Editorial Note: We are delighted to publish this “opinion piece” by Dr. Steven Mintz, a frequent contributor to our social media blog. As always, when you read his contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.
The U.S. Supreme Court may have turned whistleblowing on its head with the decision on February 21, 2018 in the case Digital Realty Trust, Inc. v. Somers. The ruling is likely to encourage employees, managers, and compliance officials to blow the whistle on retaliation as soon as it begins, and not after a sometimes-lengthy process plays out to convince superiors to change the accounting and financial reporting. Essentially, employees who choose to inform the SEC of financial wrongdoing under the Dodd-Frank Financial Reform Act must now inform the SEC while the issue with the employer is unfolding to be eligible for Dodd-Frank protections.
The key issue in the Digital Realty case is the interpretation of who is a whistleblower under Dodd-Frank, and when does a would-be whistleblower qualify for protection against retaliation. The statute defines a whistleblower as a person who reports potential violations of the securities laws to the SEC.
The SEC had been interpreting the Act with respect to the retaliation provision broadly, thereby allowing the protections to apply to internal company reporting even if the individual did not report to the SEC. The Supreme Court disagreed with that interpretation. Writing for the Court in its 9-0 unanimous decision, Justice Ruth Bader Ginsburg put it this way: “A whistleblower is any person who provides … information relating to a violation of the securities laws to the Commission” [emphasis added]. “That definition,” she added, “describes who is eligible for anti-retaliation protection if the individual engages in any of the protected conduct enumerated in the [Act]. Moreover, she observed, “this interpretation is consistent with the ‘core objective’ of Dodd-Frank’s robust whistleblower program,” … [which] is ‘to motivate people who know of securities law violations to tell the SEC.’”
Ginsburg also made an interesting observation about the Sarbanes-Oxley Act. She said: “By comparison, SOX had a broader mission to “disturb the ‘corporate code of silence’ that ‘discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally.’”
One thing that Ginsburg failed to address is that SOX retaliation claims must be filed within 180 days of discovering the act, not much time to get the information straight. Dodd-Frank, on the other hand, has a three-year period to file. The reality is that very few SOX filings have been successful, in part due to the fact that filings go to the Department of Labor whereas Dodd-Frank filings go the SEC. We may not be a fan of the SEC’s regulatory speed and efficiency. but it’s light years ahead of the DOL.
Prior to the ruling in the Digital Realty case, employees would almost automatically first report the alleged violation internally and take the matter up the chain of command all the way to the board of directors before going to the SEC. Informing the SEC was seen as a last resort. A typical scenario is: an employee jumps through the hoops internally, fails to induce change, may be demoted, treated badly, or fired, and then files for whistleblower protections under Dodd-Frank. If successful under the SEC process, the whistleblower could be reinstated and receive back pay. There is even an award if the SEC brings a lawsuit based on original information voluntarily provided to the SEC that leads to sanctions in excess of $1 million. The award is between 10%-30% of the total sanctions. This provision does not seem to be disturbed by the ruling since the SEC, presumably, would have first been informed of the retaliation.
Here’s the problem in a nutshell. Let’s assume an employee reports wrongdoing. Will that employee go to the SEC first before informing his or her supervisor? If I were the CEO and found out one of my managers went straight to the SEC without giving me a chance to first fix the matter, well you fill in the blanks. Just imagine an employee goes to the SEC to qualify for whistleblower protections, the organization finds out because the SEC starts investigating, the employee is then fired. What should the employee do next? Go back to the SEC and say, “Now look what you’ve done.”
The Supreme Court ruling is counter-productive to the intent of Dodd-Frank, which is to protect whistleblowers, but also to encourage internal reporting. In fact, the SEC has openly promoted internal reporting, especially for compliance officials. The bottom line is that the ruling will have unintended consequences, whether it is to heighten the pressures internally on an employee who wants to do the right thing and must now first report to the SEC, or to create a floodgate of reports that the SEC won’t be able to handle because its resources are limited. Either way, the ruling is a loss for whistleblowers and, most likely, companies because more employees will run to the SEC.
Dr. Steven Mintz is a Professor Emeritus at Cal Poly San Luis Obispo. His website is stevenmintzethics.com.