Whistleblowers protected only when reporting to SEC
- Fifth Circuit Cuts Employers Out of Whistleblower Loop
By _Jenna Greene_ (https://plus.google.com/105700559378297881972/about)
The National Law Journal July 18, 2013
Fifth Circuit Judge Jennifer Walker Elrod
The U.S. Court of Appeals for the Fifth Circuit has ruled that would-be
whistleblowers are protected from retaliation only if they report their
employer's wrongdoing to the U.S. Securities and Exchange Commission —
contradicting virtually every other court to consider the matter and the SEC's own
Employees who report violations internally have no recourse under the
Dodd-Frank Act if they are fired as a result, the court held in a _17-page
ruling_ (http://legaltimes.typepad.com/files/whistle.pdf) that may undermine
painstakingly developed corporate compliance programs.
"We hold that the plain language of the Dodd-Frank whistleblower
protection provision creates a private cause of action only for individuals who
provide information relating to a violation of the securities laws to the SEC,"
Judge Jennifer Walker Elrod wrote, joined by Judge Stephen Higginson and
U.S. District Judge Brian Jackson, sitting by designation from the Middle
District of Louisiana.
The suit was brought by Khalid Asadi, a former employee of G.E. Energy LLC
who was fired after telling his supervisor and a company ombudsperson
about a suspected violation of the Foreign Corrupt Practices Act.
Asadi passed on concerns that the company had improperly hired a woman to
curry favor with a senior Iraqi official in negotiating a joint venture
agreement. As Asadi's source allegedly put it, GE was "pimping its way to the
Soon after, Asadi, who was based in Jordan as GE's Iraq country executive,
got a "surprisingly negative" performance review and subsequently was
Because Asadi made his report internally rather than going to the SEC, the
court held that he was not actually a whistleblower and dismissed his
complaint for failure to state a claim.
"The court's decision makes it very clear that an employee who uncovers
serious wrongdoing of this type has very little protection from retaliation
if that wrongdoing is not reported to the SEC," said Asadi's lawyer, Ronald
Dupree of the Dupree Law Firm in Houston. "With respect to public policy,
we argued and continue to believe that the anti-retaliation provisions of
Dodd-Frank were intended to provide greater incentives to report wrongdoing,
GE was represented by Fulbright & Jaworski partners Linda Addison and
Darryl Anderson. Addison, the firm's global head of dispute resolution and
litigation, did not immediately respond to a request for comment.
The court relied on a close reading of Section 922 of the Dodd-Frank Act,
which defines a whistleblower as anyone who provides "information relating
to a violation of the securities laws to the Commission," (emphasis by the
court). "This definition, standing alone, expressly and unambiguously
requires that an individual provide information to the SEC to qualify as a
'whistleblower,' " the court held.
Where it gets trickier is in subsection (h), which outlines the
whistleblower protections. The law says that employers can't fire a whistleblower for
providing information to the SEC, aiding the SEC or "making disclosures
that are required or protected" under certain provisions of the
Sarbanes-Oxley Act of 2002, the Securities Act of 1934 or "any other law, rule or
regulation subject to the jurisdiction of the Commission."
Asadi's lawyer argued that this third provision covers people even if they
don't interact directly with the SEC. Three other federal courts — the
Southern District of New York, the Middle District of Tennessee and the
District of Connecticut — that have considered the question reached that
conclusion. The Southern District of Texas, where Asadi's case originated,
dismissed his suit by ruling that whistleblower protection does not apply overseas,
a finding that the Fifth Circuit did not discuss.
As for the SEC, the agency in its whistleblower regulations implementing
Dodd-Frank extended anti-retaliation protection to people who did not report
information to the agency, as long as the activity was protected under the
other laws specified.
According to the Fifth Circuit, the SEC got it wrong. "We must reject the
SEC's expansive interpretation of the term 'whistleblower,' " Elrod wrote,
concluding that "Congress specified that a 'whistleblower,' not merely any
individual, is protected from employer retaliation."
Employees who don't go to the SEC may still be protected under the
Sarbanes-Oxley Act, but the court recognized that those provisions are less
appealing. Sarbanes-Oxley limits monetary damages to back pay (Dodd-Frank allows
two times back pay); complaints must be filed first with the secretary of
Labor; and the law's statute of limitations is much shorter than
The Fifth Circuit decision would appear to give employees planning to a
report a securities law violation a clear incentive to skip internal
disclosure and go straight to the SEC. But it's a scenario that even some SEC
commissioners have viewed as less than optimal, particularly given the time and
money expended by many companies to set up internal programs in light of
Commissioner Troy Paredas noted the problem during a November 3, 2010, SEC
meeting. "What will be the net impact on corporate conduct and legal
compliance if individuals bypass a corporation's internal procedures for
identifying, investigating and sanctioning unlawful activity in favor of reporting
alleged violations to the SEC?" he said. "It would be unfortunate if, as
result of the Dodd-Frank whistleblower program, effective corporate
compliance programs were thwarted."
Contact Jenna Greene at jgreene@....
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