The Supreme Court appeared reluctant Tuesday to give Dodd-Frank protections to whistleblowers who report stock and investment fraud to their employers but not the federal government.
Under the Dodd-Frank Act, the Securities and Exchange Commission (SEC) in 2011 issued new rules protecting employees from being retaliated against by their employers if they report fraud internally.
Paul Somers, a former employee for Digital Realty Trust Inc., was fired after he reported alleged securities violations to his senior management. Somers never reported the information to the SEC, but his attorney says his employment should have been protected as a result of the 2011 rule.
His former employer, a publicly traded real estate trust, disagrees. Digital Realty Trust argues that Dodd-Frank’s definition of a whistleblower explicitly excludes anyone who fails to report allegations to the SEC.
{mosads}Justice Neil Gorsuch, a self-described textualist who seeks to follow the literal reading of statutes, noted that Dodd-Frank explicitly states that the incentives and protections for whistleblowers “shall apply” to anyone who provides information relating to a violation of securities laws to the SEC.
“How much clearer could they have possibly been?” Gorsuch said, referring to the language lawmakers put in the legislation.
Somers’s attorney Daniel Geyser noted the language in Dodd-Frank doesn’t end there, also stating that the policy would be implemented “in a manner established, by rule or regulation, by the Commission.”
But Digital Realty Trust’s attorney Kannon Shanmugam argued that the SEC gave no indication in its proposed rule that it planned to disperse of the requirement to report the fraud to the SEC.
“There were certainly some who thought that that would be desirable, but there is nothing in the notice of proposed rule-making, and to the extent that respondent and the government cites some language that suggests that the Commission was considering broadening the application of the anti-retaliation provision and inviting comments to that effect, the very previous sentence in the notice of proposed rule-making indicates that the Commission intended to retain the requirement of reporting to the SEC,” he said.
Gorsuch zeroed in on the process used to write the rule.
“Now, that seems to me to put the whole administrative process on its head because you’re providing no notice to people, no reasonable opportunity to comment, maybe a few people spot the issue, but most people don’t,” he said.
“The agency acts without the benefit of the notice and comment and is unable to issue a reasoned decision-making, and then we’re supposed to defer to that to resolve this ambiguity?” he said.
Justices Stephen Breyer, a member of the court’s liberal wing, seemed unconvinced that Dodd-Frank should be expanded because employees who report violations internally are already protected by the Sarbanes-Oxley Act.
“If, in fact, you read it your way, we’ve basically eliminated Sarbanes-Oxley because everybody would bring it under this provision,” he said.
Justice Ruth Bader Ginsburg, meanwhile, wanted to know if there was any reason Somers didn’t go to the SEC.
Geyser said it never occurred him, which is why he also missed the 180-day deadline to file a complaint with the secretary of Labor for protection under the Sarbanes-Oxley Act. That law, enacted eight years before Dodd-Frank, protects employees who report alleged misconduct not just to the SEC, but to an internal supervisor.
“What he tried to do was do the right thing, and to honor the corporate Code of Conduct by calling the misconduct to his supervisor’s attention, which again is exactly what all the corporate stakeholders, you know, in this proceeding have said is their goal, too,” Geyser said.
Dodd-Frank gives employees six years to bring an anti-retaliation claim. It also allows the whistleblower to seek double back pay, a legal remedy not offered under the Sarbanes-Oxley Act.
The 9th and 2nd Circuit courts have both ruled the SEC regulation is entitled deference. The 5th Circuit, however, said the Dodd-Frank definition “expressly and unambiguously requires that an individual provide information to the SEC to qualify as a ‘whistleblower.’ ”