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SEC Takes On Federal Court In Dispute Over Whistleblower Interpretation
August 14, 2015In Khaled Asadi, Plaintiff-Appellant, v. G.E. Energy (USA), L.L.C., Defendant-Appellee (12-20522, July 17, 2015), the United States Court of Appeals for the Fifth Circuit ("5Cir") considered the appeal of Asadi, who had alleged that G.E. Energy violated the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") when the company wrongfully terminated him after he had internally reported a possible securities law violation pursuant to the Foreign Corrupt Practices Act.
The Southern District of Texas granted G.E.'s motion to dismiss for failure to state a claim because that trial court found Asadi had not qualified as a Dodd-Frank "whistleblower." The District Court found that Asadi's extraterritorial whistleblowing activity was not covered under Dodd-Frank.§ 240.21F-2 Whistleblower status and retaliation protection.(a) Definition of a whistleblower.(1) You are a whistleblower if, alone or jointly with others, you provide the Commission with information pursuant to the procedures set forth in § 240.21F-9(a) of this chapter, and the information relates to a possible violation of the federal securities laws (including any rules or regulations thereunder) that has occurred, is ongoing, or is about to occur. A whistleblower must be an individual. A company or another entity is not eligible to be a whistleblower. (2) To be eligible for an award, you must submit original information to the Commission in accordance with the procedures and conditions described in §§240.21F- 4, 240.21F-8, and 240.21F-9 of this chapter.(b) Prohibition against retaliation: (1) For purposes of the anti-retaliation protections afforded by Section 21F(h)(1) of the Exchange Act (15 U.S.C. 78u-6(h)(1)), you are a whistleblower if:(i) You possess a reasonable belief that the information you are providing relates to a possible securities law violation (or, where applicable, to a possible violation of the provisions set forth in 18 U.S.C. 1514A(a)) that has occurred, is ongoing, or is about to occur, and;(ii) You provide that information in a manner described in Section 21F(h)(1)(A) of the Exchange Act (15 U.S.C. 78u-6(h)(1)(A)).The anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.(2) Section 21F(h)(1) of the Exchange Act (15 U.S.C. 78u-6(h)(1)), including any rules promulgated thereunder, shall be enforceable in an action or proceeding brought by the Commission.§ 240.21F-9 Procedures for submitting original information.(a) To be considered a whistleblower under Section 21F of the Exchange Act (15 U.S.C. 78u-6(h)), you must submit your information about a possible securities law violation by either of these methods:(1) Online, through the Commission's website located at www.sec.gov; or(2) By mailing or faxing a Form TCR (Tip, Complaint or Referral) (referenced in § 249.1800 of this chapter) to the SEC Office of the Whistleblower, 100 F Street NE, Washington, DC 20549-5631, Fax (703) 813-9322.(b) Further, to be eligible for an award, you must declare under penalty of perjury at the time you submit your information pursuant to paragraph (a)(1) or (2) of this section that your information is true and correct to the best of your knowledge and belief.(c) Notwithstanding paragraphs (a) and (b) of this section, if you are providing your original information to the Commission anonymously, then your attorney must submit your information on your behalf pursuant to the procedures specified in paragraph (a) of this section. Prior to your attorney's submission, you must provide your attorney with a completed Form TCR (referenced in §249.1800 of this chapter) that you have signed under penalty of perjury. When your attorney makes her submission on your behalf, your attorney will be required to certify that he or she:(1) Has verified your identity(2) Has reviewed your completed and signed Form TCR (referenced in §249.1800 of this chapter) for completeness and accuracy and that the information contained therein is true, correct and complete to the best of the attorney's knowledge, information and belief; (3) Has obtained your non-waivable consent to provide the Commission with your original completed and signed Form TCR (referenced in §249.1800 of this chapter) in the event that the Commission requests it due to concerns that you may have knowingly and willfully made false, fictitious, or fraudulent statements or representations, or used any false writing or document knowing that the writing or document contains any false fictitious or fraudulent statement or entry; and(4) Consents to be legally obligated to provide the signed Form TCR (referenced in §249.1800 of this chapter) within seven (7) calendar days of receiving such request from the Commission.(d) If you submitted original information in writing to the Commission after July 21, 2010 (the date of enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act) but before the effective date of these rules, your submission will be deemed to satisfy the requirements set forth in paragraphs (a) and (b) of this section. If you were an anonymous whistleblower, however, you must provide your attorney with a completed and signed copy of Form TCR (referenced in §249.1800 of this chapter) within 60 days of the effective date of these rules, your attorney must retain the signed form in his or her records, and you must provide of copy of the signed form to the Commission staff upon request by Commission staff prior to any payment of an award to you in connection with your submission. Notwithstanding the foregoing, you must follow the procedures and conditions for making a claim for a whistleblower award described in §§ 240.21F-10 and 240.21F-11 of this chapter.WT21F?21F-2 explains that Whistleblowers are entitled to anti-retaliation protection; however, a "whistleblower" is someone who previously submitted original information to the SEC. Moreover, 21F-9 seems to support the interpretation that in order to be deemed a "whistleblower" under Dodd-Frank that you had to submit information to the SEC via mail, fax, or the SEC's online portal.Hmmm . . . assuming that Asadi didn't submit information to the SEC but merely reported his concerns internally, was he entitled to the anti-retaliation protections under the rules? On the one hand, those whistleblower protections clearly seem to attach only after the submission to the SEC of original information -- but, the SEC procedural requirements for filing original information sort of look like prerequisites to becoming eligible for an award under the Whistleblower program. If someone is not seeking an award and have not filed original information with the SEC, can they still become a non-statutory Whistleblower and, as such, obtain coverage under the SEC's anti-retaliation provisions?Taking the FifthOn appeal, the 5Cir noted that Asadi conceded that he had not provided any information directly to the SEC; however, he argued that notwithstanding the lack of direct communication to the SEC, he had still engaged in what should be deemed "whistleblowing," and, accordingly, afforded the protections under Dodd- Frank. The 5Cir concluded that :
