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Two Favorable Rulings for Dodd-Frank Whistleblowers, and the Whittling Away of Asadi

Posted  June 5, 2014

By Gordon Schnell

Last summer, the Fifth Circuit in Asadi v. GE Energy ruled the whistleblower retaliation protections of the Dodd-Frank Act apply only to those who actually provide information to the government (through the SEC or CFTC).  If a whistleblower merely reports within the company, to a supervisor or through an internal compliance program, the Fifth Circuit ruled there is no coverage under the Act.  Click here for more.  For now, it remains the only appellate court to speak to this issue with a definitive split among the district courts as to whether the Fifth Circuit got it right.  Add two more district court decisions to the line of cases finding the Fifth Circuit got it wrong….

The first, Yang v. Navigators Group, was decided on May 8 by the federal court in New York.  It involved the firing of a corporate whistleblower after she repeatedly warned her superiors the company was engaging in improper risk control practices and shareholder fraud.  Relying on Asadi, the company argued her firing could not be the subject of a Dodd-Frank whistleblower retaliation claim because she never went to the SEC with her concerns.  The court refused to find such a requirement in the statute, holding the statutory language ambiguous on the question.  Instead, the court deferred to the SEC’s own interpretation that there is no such requirement; that the anti-retaliation protections apply even if the whistleblower does not report to the SEC.

The other recent decision to go against Asadi, Bussing v. COR Clearing, was decided on May 21 by the federal court in Nebraska.  It too involved the firing of a corporate whistleblower after she made repeated reports to her superiors of what she considered to be serious violations of the Bank Secrecy Act and the SEC’s anti-money laundering provisions.  Following Asadi, the magistrate judge ruled the whistleblower was not covered under Dodd-Frank because she never reported her concerns to the SEC.  The district court disagreed and rejected outright the approach taken by the Fifth Circuit in Asadi.

But the court got there a very different way than did the court in Yang and in the other district court decisions refusing to follow Asadi.  The court did not simply defer to the SEC’s interpretation as these other courts have done.  Rather, it did its own extended analysis of the statute, its legislative history and most importantly, the negative policy implications of limiting Dodd-Frank protections only to those whistleblowers who report to the SEC.  It is this last part of the analysis that provides the most compelling reason for why Asadi was wrongly decided.  The court made two key arguments.

First, Asadi would push outside the protections of Dodd-Frank the “majority of whistleblowers,” including “those who are most vulnerable to retaliation.”  That is because the vast majority of whistleblowers do not report to the government.  They try to work it out within their company first.  Second, and even more fundamentally, Asadi would “discourage internal reporting” and undermine the significant benefits — to both companies and the government — that internal reporting provides.  As the court noted, these include:

  • Allowing companies to remedy improper conduct at an early stage, perhaps before it rises to the level of a violation.
  •  Encouraging whistleblowers to participate in internal compliance programs.
  •  Preventing simple misunderstandings (where the employee is mistaken about alleged misconduct) from transforming into investigations that waste corporate and government resources.
  • Vetting whistleblower complaints so the SEC receives fewer and higher quality tips from whistleblowers.

Ironically, many of the companies now pushing for Asadi to control were the same ones that originally lobbied the SEC to make reporting internally a prerequisite for qualifying as a Dodd-Frank whistleblower.  GE — the defendant in Asadi — actually led the charge with a letter to the SEC (along with Google, Honeywell, JP Morgan Chase, Microsoft and Northrop Grumman) arguing “the best way to balance the desires for strong compliance functions and an effective whistleblower program is to require internal reporting to be eligible for an award” under the statute.  Such a precondition to Dodd-Frank coverage was rightly rejected by the SEC.  But the corporate push for one highlights the important role these internal programs can play and the potentially disastrous consequences that might follow if Asadi is more widely adopted.

It is a perfect case of “be careful what you wish for.”  In Asadi, GE was successful in dismissing the particular whistleblower retaliation claim at issue.  In doing so, however, GE set in motion a body of law that will drive well counseled whistleblowers to ignore their companies’ internal compliance programs no matter how well they are run or how seriously the company takes them.  It is the very outcome GE and other companies were so desperately trying to avoid.

Luckily, the Bussing court and a growing number of other district courts, have rejected this ill-advised approach endorsed by the Fifth Circuit.  But these district court decisions alone will not be enough to reverse this perilous precedent.  It will take other appellate courts, and eventually the Supreme Court, to set the record straight on just how a whistleblower is to be defined under the Dodd-Frank Act.