at * Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842 (1984). 110 Id. 111 Id. at Id. 113 Rosenblum, 2013 WL , at * Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013) (finding the statute unambiguous and a clear expression of Congress s intent, thereby rendering unnecessary an analysis under the second step articulated in Chevron). 115 See supra notes Asadi, 720 F.3d at Id. at Id. 119 Id. 120 Id. 121 Id.

13 164 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 overbroad redefinition of whistleblower. 122 The Fifth Circuit offered a hypothetical to illustrate its position that the plain language of the statute unambiguously describes how the sections fit together. 123 The Fifth Circuit s decision in Asadi could be the start of a new trend. On July 19, 2013, the U.S. District Court for the District of Colorado became the first court to side with the Fifth Circuit s reasoning in Asadi. 124 The court in Wagner v. Bank of America Corp. held that the plain language of the statute precluded the plaintiff from protection in one subsection of the statute that she admittedly could not find in two other subsections. 125 The U.S. District Court for the Northern District of California in Banko v. Apple Inc. became the second court to subscribe to the Fifth Circuit s interpretation of Dodd-Frank s whistleblower-protection provision. 126 These cases demonstrate that the priority a court places on a particular section in 78u-6 indicates how broadly the court will interpret the anti-retaliation provision. IV. ANALYSIS OF COMPETING INTERPRETATIONS A. Which Comes First, Being a Whistleblower or Violating an SEC Rule? The outcome of a case where an individual reports a suspected violation only through internal channels can hinge upon the section of Dodd-Frank the court places greater emphasis on. 127 If a court believes an 122 Id. 123 Id. at ( Assume a mid-level manager discovers a securities law violation. On the day he makes this discovery, he immediately reports this securities law violation (1) to his company's chief executive officer ( CEO ) and (2) to the SEC. Unfortunately for the mid-level manager, the CEO, who is not yet aware of the disclosure to the SEC, immediately fires the mid-level manager. The mid-level manager, clearly a whistleblower as defined in Dodd Frank because he provided information to the SEC relating to a securities law violation, would be unable to prove that he was retaliated against because of the report to the SEC. Accordingly, the first and second category of protected activity would not shield this whistleblower from retaliation. The third category of protected activity, however, protects the mid-level manager. In this scenario, the internal disclosure to the CEO, a person with supervisory authority over the mid-level manager, is protected under 18 U.S.C. 1514A, the anti-retaliation provision enacted as part of [SOX]. Accordingly, even though the CEO was not aware of the report to the SEC at the time he terminated the mid-level manager, the mid-level manager can state a claim under the Dodd Frank whistleblower-protection provision because he was a whistleblower and suffered retaliation based on his disclosure to the CEO, which was protected under SOX. ) (footnotes omitted). 124 Wagner v. Bank of Am. Corp., No. 12 cv RBJ, 2013 WL , at *6 (D. Colo. July 19, 2013) (acknowledging that the court s view is in the minority). 125 Id. at * Banko v. Apple Inc., No. CV RS, 2013 U.S. Dist. LEXIS , at *12 16 (N.D. Cal. Sep. 26, 2013) (agreeing with the Asadi decision and finding no need to grant deference to the SEC regulation because the statute is not unambiguous). 127 Compare Asadi, 720 F.3d at 625 ( Under Dodd Frank's plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC. The three categories listed in subparagraph 78u 6(h)(1)(A) represent the protected activity in a whistleblower-protection claim. They do not, however, define which individuals qualify as whistleblowers. ), with Egan v. TradingScreen, Inc., No. 10 Civ. 8202(LBS), 2011 WL

