Dodd-Frank Provides Retaliation Protection to Employee for Internal Complaint Despite No SEC Complaint: N. D. California | Practical Law

Dodd-Frank Provides Retaliation Protection to Employee for Internal Complaint Despite No SEC Complaint: N. D. California | Practical Law

In Connolly v. Remkes, the US District Court for the Northern District of California (Northern District) denied an employer's motion to dismiss an employee's claim that she was protected by the retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 when she complained internally but not to the US Securities and Exchange Commission (SEC). In a matter of first impression in the Ninth Circuit, the Northern District held that the employee was a whistleblower under the Dodd-Frank Act and was protected from retaliation by her employer, despite not having reported the alleged violations directly to the SEC.

Dodd-Frank Provides Retaliation Protection to Employee for Internal Complaint Despite No SEC Complaint: N. D. California

by Practical Law Labor & Employment
Published on 10 Nov 2014 • USA (National/Federal)
In Connolly v. Remkes, the US District Court for the Northern District of California (Northern District) denied an employer's motion to dismiss an employee's claim that she was protected by the retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 when she complained internally but not to the US Securities and Exchange Commission (SEC). In a matter of first impression in the Ninth Circuit, the Northern District held that the employee was a whistleblower under the Dodd-Frank Act and was protected from retaliation by her employer, despite not having reported the alleged violations directly to the SEC.
On October 28, 2014, the US District Court for the Northern District of California (Northern District) in Connolly v. Remkes denied an employer's motion to dismiss an employee's claim that she was protected by the retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) when she complained about regulatory violations internally but not to the US Securities and Exchange Commission (SEC). In a matter of first impression in the Ninth Circuit, the Northern District held that the employee was a whistleblower under the Dodd-Frank Act and was protected from retaliation by her employer, despite not having reported the alleged violations directly to the SEC (No. 14-01344, (N.D. Cal. Oct. 28, 2014).)

Background

WHJR Associates (WHJR) was a sole proprietorship owned by Wolfgang Remkes (Remkes), a company involved in the securities industry and regulated by the Financial Industry Regulatory Authority (FINRA). Karen Connolly began working for Remkes in July 2012 as a financial advisor. In December 2012, Connolly reviewed the file of another financial advisor (Trausch) and discovered that the file contained "actual checks" and violated several FINRA rules. Remkes allegedly told her that Trausch's file did not violate FINRA, but that she should check with a compliance officer. When Connolly told Remkes that the compliance officer determined that the file was indeed in violation of FINRA, Remkes instructed Connolly that the matter was resolved and told her to copy the file and return it to Trausch.
In December 2012, the compliance officer asked Connolly for a written statement on the issue. Remkes allegedly:
  • Told Connolly not to respond to the inquiry.
  • Drafted an untruthful response himself.
  • Urged Connolly to tell the compliance officer that there was no file and were no actual checks.
  • Said he would shred the file.
In response, Connolly, who did not want to be involved in a cover-up:
  • Resigned from her employment.
  • Left a message for the compliance officer that Trausch's file contained actual checks.
  • Asked the compliance officer to protect her licenses.
Connolly claimed that Remkes:
  • Wanted her to participate in a cover-up.
  • Engaged in coercive acts against her.
  • Caused a constructive discharge, by forcing her to quit.
In March 2014, Connolly filed a lawsuit with 11 causes of action, including claims that:
  • Connolly qualified as a whistleblower under the Dodd-Frank Act because she reported alleged securities law violations and the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act).
  • Remkes violated the Dodd Frank Act and Sarbanes-Oxley Act by constructively discharging Connolly in retaliation for reporting FINRA violations.
Defendants filed a motion to dismiss all of Connolly's claims, arguing:
  • Connolly was not a whistleblower under the Dodd-Frank Act because she failed to report the alleged misconduct to the SEC.
  • Connolly was not a whistleblower under the Sarbanes-Oxley Act because her claims were time-barred and Connolly was not engaged in protected activity.

