Last week, as the Supreme Court was closing business for the Summer, it announced it will soon hear a case that will either preserve or strip away an important protection for corporate whistleblowers. Digital Realty Trust, Inc. v. Somers appears at first blush to involve just a narrow question of statutory interpretation. But its potential implications for Ohio and the nation are actually much broader than that.
In the wake of two financial crises, Congress enacted whistleblower protections to encourage reporting of corporate fraud
The collapse of Enron, Worldcom, and Arthur Anderson in the early 2000s led to Wall Street reform efforts in Congress. One of the results was the Sarbanes-Oxley Act of 2002, commonly known as “SOX.” The Act created a whistleblower protection designed to encourage reporting of corporate fraud and thus combat the “corporate code of silence” that enabled the financial turmoil these scandals caused. S. Rep. No. 107-146, at 5 (2002).
The SOX whistleblower protection prohibits employers from retaliating against corporate whistleblowers who report several types of corporate or shareholder fraud. To be protected, the whistleblower must report the conduct to an appropriate federal regulatory or law enforcement agency (like the FBI or SEC), Congress, or a supervisor or other person at the company with authority to investigate and terminate the misconduct.
Well-intended as the SOX whistleblower provision was, for a variety of reasons it proved imperfect. So when the housing bubble and Madoff ponzi scheme cratered the economy again less than a decade later, Congress went back to the drawing board. In 2010, Congress passed another law aimed at reigning in corporate fraud, known as the Dodd-Frank Act. With it, Congress created a new whistleblower protection. As with SOX, Congress designed this new law to encourage reporting of corporate fraud by protecting those who come forward.
The federal courts of appeals split over whether Dodd-Frank protects internal whistleblowers
Because the statutory language in two sections of the law appeared to contradict, shortly after Dodd-Frank went into effect, whistleblowers and corporations began fighting in the courts over an unsettled question: whether—unlike SOX—the Dodd-Frank whistleblower provision protects individuals who report fraud only internally rather than to the Securities and Exchange Commission. It is this question that the Supreme Court recently agreed to decide. And while that might seem merely academic, given the carnage unchecked corporate fraud twice wrecked on this nation since 2000, its practical implications for shareholders, consumers, and everyone else who cares about the U.S. economy (i.e., everyone not living off the grid in the woods) are anything but abstract.
The U.S. Court of Appeals for the Fifth Circuit was the first federal appellate court to address whether Dodd-Frank protects internal whistleblowers. In a 2013 case called Asadi v. G.E. Energy, LLC, 720 F.3d 620, 622 (5th Cir. 2013), the court said no. It held that the corporate whistleblower provision protects only those individuals who make a report to the SEC.
Most courts—and the SEC itself—disagree with the holding in Asadi. When passing the law, Congress gave the SEC the authority to interpret Dodd-Frank. In 2011, the SEC issued regulatory guidance stating that the whistleblower provision does protect internal reporting. The majority of federal district courts to address the question have agreed, typically citing the SEC’s interpretation. The U.S. Court of Appeals for the Second Circuit took the same approach in a 2015 case, Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 155 (2d Cir. 2015).
In 2015, we predicted in this blog that the issue might make its way to the Supreme Court. Now it has.
The Supreme Court decides to weigh in on the scope of Dodd-Frank’s protection for corporate whistleblowers
Paul Somers alleged that Digital Realty Trust fired him from his job as Vice President shortly after he reported possible securities-law violations to senior management. But the Company fired him before had the chance to also report his concerns to the SEC. In response to his subsequent lawsuit, Digital Realty argued that because he reported only internally, and not to the SEC, he was not a protected whistleblower. The district court and U.S. Court of Appeals for the Ninth Circuit disagreed, both holding the case could proceed. In May, Digital Realty Trust asked the U.S. Supreme Court to review the case, highlighting the circuit split among the courts of appeals. On June 26th, the Court accepted the case, which it will likely hear sometime this Fall or Winter.
Ohio whistleblowers protect all of us. We protect them
Corporate whistleblowers play a key role in protecting not only shareholders, but also the public, from corporate fraud and abuse. In turn, protecting whistleblowers from retaliation incentivizes people to come forward. Taking those protections away does the opposite. And the lessons of two financial collapses since the turn of the century should be reminder enough that we want people to come forward and report corporate fraud before it spirals out of control.
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According to the SEC’s annual report to Congress, 230 corporate whistleblowers tips came to the SEC from Ohio in FY 2016. Only three states had more. If you had the courage to speak up as a whistleblower and faced retaliation for it, call the Cleveland whistleblower attorneys at Bolek Besser Glesius. Corporations have lawyers to protect themselves. So should you.