June 18, 2014

The SEC’s First Whistleblower Retaliation Case

Here’s news from Nick Morgan of DLA Piper:

The SEC’s biggest problem in bringing its first whistleblower retaliation case – a settled administrative action against Paradigm Capital Management – may be the lack of statutory authority to do so under Dodd-Frank. The SEC’s track record in this area is already blemished.

Dodd-Frank unambiguously defined “whistleblower” to mean people who provide information to the SEC. However, the SEC promulgated regulations that purported to expand the definition of “whistleblower” to include any individual who has reported information which could lead to prosecution by the SEC for violations of US securities laws, even if the individual does not report that information directly to the SEC. Under this expansive SEC regulation, a “whistleblower” would include an individual who only made an internal complaint to his or her company, but did not report the alleged conduct to the SEC.

A recent opinion by the federal Fifth Circuit Court of Appeals rejected the SEC’s “expansive interpretation of the term ‘whistleblower’ for purposes of the whistleblower protection,” denying retaliation protection to an employee who did not report alleged misconduct to the SEC and was demoted, then fired, for complaining to managers and a corporate ombudsman that the company was engaged in questionable lobbying efforts with an official in the Iraqi government.

The Fifth Circuit dismissed the employee’s arguments that the more expansive SEC regulation provided protection, stating that “there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.”

The SEC’s self-granted authority to bring its own anti-retaliation action suffers from the same impermissibly “expansive interpretation” of Dodd-Frank.

The relevant portion of Dodd-Frank authorizes “[a]n individual who alleges discharge or other discrimination” to file an anti-retaliation lawsuit. The statute does not authorize the SEC to file such a lawsuit. However, the same regulation promulgated by the SEC that the 5th Circuit found exceeded the SEC’s statutory authority to define “whistleblower” also purports to make the anti-retaliation provisions “enforceable in an action or proceeding brought by the Commission.”

As with the SEC’s attempt to redefine “whistleblower,” the SEC’s first attempts to exercise its self-granted authority to pursue an anti-retaliation claim will eventually be challenged in courts.

Here’s more on this case from David Smyth’s blog…

Pension Funds: Mad at SEC Commissioner Gallagher

According to this Reuters article, 11 pension funds have written a letter disputing comments that Commissioner Gallagher made in a recent speech about possible funding gaps at pension funds generally…

The SEC Celebrates 80 Years Online

Although the actual celebration was tamped down this year – an ice cream social – the SEC has built a “80th Anniversary” spotlight page that is pretty cool. Some old-time videos including one with the 1st SEC Chair, Joe Kennedy…

– Broc Romanek