14 2014] ALLEVIATING INSECURITIES 165 individual must be a whistleblower first, as per the definition in 78u- 6(a)(6), then not reporting to the SEC precludes the individual from any protections contained in 78u However, if a court believes an individual meets any of the requirements in 78u 6(h)(1)(A)(iii), then the individual receives the all the protections in 78u-6 whether or not they reported the violations to the SEC. 129 A key distinction should be drawn between the actions of an individual and the actions of a whistleblower. 130 Section 78u 6(h)(1)(A) does not give protection to an individual it protects a whistleblower. 131 Protecting actions of an individual who does not meet the definition of whistleblower in 78u- 6(a)(6) would essentially be the same as replacing whistleblower with individual in 78u 6(h)(1)(A). 132 Furthermore, the SEC s definition of whistleblower for the purposes of Dodd-Frank gives the green light to protect activity that the plain language of Dodd-Frank does not protect. 133 As noted in Asadi, the SEC s regulation attempts to use the law to expand the whistleblower definition beyond the scope of the law. 134 Section 78u 6(h)(1)(A)(iii), gives protection to whistleblowers who make protected disclosures, inter alia, under any regulation subject to the jurisdiction of the SEC. 135 The SEC then writes a regulation that defines whistleblower more broadly than the definition in 78u-6(a)(6). 136 Permitting this will result in a circular , at *5 (S.D.N.Y. May 4, 2011) ( The contradictory provisions of the Dodd Frank Act are best harmonized by reading 15 U.S.C. 78u6(h)(1)(A)(iii)'s protection of certain whistleblower disclosures not requiring reporting to the SEC as a narrow exception to 15 U.S.C. 78u 6(a) (6)'s definition of a whistleblower as one who reports to the SEC. ). 128 See Asadi, 720 F.3d at 627 ( Section 78u 6(h)(1)(A) does not provide alternative definitions of the term whistleblower for purposes of the whistleblower-protection provision. Instead, the text of 78u 6 clearly and unambiguously provides a single definition of whistleblower. Therefore, the whistleblower-protection provision does not contain conflicting definitions of whistleblower. ). 129 See Genberg v. Porter, No. 11 cv WYD MEH, 2013 WL , at *9 (D. Colo. Mar. 25, 2013) (finding that the plaintiff qualified as a whistleblower under Dodd-Frank because he reported suspected securities violations to his employer despite having not provided the SEC any information on the suspected violations). 130 See generally Asadi, 720 F.3d at (noting the significance of the use of whistleblower rather than terms such as individual or employee in 78u-6(h)(1)(A)). 131 See generally id. at 627 (discussing the impact on the law if Congress had chosen broader terms than whistleblower in 78u 6(h)(1)(A)). 132 See generally id. (noting that 78u 6(h)(1)(A) does not provide alternative definitions of the term whistleblower for purposes of the whistleblower-protection provision. ). 133 See Murray v. UBS Sec., No. 12 Civ. 5914(JMF), 2013 WL , at *4 (S.D.N.Y. May 21, 2013) (acknowledging that the SEC regulation extends Dodd-Frank s anti-retaliation provision to some individuals who do not report to the SEC and concluding that deference to the SEC s rule is warranted ). 134 Asadi, 720 F.3d at U.S.C. 78u-6(h)(1)(A) (2012). 136 See Asadi, 720 F.3d at 629 (stating that the SEC s regulation redefines whistleblower more broadly [than the statutory definition of whistleblower] by providing that an individual qualifies as a whistleblower even though he never reports any information to the SEC.... ).

15 166 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 justification for expanding the definition of whistleblower. 137 For example, an individual who does not fit Dodd-Frank s definition of whistleblower can gain protection under Dodd-Frank so long as that individual makes a protected disclosure under any regulation under the SEC s jurisdiction. 138 The SEC can then define, as it did here, any number of things it considers a protected disclosure that Dodd-Frank did not intend to cover. 139 B. Congressional Intent Congress s stated goal for the whistleblower program in Dodd- Frank was to motivate those with inside knowledge to come forward and assist the Government to identify and prosecute persons who have violated securities laws and recover money for victims of financial fraud. 140 There is little indication that Congress intended to allow individuals to reap the rewards of Dodd-Frank without reporting the suspected violation to the SEC. The SEC created the Office of the Whistleblower (OWB) because of 924(d) in Dodd-Frank. 141 This section directed the SEC to establish a separate office within the Commission and to administer and effectuate the whistleblower program. 142 Additionally, Dodd-Frank requires the SEC to submit a report to Congress each year on the whistleblower award program. 143 The OWB tracks the number of tips received and reports this information in its annual report to Congress. 144 If an individual only reports a suspected violation via their company s internal reporting procedures, then that suspected violation would never make it into the OWB report. 145 In a society that places a high value on exposure of wrongdoing, it is likely that Congress intended to use this program to collect as much data as possible about trends in securities violations. 146 The bill that initially passed the House gives some indication of Congress s intent. That bill did not use whistleblower to describe the 137 The circular argument is as follows: Dodd-Frank protects whistleblowers acting pursuant to SEC regulations; the SEC regulation says that a whistleblower is an individual who acts according to Dodd- Frank; and now the individual is a whistleblower according to Dodd-Frank because the SEC regulation defined them someone acting according to Dodd-Frank. 138 See generally Rosenblum v. Thomson Reuters (Mkts.) LLC, No. 13 Civ. 2219(SAS), 2013 WL , at *5 6 (S.D.N.Y. Oct. 25, 2013) (permitting claim under Dodd-Frank to proceed despite the plaintiff having never reported a suspected violation to the SEC). 139 See 17 C.F.R F-2(b) (2013) (defining a whistleblower as one who provides information in a manner described in 15 U.S.C. 78u 6(h)(1) (A)). 140 S. REP. NO , at 110 (2010) (emphasis added). 141 Annual Report on Whistleblower Program Fiscal Year 2012, SEC. & EXCH. COMM N (Nov. 2012), Id U.S.C. 78u-6(g)(5) (2012). 144 Annual Report on Whistleblower Program Fiscal Year 2012, supra note See id. (describing the process required to submit a tip to OWB). 146 See id. (graphically representing whistleblower tips by allegation type and geographic location).