[T]he plain language of § 78u-6 limits protection under the Dodd-Frank whistleblower-protection provision to those individuals who provide "information relating to a violation of the securities laws" to the SEC. § 78u-6(a)(6). Asadi did not provide any information to the SEC; therefore, he does not qualify as a "whistleblower."13 Accordingly, we AFFIRM the district court's dismissal of Asadi's Dodd-Frank whistleblower-protection claim.Page 17 of the 5Cir Opinion
[C]ongress specified that a "whistleblower," not merely any individual, is protected from employer retaliation on the basis of the whistleblower's protected activities. The statute, therefore, clearly expresses Congress's intention to require individuals to report information to the SEC to qualify as a whistleblower under Dodd-Frank. Because Congress has directly addressed the precise question at issue, we must reject the SEC's expansive interpretation of the term "whistleblower" for purposes of the whistleblower protection provision. . . Moreover, the SEC's regulations concerning the Dodd-Frank whistleblower-protection provision are inconsistent. While 17 C.F.R. § 240.21F-2(b)(1) appears to adopt a broader definition of "whistleblower," as described above, 17 C.F.R. § 240.21F-9, which governs the procedures for submitting original information to the SEC, explicitly requires that an individual submit information about a possible securities law violation to the SEC. . . .Page 16 of the 5Cir Opinion
Since our adoption of the whistleblower rules, we have consistently understood Rule 21F-9(a) as a procedural rule that applies only to help determine an individual's status as a whistleblower for purposes of Section 21F's award and confidentiality provisions. Notwithstanding our view that Rule 21F-2(b)(1) alone controls in the context of determining the relevant reporting procedures for an individual to qualify as a whistleblower eligible for Section 21F's employment retaliation protections, the Court of Appeals for the Fifth Circuit expressed some uncertainty about this reading in a recent decision.4Although we appreciate that if read in isolation Rule 21F-9(a) could be construed to require that an individual must report to the Commission before he or she will qualify as a whistleblower eligible for the employment retaliation protections provided by Section 21F, that construction is not consistent with Rule 21F-2 and would undermine our overall goals in implementing the whistleblower program. We reach this conclusion for several reasons.Pages 5 -6 of the Interpretation
Specifically, by providing employment retaliation protections for individuals who report internally first to a supervisor, compliance official, or other person working for the company that has authority to investigate, discover, or terminate misconduct, our interpretive rule avoids a two-tiered structure of employment retaliation protection that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the investor-protection and law-enforcement benefits that can result from internal reporting.8 Under our interpretation, an individual who reports internally and suffers employment retaliation will be no less protected than an individual who comes immediately to the Commission. Providing equivalent employment retaliation protection for both situations removes a potentially serious disincentive to internal reporting by employees in appropriate circumstances. A contrary interpretation would undermine the other incentives that were put in place through the Commission's whistleblower rules in order to encourage internal reporting.9For the foregoing reasons, we are issuing this interpretation to clarify that, for purposes of Section 21F's employment retaliation protections, an individual's status as a whistleblower does not depend on adherence to the reporting procedures specified in Rule 21F-9(a).Pages 7 -8 of the InterpretationBill Singer's CommentUnder the circumstances, it is appropriate for me to clearly disclose my bias: I am an ardent advocate of whistleblowing, I have represented several whistleblowers and achieved an Award in excess of $1.5 million for one, and I oppose any retaliation against such informants. That being said, I am also highly critical of the SEC's Whistleblower process: "SEC Whistleblower Program Is A Black Hole Of Despair" (BrokeAndBroker.com Blog, April 9, 2015).Strictly from the perspective of which organization makes the more compelling legal argument here -- the 5Cir or the SEC -- I must admit that the Court seems on firmer footing. Given the contentious history surrounding Dodd-Frank and the often testy battle over the SEC's drafting of the necessary rules to implement the Act, it is apparent that Rule 21F doesn't say what the SEC says it means. Congress and the SEC engaged in some dubious wordsmithery when drafting the whistleblower laws and rules, and, as a result, the definition of a "whistleblower" (and, as a consequence, a whistleblower entitled to anti-retaliation protection) is narrowly proscribed to only those who properly file their original information with the SEC. I've never been a big fan of this interpretation nonsense because it too often amounts to questionable attempts to rewrite laws and rules without actually going through the draft-to-approval route. Ultimately, I'm not sure that the SEC can simply wave a wand here, mumble a few words, and cast a spell that will satisfy any future federal courts to which this same issue is presented. In the absence of formally revising 21F, this issue may yet wind up enmeshed in further federal court appeals until, perhaps, it comes before the Supreme Court.READ:
5th Circuit Opinion SEC 21F InterpretationThe BrokeAndBroker.com Whistleblower Archive