High court struggles with whistleblower protections



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The Supreme Court was reluctant on Tuesday to grant Dodd-Frank protections to whistleblowers who denounce equity and investment fraud to their employers but not to the federal government.

Under the Dodd-Frank Act, the Securities and Exchange Commission (SEC) in 2011 issued new rules to protect employees against retaliation from their employers if they report fraud internally.

Paul Somers, a former employee of Digital Realty Trust Inc., was fired after he reported on alleged securities violations to his top management. Somers never reported the information to the SEC, but his lawyer says his employment should have been protected as a result of the 2011 rule.

His former employer, a publicly traded real estate trust, disagrees. Digital Realty Trust argues that Dodd-Frank's definition of a whistleblower explicitly excludes anyone who does not report the allegations to the SEC.

Judge Neil Gorsuch, a self-styled textualist seeking to follow the literal reading of the statutes, noted that Dodd-Frank explicitly states that the incentives and protections for whistleblowers "will apply" to anyone who provides information related to a violation of securities laws to the SEC.

"How much clearer could it have been?" Gorsuch said, referring to the language that lawmakers put into legislation.

Somers' attorney, Daniel Geyser, noted that the language in Dodd-Frank does not end there, and states that the policy would be implemented "in the manner established, by rule or regulation, by the Commission."

But Digital Realty Trust attorney Kannon Shanmugam argued that the SEC gave no indication in its proposed rule that it planned to disperse the requirement to report fraud to the SEC.

"Certainly there were some who thought that would be desirable, but there is nothing in the notification of the proposed regulation, and to the extent that the respondent and the government cite some language that suggests that the Commission was considering expanding the application of the anti-retaliation provision and inviting comments to that effect, the previous sentence in the notification of regulatory proposal indicates that the Commission intended to retain the requirement to inform the SEC, "he said.

Gorsuch zeroed in on the process used to write the rule.

"Now, I think it puts the whole administrative process in your head because you are not giving notice to people, there is no reasonable opportunity to comment, maybe some people realize the problem, but most of the not people, "he said.

"The agency acts without the benefit of notification and comment and can not issue a reasoned decision, and then we are supposed to give in to the To resolve this ambiguity?" He said.

Judges Stephen Breyer, a member of the liberal wing of the court, seemed unconvinced that Dodd-Frank should be expanded because employees who report violations internally are already protected by the Sarbanes-Oxley Act.

"If, in fact, you read it your way, we have basically eliminated Sarbanes-Oxley because everyone would put it under this provision," he said.

Judge Ruth Bader Ginsburg, meanwhile, wanted to know if there was any reason why Somers did not go to the SEC.

Geyser said it had never occurred to him, so he also missed the 180-day deadline to file a complaint with the Labor Secretary for protection under the Sarbanes-Oxley Act. That law, enacted eight years before Dodd-Frank, protects employees who report misconduct not only to the SEC, but to an internal supervisor.

"What you tried to do was do the right thing and comply with the Corporate Code of Conduct by calling the misconduct to the attention of your supervisor, which is again exactly what all the corporate stakeholders, you know, in this procedure they have said is their goal too, "said Geyser.

Dodd-Frank gives employees six years to bring an anti-retaliation claim. It also allows the complainant to request double late payment, a legal remedy not offered under the Sarbanes-Oxley Act.

The courts of the ninth and second circuits have ruled that the regulation of the SEC is entitled to deference. The Fifth Circuit, however, said Dodd-Frank's definition "expressly and unequivocally requires an individual to provide information to the SEC to qualify as a 'whistleblower'."

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