16 2014] ALLEVIATING INSECURITIES 167 individuals protected from employer retaliation. 147 In its place, the bill used the phrase employee, contractor, or agent. 148 The final bill that passed was the Senate s subsequent version; it replaced employee, contractor, or agent with whistleblower. 149 In Asadi, GE contended that the Senate s version demonstrated that Congress eventually rejected the broader description of individuals eligible for protection used in the initial House bill. 150 Further evidence of GE s contention exists in the Senate s Report on Dodd-Frank. 151 Senator Dodd s April 30, 2010 Senate Report on Dodd-Frank does not indicate a desire by Congress to extend whistleblower protection to people who do not report to the SEC. 152 While the report did not address reporting requirements under the anti-retaliation provision, the Committee did state its intent to require the SEC to reward people who provided assistance to the SEC. 153 If the whistleblower does not report to the SEC, then the Committee s intent cannot be carried out because the SEC never received the information. 154 The Committee report states that SEC had the discretion to determine the amount and whether or not a whistleblower was eligible for an award; however, it does not discuss giving the SEC the ability to define whistleblower. 155 C. Intent of SEC Regulation The SEC s proposed regulations did not indicate the SEC s desire to extend whistleblower protection under Dodd-Frank to individuals who did not report violations to the SEC. 156 The language in the proposed rules acknowledged that Dodd-Frank requires individuals to report suspected violations to the SEC. 157 The SEC s proposed rules defined a whistleblower as someone who provides information relating to a potential violation of 147 Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, 111th Cong. 7203(g)(1)(A) (2009) ( No employer may discharge... or in any other manner discriminate against an employee, contractor, or agent... because of any lawful act done by the employee, contractor, or agent in providing information to the Commission.... ). 148 Id. 149 Id. 150 Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 627 (5th Cir. 2013). 151 See S. REP. NO , at (2010). 152 Id. at (2010) (stating that the new whistleblower program is designed to motivate people who know of securities law violations to tell the SEC ) (emphasis added). 153 Id. at 111 ( Whenever a whistleblower or whistleblowers tip leads the SEC to collect sanctions and penalties.... ); see 15 U.S.C. 78u-6(b)(1) (indicating the Committee s intent to have individuals report to the SEC because whistleblowers must report potential securities laws violations to the SEC prior to becoming eligible for an award). 154 Id. at Id. at Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, 75 FED. REG , 70,489 (Proposed Nov. 17, 2010) (to be codified at 17 C.F.R. pts. 240 & 249). 157 Id.

17 168 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1 securities laws to the SEC. 158 After receiving comments to the proposed rules, the SEC published the responses to the comments with the final rules. 159 In the responses, the SEC stated that 21F(h)(1)(A)(iii) of the Exchange Act (same as 15 U.S.C. 78u-6(h)(1)(A)(iii)) gives whistleblower protection to individuals who do not report securities violations under certain circumstances. 160 This rule gives the green light for some people to benefit from Dodd-Frank s whistleblower protections despite not reporting the violation to the SEC. 161 V. IMPACT ON WHISTLEBLOWING A. Dodd-Frank s Effect on Private Company Employees Who Report Securities Violations A current topic of discussion regarding Dodd-Frank and SOX is the different treatment of employees of public companies, who only report internally, compared to employees of private companies, who only report internally. 162 The general belief is that public company employees, who only report internally may get Dodd-Frank protections (because SOX covers employees of public companies), whereas private company emloyees who only report internally do not get Dodd-Frank protections. 163 If the holding in Asadi becomes the standard, then the treatment of employees who only report securities violations internally will be the same neither public nor private company employees will have protection under Dodd-Frank. 164 The bottom line is that Dodd-Frank protects an employee who reports a suspected securities violation to the SEC prior to termination, whether that employee works for a private or public company. 165 A problem arises when an individual first reports internally, gets fired, then either attempts to report to the SEC or files a claim under Dodd-Frank. The SEC rule incentivizes reporting internally by offering a larger bounty if the individual complies with his or her company s internal reporting 158 Id. 159 Securities Whistleblower Incentives and Protections, 76 FED. REG , 34,300 (June 13, 2011) (to be codified at 17 C.F.R. pts. 240 & 249). 160 Id. at 34,304 ( This change to the rule reflects the fact that the statutory anti-retaliation protections apply to three different categories of whistleblowers, and the third category includes individuals who report to persons or governmental authorities other than the Commission. ). 161 See supra notes Overhuls, supra note 1, at Id. 164 See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 629 (5th Cir. 2013) (concluding that the whistleblower-protection provision unambiguously requires individuals to provide information relating to a violation of the securities laws to the SEC to qualify for protection from retaliation under 78u 6(h) ). 165 See Overhuls, supra note 1, at

