Court of Appeals asked to clarify scope of Dodd-Frank Act whistleblower protections

Christopher R. Hall
Published August 28, 2014

The Dodd-Frank Act, which was enacted in the wake of the 2008 financial crisis, encourages individuals to provide information relating to a violation of U.S. securities laws to the SEC.  Notably, the Act created a private cause of action for employees against whom employers retaliate after the employee takes certain “protected” actions, including an expression of concern about possible violations of securities laws.  15 U.S.C. 78u-6.

In 2012, a former executive of COR Clearing LLC (“Clearing” or the “Company”) filed a retaliation lawsuit under the Dodd-Frank Act against the Company and four individuals.  The plaintiff alleged Clearing terminated her after she had cooperated with the Financial Industry Regulatory Authority (“FINRA”) in an investigation of the Company.  The plaintiff also alleged the Company terminated her after she had provided FINRA with a report that she authored, and which alleged that the Company potentially violated the Bank Secrecy Act and FINRA’s anti-money laundering rules.  This report, which was authored by the plaintiff, was also provided to the Company’s top executives.

The defendants moved to dismiss the Dodd-Frank retaliation claim, arguing that the plaintiff did not qualify as a whistleblower under the Act (and therefore could not bring a claim) because she had not complained directly to the SEC about the potential fraud.  The district court rejected the defendants’ argument, reasoning that the Act also protected whistleblowers who do not complain directly to the SEC.

On July 28, 2014, the defendants filed an interlocutory appeal with the Eighth Circuit Court of Appeals, asking the court to clarify whether the Act shields whistleblowers who do not complain directly to the SEC. The Eighth Circuit has not yet decided whether to address the issue. 

Only one other court of appeals has ruled on this question.  In 2013, the Fifth Circuit Court of Appeals held that the Act’s whistleblower protections only extend to tipsters who complain directly to the SEC.  The Fifth Circuit reasoned that plaintiffs are not “whistleblowers” under the statutory definition of Dodd-Frank unless they report to the SEC.

Going forward

Saul Ewing will continue to follow this case because of the potential for significant corporate liability under the Dodd-Frank Act.  If the Eighth Circuit affirms the lower court in COR Clearing, all employees who report concerns to regulated employers could invoke the Act’s protections if they later experience an adverse employment action regardless of whether they report their concerns to the SEC.  This may have the unintended consequence of inducing troubled employees to fabricate concerns to report to their ombudsmen to  inoculate themselves from termination.  We will keep you posted.

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