Outcome

In a matter of first impression in the Ninth Circuit, the Northern District held that Connolly qualified as a whistleblower under the Dodd-Frank Act and was protected from retaliation by her employer despite not having reported alleged violations directly to the SEC.
The Dodd-Frank Act defines a whistleblower as someone who provides information regarding securities law violations to the Commission (15 U.S.C. § 78u-6(a)(6)). However, it provides whistleblower protection for three types of behavior:
  • Providing information to the SEC in accordance with the Dodd-Frank Act.
  • Initiating, testifying in or assisting in any investigation or judicial or administrative action of the SEC based on or related to such information.
  • Making disclosures that are required or protected under the Sarbanes-Oxley Act, the Dodd-Frank Act and any other law, rule, or regulation subject to the jurisdiction of the SEC.
(15 U.S.C. § 78u-6(h)(1)(A).)
The Sarbanes-Oxley Act gives whistleblower protection to employees who assist or provide information, not just to the SEC, but to "a person with supervisory authority over the employee" (18 U.S.C. § 1514A(a)(1)(C)).
The SEC issued a regulation (and asserted in litigation) that a whistleblower is someone who provides information as described in 15 U.S.C. § 78u-6(h)(1)(A). (17 C.F.R. 240.21F-2(b)(1) (Rule 21F-2(b)(1)).)
In reaching its conclusion, the district court noted that:
  • There is a split of authority regarding whether an individual must report possible securities violations to the SEC to fall under the retaliation protections of the Dodd-Frank Act.
  • The SEC's Rule 21F-2(b)(1) does not require a whistleblower to report potential securities violations directly to the SEC, since 15 U.S.C. § 78u-6(h)(1)(A)(iii) refers to the conditions of the Sarbanes-Oxley Act, which does not require complaints to the SEC.
  • The Fifth Circuit, the only circuit court to address the issue raised in this case, gave no deference to SEC Rule 21F-2(b)(1) and concluded that the Dodd-Frank Act's whistleblower provision does require a report to the SEC (Asadi v. GE Energy (USA) L.L.C., 720 F.3d 620 (5th Cir. 2013)).
  • While a minority of district courts have followed the Fifth Circuit's Asadi decision, a substantial majority have deferred to the SEC's interpretation of the Dodd-Frank Act because of the ambiguity in the interplay between 15 U.S.C. § 78u-6(a)(6) and 15 U.S.C. § 78u-6(h)(1)(A) (see, for example, Murray v. UBS Securities LLC, (S.D.N.Y. May 21, 2013)).
  • The SEC has previously argued that:
    • Asadi was decided incorrectly and contradicted the Dodd-Frank Act's purposes; and
    • that the Asadi court's reading of the term whistleblower, requiring a report to the SEC, would make the Dodd-Frank Act's third clause (15 U.S.C. § 78u-6(h)(1)(A)(iii)) superfluous because the first two clauses of Dodd-Frank Act's retaliation provision already prohibit retaliation against an employee who reports violations to the SEC.
  • The SEC's interpretation is reasonable and should receive deference.
  • The defendants offered no reason why Rule 21F-2(b)(1) would be impermissible.
Additionally, the district court denied the defendants' motion to dismiss Connolly's contract-related and wage and hour claims, but granted the defendants' motion to dismiss concerning most of Connolly's other claims, including her Sarbanes-Oxley Act claim (because she did not file a complaint with the Department of Labor within the 180 day statute of limitations) and her constructive discharge claims.

Practical Implications

Employers should continue to monitor this split of authority regarding the reach of the Dodd-Frank Act's whistleblower protections. Only one circuit court (the Fifth Circuit) has decided the issue, holding that an employee must report to the SEC to gain whistleblower protection. However, most district courts have accepted the SEC's interpretation of the Act, extending the protections to those who complain internally about securities violations. Until this split is resolved in the courts or clarified by legislation, employers must avoid retaliating against employees who complain of securities violations internally or to the SEC.