Dodd-Frank Provides No Retaliation Protection to Employees Who Do Not Report Violations to SEC: SDNY | Practical Law

Dodd-Frank Provides No Retaliation Protection to Employees Who Do Not Report Violations to SEC: SDNY | Practical Law

In Berman v. Neo@Ogilvy LLC, the United States District Court for the Southern District of New York declined to adopt a magistrate report that accepted the contention that an employee was a whistleblower under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) despite reporting suspected securities violations internally and not to the Securities and Exchange Commission (SEC). The district court instead followed the Fifth Circuit's decision in Asadi v. G.E. Energy (USA), L.L.C., which held that an employee must report violations of securities law directly to the SEC to avail himself of the anti-retaliation protections of the Dodd-Frank Act.

Dodd-Frank Provides No Retaliation Protection to Employees Who Do Not Report Violations to SEC: SDNY

by Practical Law Labor & Employment
Published on 22 Dec 2014 • USA (National/Federal)
In Berman v. Neo@Ogilvy LLC, the United States District Court for the Southern District of New York declined to adopt a magistrate report that accepted the contention that an employee was a whistleblower under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) despite reporting suspected securities violations internally and not to the Securities and Exchange Commission (SEC). The district court instead followed the Fifth Circuit's decision in Asadi v. G.E. Energy (USA), L.L.C., which held that an employee must report violations of securities law directly to the SEC to avail himself of the anti-retaliation protections of the Dodd-Frank Act.
On December 5, 2014, in Berman v. Neo@Ogilvy LLC, the United States District Court for the Southern District of New York declined to adopt a magistrate report that accepted the contention that an employee was a whistleblower under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) despite reporting suspected securities violations internally, and not to the Securities and Exchange Commission (SEC). The district court instead followed the Fifth Circuit's decision in Asadi v. G.E. Energy (USA), L.L.C., which held that an employee must report violations of securities law directly to the SEC to avail himself of the anti-retaliation protections of the Dodd-Frank Act. (No. 1:14-CV-523, , at *1 (S.D.N.Y. Dec. 5, 2014).)

Background

Daniel Berman, a financial employee for NeoOgilvy LLC (Neo@Ogilvy), reported to his superiors suspected violations of several laws including the Dodd-Frank Act. He did not report these violations to the SEC. Berman's employment was terminated after he made these complaints and he filed a lawsuit claiming that Neo@Ogilvy terminated his employment in violation of the anti-retaliation provisions of the Dodd-Frank Act. The employer argued that Berman was not a protected whistleblower under the Dodd-Frank Act since he did not report violations to the SEC and did not reasonably believe that the alleged violations were securities law violations. A magistrate judge issued a report stating that:
  • Berman was a whistleblower under the Dodd-Frank Act.
  • Berman's claims should still be dismissed because he did not sufficiently claim that he had a reasonable belief that he was reporting violations of the law.
  • Berman was granted leave to amend the retaliation claim of his complaint.
Berman amended his complaint and the employer argued that the Court should adopt the Fifth Circuit's decision in Asadi v. G.E. Energy (USA) L.L.C, 720 F.3d 620 (5th Cir. 2013).

Outcome

The United States District Court from the Southern District of New York (SDNY):
  • Declined to adopt the magistrate judge's recommendation concerning Berman's retaliation claims.
  • Held that Berman was not a whistleblower under the Dodd-Frank Act.
  • Dismissed Berman's retaliation claim against Neo@Ogilvy.
In reaching its conclusion, the SDNY noted that:
  • The Dodd-Frank Act's definition unambiguously states that an individual must report information to "the Commission" (the SEC) to qualify for whistleblower protection.
  • The SEC would not be able to pay financial awards under the Dodd-Frank Act, if information was not reported to it.
  • It disagrees with the report and other district courts which have held that:
    • the conflict between the Dodd-Frank Act's definition of whistleblower and the kinds of activity the statute protects renders the statute ambiguous;
    • this ambiguity gives rise to a narrow exception to the SEC reporting requirement; and
    • courts should follow the SEC's regulations interpreting the term whistleblower to include people who make violation reports to internal supervisors.
  • It adopted the Fifth Circuit's view in Asadi which stated that:
    • the plain meaning of the Dodd-Frank Act's retaliation provision creates a private cause of action only for those individuals who provide information to the SEC;
    • a statute must be construed in a "compatible, not contradictory" way, without superfluous words or clauses; and
    • the third category of protected activity under Section 78u-6(h)(1)(A)(iii), which includes making disclosures protected under the Dodd-Frank Act, the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) or other laws, rules or regulations would not contradict the Dodd-Frank Act's whistleblower definition in the hypothetical situation in which an employee reports a violation both internally and to the SEC and is fired by a superior who did not know of the SEC disclosure. The SDNY notes that this employee would be protected only under this third category.
  • Individuals who complain internally are still protected by the retaliation provisions of the Sarbanes-Oxley Act if they file a complaint with the DOL before bringing a private legal action.
  • It would not create a private right of action that would allow whistleblowers to bypass the requirement of contacting a government agency.

Practical Implications

The Southern District of New York has joined a number of courts, including the only circuit court to address the issue (the Fifth Circuit in Asadi) that find that an individual is a Dodd-Frank whistleblower only if he complains to the SEC. There is a definite split as several other district courts have held that an internal complaint is enough to qualify for whistleblower protection under Dodd-Frank's anti-retaliation clause. Until this split is resolved in the courts or clarified by legislation, employers must avoid engaging in adverse actions against employees who complain of securities violations internally or to the SEC.