One of the major splits among lower courts has been around the whistleblower provision of the 2010 Dodd-Frank Act. In July of 2013, the U.S. Court of Appeals for the Fifth Circuit issued a decision holding that an employee must provide information relating to a violation of the securities laws to the SEC in order to qualify as a “whistleblower,” under the Dodd-Frank Act. The decision, and other district court rulings that followed, appeared to deter employees from reporting violations directly to their employer because they were not guaranteed protection. However on October 16th, a United States District Judge in Massachusetts ruled that the whistleblower provision of the 2010 Dodd-Frank Act protects employees whether or not they report the violations to the Securities and Exchange Commission (“SEC”) before they bring the information to their employer. (Read the opinion here)
The plaintiff, Richard Ellington, was employed as a financial planner by defendant, New England Investment & Retirement Group (“NEINV”). After becoming aware of possible violations of the Investment Advisors Act of 1940, plaintiff discussed his concerns with the principal shareholder of the company compiled a twenty page report and submitted it to NEINV’s compliance officer, who subsequently began investigating. Shortly thereafter, plaintiff was terminated from the company for emailing company files to himself after being warned that he was likely to be terminated. After being terminated, plaintiff reported the information to the SEC and assisted in an investigation which ultimately led NEINV to pay $200,000 in civil penalties for violating the security regulations.
The issue in the case was whether plaintiff qualified as a whistleblower under the 2010 Dodd-Frank Act, which prohibits an employer from retaliating against a whistleblower. The Act defines whistleblower as “any individual who provides..information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” The defendants moved for summary judgment arguing that plaintiff does not qualify as a whistleblower because he did not provide the information to the SEC until after he was terminated.
Judge Richard G. Stearns did not accept the defendant’s argument, which cited the 5th Circuit decision and instead relied on the SEC’s interpretation of the Act, which states that a person is provided protection when the information is provided “[t]o, a person with supervisory authority over the employee or such other person working for the employer who has authority to investigate, discover, or terminate misconduct.” Judge Stearns stated that a person has a private right of action under Dodd-Frank “whether or not the employer wins the race to the SEC’s door with a termination notice.”
The decision is in line with the purpose of the whistleblower provision, to encourage employees to report violations when they believe their employer is violating the Securities laws. However, while the decision is a step in the right direction for employers, until there is clear guidance on the issue that resolves the lower courts split, employers will still be hesitant to report the violations to their employers for fear of being terminated without any avenue of recourse.