Court Finds Dodd-Frank Protections for Whistleblowers Who Report Internally

On September 10, 2015, a federal appeals court ruled Thursday that an ex-employee can seek Dodd-Frank retaliation remedies after reporting alleged wrongdoing internally before being terminated, rather than only in instances where the report is made to the Securities and Exchange Commission before termination..

The U.S. Court of Appeals for the Second Circuit reversed a decision dismissing the whistleblower suit by Daniel Berman, former finance director at Neo@Ogilvy LLC, a digital and direct services media company. Berman’s suit will now be permitted to proceed in the District Court.

Berman was represented by Bennet Susser, Richard S. Meisner and Alissa Pyrich of Jardim, Meisner & Susser, P.C., in Florham Park, N.J. In a statement, Berman’s attorneys said, “This case is all about allegations of corporate officer misconduct, of the precise nature that Sarbanes-Oxley and Dodd-Frank were intended to prevent.”

At issue in Berman v. Neo@Ogilvy LLC, Docket No. 14-4626, 2015 U.S. App. LEXIS 16071 (2d Cir. Sept. 10, 2015), was a tension between two provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Subsection 21F(a)(6) of Dodd-Frank defines whistleblowers as individuals who report violations to the SEC. Subdivision (iii) of subsection 21F(h)(1)(A), the anti-retaliation provision of Dodd- Frank, does not limit protection to those individuals. It expands Dodd-Frank protections to include whistleblower protection provisions in the Sarbanes-Oxley Act – provisions that contemplate employees reporting internally and that do not require reporting to the SEC. To make clear that the anti-retaliation provisions are intended to apply to those who report internally, and not just to the SEC, the SEC had issued a rule supporting that interpretation.

Berman, who had been responsible for financial reporting and compliance, contended he discovered practices that amounted to accounting fraud and that violated Dodd-Frank, Sarbanes-Oxley and Generally Accepted Accounting Principles (GAAP).

He reported his findings internally and was terminated in April 2013. In October 2013, he provided information to the SEC.

His suit alleged that he was discharged in violation of the whistleblower protection provisions of Dodd-Frank’s section 21F and in violation of his employment contract.

The United States District Court for the Southern District of New York dismissed Berman’s lawsuit, finding that Dodd-Frank contained protections for employees discharged for reporting violations to the SEC,and did not extend to those who reported wrongdoing internally. Berman appealed. The SEC joined in the appeal as an amicus curiae, supporting Berman’s reading of the statute and the SEC regulation.

The Second Circuit Court of Appeals ruled in favor of Berman and the SEC’s rule:

“Applying the [SEC] reporting requirement to employees seeking Sarbanes-Oxley remedies pursuant to subdivision (iii) would leave that subdivision with an extremely limited scope for several reasons,” Judges Jon Newman and Guido Calabresi said.

First, they said, few potential whistleblowers simultaneously report alleged wrongdoing to their employer and the commission.

Second, they continued, some employees, such as auditors and attorneys, cannot report wrongdoing to the SEC until they have reported it to their employer.

The judges found that congressional intent was difficult to determine because the legislative history is unclear.

They also said that courts have reached conflicting results over the issue but that a larger number found the statute ambiguous and deferred to the SEC’s rule.

The appeals court concluded “that the pertinent provisions of Dodd-Frank create a sufficient ambiguity to warrant our deference to the SEC’s interpretive rule,” which supports Berman’s view of the statute.”

In his dissent, Judge Dennis Jacobs said the majority “altered a federal statute by deleting three words (‘to the Commission’) from the definition of ‘whistleblower in the Dodd-Frank Act.”

He said, the sole consequence of applying the statute as written is that those who report securities violations only to their employer will receive statutory protection that in the SEC’s view is sub-optimal.”

He added, “They will be protected under Sarbanes-Oxley, but not Dodd-Frank – that is, they will enjoy the same protection every securities whistleblower had before the passage of Dodd-Frank in 2010, and more protection than any securities whistleblower had before passage of Sarbanes-Oxley in 2002.”

The full Second Circuit decision is available here.

Susser, an attorney for Berman, on the brief, observed that “The Second Circuit decision gives teeth to the anti-retaliation provisions of Dodd-Frank to enable GAAP accountants to try to be good employees, to do the right thing, and report identified financial irregularities to management to that they can be addressed, without immediately running to the SEC.”

About Jardim, Meisner & Susser, P.C.:
The firm, based in Florham Park, NJ, handles litigation and corporate, real estate, and trust and estates matters. Its attorneys focus on employment and benefits law, commercial litigation, construction litigation, ERISA counseling and litigation, malpractice actions, products liability defense as well as general representation of medical providers, automobile dealerships and franchisees. The firm’s employment and executive benefits departments are headed by Thomas Jardim and Richard Meisner.