18 2014] ALLEVIATING INSECURITIES 169 procedures. 166 In drafting the final rule, the SEC attempted to balance the concerns of whistleblower advocates who did not want internal reporting mandated with others who wanted to encourage internal reporting Vega, supra note 25, at Id.

19 170 BUSINESS & BANKRUPTCY LAW JOURNAL [Vol. 1

20 2014] ALLEVIATING INSECURITIES 171 Figure 1 is a graphical depiction of the effect of the two interpretations of Dodd-Frank s whistleblower-protection provision. 168 The columns represent whether the employee works for a public or private company. 169 The rows indicate the entity to which the employee reports a suspected securities violation first. 170 Under both interpretations, Dodd- Frank will not help a private company employee who reports internally; it will help an employee who reports to the SEC regardless of what type of company they work for. 171 The divergence comes when a public company fires an employee who reports internally prior to notifying the SEC. 172 The lower left quadrant is the disputed area where reasoning based on Asadi and Egan will make a difference. 173 Rosenblum is a good example of how the different interpretations in Asadi and Egan can change the outcome in the disputed area. 174 Rosenblum was an employee at a publicly traded company. 175 He only reported suspected securities violations to his employer and the FBI. 176 Thomson Reuters subsequently fired Rosenblum prior to his contacting the SEC. 177 Rosenblum claimed that Dodd-Frank protected him because SOX protected him. 178 The court sided with the Egan interpretation. 179 In the table on the right in Figure 1, Rosenblum wins. The SEC s rule could lead people to believe that they should first report internally then report to the SEC. 180 Attorneys counseling clients on this issue must be aware of the risks involved in this strategy. 181 In that 168 The author of this Comment created Figure 1. Asadi and Rosenblum are good examples for depicting the disputed area best because both plaintiffs were present in that quadrant (lower left), and the courts came to completely different conclusions. Asadi, 720 F.3d at 630; Rosenblum v. Thomson Reuters (Mkts.) LLC, No. 13 Civ. 2219(SAS), 2013 WL , at *6 (S.D.N.Y. Oct. 25, 2013). The plaintiff in Egan did not actually work for a publicly traded company. Egan v. TradingScreen, Inc., No. 10 Civ. 8202(LBS), 2011 WL , at *5 (S.D.N.Y. May 4, 2011). Overhuls is helpful in illustrating why there is no protection in the lower right quadrant under any circumstance. See Overhuls, supra note 1, at 18. All references in this Comment that discuss situations in the upper two quadrants acknowledge that Dodd-Frank protects those who report to the SEC prior to being terminated. See Overhuls, supra note 1, at See supra note This assumes the following: employee first reported a suspected violation to employer, employer then fires employee, and employee then notifies SEC. 171 Overhuls, supra note 1, at See generally Asadi, 720 F.3d at 630 (dismissing a claim by a public company employee who reported suspected violations internally prior to notifying the SEC). 173 Compare id. at 625 (public company employee who reports internally only not protected), with Egan, 2011 WL , at *5 (public company employee who reports internally only is protected). 174 See Rosenblum v. Thompson Reuters (Mkts.) LLC, No. 13 Civ (SAS) 2013 WL , at *5 (S.D.N.Y. Oct. 25, 2013). 175 Id. 176 Id. 177 Id. 178 Id. 179 Id. 180 Overhuls, supra note 1, at 17 (noting that this is a realistic scenario because the SEC has stated the amount of the bounty will increase if a whistleblower first reports internally ). 181 See supra notes