Connecticut Court: Dodd-Frank "Whistleblower" Protection Extends to Informal SEC Complaints

A federal district court in Connecticut this week held that the federal Dodd-Frank Act protects a larger class of “whistleblowers” than many previously thought. In allowing the claimant’s “whistleblower" retaliation claim to survive a motion to dismiss, the judge ruled that Dodd-Frank’s definition of “whistleblower” was broad enough to protect not only those who file official complaints with the Security and Exchange Commission (SEC), but also those who provide the SEC with informal letters complaining of unlawful practices. The judge rejected concerns that such an interpretation would allow Dodd-Frank’s anti-retaliation provision — with its longer statute of limitations and double-pay awards – to effectively swallow the corresponding provisions of the (less claimant-friendly) Sarbanes-Oxley Act: “the Dodd-Frank Act appears to have been intended to expand upon the protections of Sarbanes-Oxley,” the judge noted, “and thus the claimed problem is no problem at all.” More ›

First Circuit Holds that Private Companies’ Employees not Entitled to Whistleblower Protections Under SOX

Former employees of private companies that act under contract as advisers to and managers of mutual funds organized under the Investment Company Act of 1940 filed suit against their respective employers for unlawful retaliation after they were terminated. The employees claimed that they were entitled to the whistleblower protection provision within the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1514A) (“SOX”) because they had reported potential fraud and security violations. The employers contested this, arguing that SOX’s protections did not extend to employees of private companies, and filed motions to dismiss the lawsuits.The district court disagreed with the employers, holding that this particular provision of SOX did protect employees of private companies that are contractors or subcontractors to “public companies" (as defined under the Act), where those employees were reporting violations relating to fraud against shareholders. More ›

RICO Claim of Retaliation for Whistleblower Activity Restored on Appeal

A tax manager at a home products company was terminated after reporting a tax fraud scheme to the company and federal agencies. Following the internal report, the tax manager received a negative performance evaluation from a supervisor involved in the alleged scheme. After the external reports and failed attempts to get the tax manager to sign a release of claims, the company terminated him and sued the tax manager for breach of contract and conversion. In response, the tax manager sued for a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). In a RICO claim, recovery is available upon a showing that the plaintiff was injured “by reason of” a pattern of racketeering activity. Based on the pleadings, the tax manager was limited to showing that he was injured “by reason of” the company’s retaliatory conduct to his whistleblower activity. In allowing the tax manager’s claim to survive a motion to dismiss, the U.S. Court of Appeals Seventh Circuit focused on a provision of the Sarbanes-Oxley Act making it unlawful to “knowingly . . . take[] any action harmful to any person . . . for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense.” Violation of this provision is a “racketeering activity” under the RICO, and the Seventh Circuit held that retaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower. Accordingly, the alleged tax fraud scheme and retaliatory acts could not be viewed as isolated acts. After all, the same supervisors involved in the tax fraud scheme were responsible for the retaliatory conduct. Additionally, the timing between the whistle-blowing, attempts to get a release and the decision to terminate could support an inference that the tax manager was terminated for whistle-blowing after attempts to silence him failed. If possible, employers should prohibit supervisors accused of wrongdoing from making disciplinary decisions related to the complaining employee.

DeGuelle v. Camilli, No. 10-2172 (7th Cir. Dec. 15, 2011)