Hurdle for Securities Whistle-Blowers Nixed

MANHATTAN (CN) - Retaliation protections are available to workers who report concerns internally before alerting the government, the Second Circuit ruled.

The 2-1 decision Thursday stems from Neo@Ogilvy's 2013 firing of its finance director, Daniel Berman, who had been with the company since 2010.

Berman claimed the company, a digital-media subsidiary of advertising giant WPP, fired him after he discovered and made an internal report about various practices that he alleged amounted to accounting fraud.

In addition to violating GAAP, short for generally accepted accounting principles, Berman alleged that the practices violated the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Dodd-Frank was passed in 2010 to overhaul and strengthen financial regulation following the downturn in the U.S. economy. Sarbanes-Oxley, passed in 2002 with a similar intent in the aftermath of the Enron scandal, setting new or expanded requirements for all U.S. public company boards.

After his April 2013 termination, Berman reported his allegations to the WPP Audit Committee in August 2013. He reported the accusations to the Securities and Exchange Commission that October, but by then the limitations period on one of his Sarbanes-Oxley claims had ended.

Berman claimed in his January 2014 lawsuit that the company discharged him in violation of Dodd-Frank's whistle-blower protection provisions.

U.S. District Judge Gregory Woods threw out Berman's Dodd-Frank claims in December, however, based on the fact that he was fired long before he reported the alleged violations to the SEC.

Citing the definition of "whistleblower" in subsection 21F(a)(6) of Frank-Dodd, Woods said the statute "provided whistleblower protection only to those discharged for reporting alleged violations to the commission."

Section 21F(a)(6) of Dodd-Frank defines a whistleblower as a person who "provide[s] the commission" with specific information. However, subsection 21F2(b), headed "protection against retaliation," says that, for purposes of the retaliation protections of Dodd-Frank, a person is a whistleblower if the person "provide[s]" specified information "in a manner described in" the retaliation protection provisions of Dodd-Frank, which includes the cross-reference in subdivision (iii) to the reporting provisions of Sarbanes-Oxley.

A divided three-judge panel with the Second Circuit found Thursday that these provisions "protect an employee who reports internally without reporting to the commission."

Ultimately "the definitional section of subsection 21F(a)(6) and subdivision (iii) of subsection 21(F)(h)(1)(A) creates sufficient ambiguity as to the coverage of subdivision (iii)" for whistle-blowers, the court found.

The ruling highlights the language of the Exchange Rules specifically 21F-2 that the SEC issued in 2011 shortly after the passing of Frank-Dodd.

That statue says that "the statutory anti-retaliation protections [of Dodd-Frank] apply to three different categories of whistleblowers, and the third category [described in subdivision (iii) of subsection 21F(h)(1)(A)] includes individuals who report to persons or governmental authorities other than the Commission," Judge Jon Newman wrote for the majority.

The majority noted that its holding splits from the Fifth Circuit's resolution in 2013 of Asadi v. G.E. Energy, a decision that "three other district courts have followed."

"On the other hand, a far larger number of district courts have deemed the statute ambiguous and deferred to the SEC's Rule," Newman wrote.

"Thus, although our decision creates a circuit split, it does so against a landscape of existing disagreement among a large number of district courts," Newman added.

Judge Dennis Jacobs dissented, saying the SEC views the move as giving "suboptimal" protection to those who report securities violations only to their employer.

"They will be protected under Sarbanes-Oxley, but not Dodd-Frank - that is, they will enjoy the same protection every securities whistleblower had before the passage of Dodd-Frank in 2010, and more protection than any securities whistleblower had before passage of Sarbanes-Oxley in 2002," Jacobs wrote.

Bennet Susser, an attorney for Berman with Jardim, Meisner & Susser, noted in a statement that Thursday's decision "gives teeth to the anti-retaliation provisions of Dodd-Frank to enable GAAP accountants to try to be good employees, to do the right thing, and report identified financial irregularities to management to that they can be addressed, without immediately running to the SEC."

Reaction in the legal world to the ruling was swift.

Christopher Robertson, who co-chairs the whistle-blower practice at Seyfarth Shaw in Boston, told the Reuters that Thursday's decision renders "almost superfluous" the protections of Sarbanes-Oxley.

John Zach, a partner with Boies, Schiller & Flexner who prosecuted five Madoff employees, said "the Second Circuit's decision in the Berman case will further the SEC's enforcement strategy of encouraging and incentivizing whistleblowers to step forward and report corporate misconduct."

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