Uncertainty Surrounds Dodd-Frank Act’s Protection of Whistleblowers

Whistleblowers seeking protection under the Dodd-Frank Act beware. The U.S. Fifth Circuit Court of Appeals ruled on July 17, 2013 in Asadi v. G.E. Energy (USA), L.L.C.,2013 WL 3742492, that the whistleblower provisions in the Dodd-Frank Act only protect those who disclose information directly to the U.S. Securities and Exchange Commission. Ignoring several federal district court rulings and the SEC’s own regulations, the Fifth Circuit held that persons reporting internally to their employers (rather than to the SEC) were not afforded whistleblower protection under Dodd-Frank. This decision has therefore set up a potential circuit split, meanwhile leaving potential whistleblowers uncertain as to the protections they are afforded.

The Dodd-Frank Act of 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub.L. 111-203, H.R. 4173, was signed into federal law by President Barack Obama on July 21, 2010. Dodd-Frank was intended to regulate financial markets and prevent a recurrence of the 2008 financial crisis. Given its emphasis on increased oversight, Dodd-Frank included protection for whistleblowers, which are defined in 15 U.S.C. 78u-6(a)(6) as individuals who provide information relating to a violation of securities law “to the Commission.” A separate provision, 15 U.S.C. 78u-6(h), provides “whistleblowers” with the right to sue their employer for retaliation, but it does not require disclosure to the SEC. Notably, unlike the Sarbanes-Oxley Act of 2002 (which does not require reporting to the SEC but does have many administrative requirements), Dodd-Frank permits whistleblowers to sue for double the pay they lost through corporate retaliation without jumping through administrative hoops. As such, there is a potential benefit in suing for retaliation against a former employer under Dodd-Frank rather than Sarbanes-Oxley.

The discrepancy between 15 U.S.C. 78u-6(a)(6) and 15 U.S.C. 78u-6(h) regarding whistleblower disclosure to the SEC provided the basis for several federal district courts to hold that the provisions are either ambiguous or conflicting. As such, each of those courts afforded whistleblower protection to persons first reporting potential fraud to their employers. The SEC itself adopted a final regulation stating that persons may be deemed whistleblowers even if they do not first report directly to the SEC. Nevertheless, the Fifth Circuit’s opinion in Asadi, the first by an appeals court regarding whistleblower protection under Dodd-Frank, focused on the plain language of 15 U.S.C. 78u-6(a)(6) in holding that protection is only afforded those reporting “to the Commission” – namely, the SEC.

Asadi v. G.E. Energy (USA), L.L.C.

Khaled Asadi is a former GE executive who worked in GE Energy’s Amman, Jordon, office. In that capacity, he was responsible for maintaining the company’s relationship with Iraq’s central government. In June 2010, Mr. Asadi learned that GE had hired a woman closely associated with Iraq’s senior deputy minister of electricity, allegedly to curry favor with Iraq’s electricity ministry while GE negotiated a contract with that agency. Mr. Asadi was concerned that these actions might violate the Foreign Corrupt Practices Act, and he reported his concerns to his supervisor and the GE ombudsman for the region. Notably, Mr. Asadi never alerted the SEC, and he was ultimately terminated by GE following a negative performance review. He filed suit in Houston claiming that GE had illegally retaliated against him in violation of Dodd-Frank. Asadi’s suit was initially dismissed in the district court because the Judge opined that the anti-retaliation provisions of Dodd-Frank did not apply outside the United States, and Asadi appealed.

The Fifth Circuit affirmed the district court’s ruling, but was far more concerned with the issue of who qualifies as a whistleblower under Dodd-Frank. As noted above, the Fifth Circuit opined that the language of 15 U.S.C. 78u-6(a)(6) requires that reporting must be made “to the Commission,” and internal reporting to an employer did not meet the statutory requirements for whistleblower protection. In the Fifth Circuit’s view, the statute “clearly expresses Congress’ intention to require individuals to report information to the SEC to qualify as a whistleblower under Dodd-Frank.” Thus, despite lower court rulings and SEC regulations to the contrary, the Fifth Circuit relied on Congress’s clear language in defining a “whistleblower” in interpreting the Dodd-Frank Act and excluded individuals reporting only internally from protection.

Given that this ruling stands in conflict with numerous district court holdings from other circuits, the potential for a circuit split looms. After all, would Mr. Asadi’s protection under Dodd-Frank have been interpreted differently in Manhattan? Or Nashville? District Court rulings suggest that is a distinct possibility, and ultimately, as some have suggested, the Supreme Court may have to review this controversy. To date, however, the Fifth Circuit is the only Court of Appeals to rule on the issue of whistleblower protection under the Dodd-Frank Act, and the Asadi opinion provides a cautionary tale to would-be Dodd-Frank whistleblowers: be wary of your reporting technique because you may not be afforded the protection you expect.