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From Securities Regulation Daily, December 9, 2015

Employee not a whistleblower under strict reading of Dodd-Frank

By Anne Sherry, J.D.

In a case of first impression, a district court in Tennessee held that Dodd-Frank’s anti-retaliation provision only protects whistleblowers who report misconduct to the SEC. Finding the Fifth Circuit’s reasoning in Asadi more persuasive than that of the Second Circuit in Berman, the court dismissed all of the employee’s claims (Verble v. Morgan Stanley Smith Barney, LLC, December 8, 2015, Varlan, T.).

Termination and lawsuit. The former Morgan Stanley employee alleged that he was fired after his colleagues suspected he was acting as a confidential source to the FBI. He claimed that, through that role, he uncovered insider trading and other Sarbanes-Oxley violations. As of his termination, the employee had not provided any information to the SEC. He filed a complaint in the Eastern District of Tennessee for retaliation under SOX, Dodd-Frank, and the False Claims Act, as well as under state law. The defendants moved to dismiss.

The court made short work of dismissing the SOX anti-retaliation claim because the employee undisputedly had not filed the prerequisite complaint with OSHA. The False Claims Act allegations also fell short because the employee did not take any action in furtherance of a qui tam action, assist in an FCA action brought by the government, or attempt to stop specific fraudulent claims against the government.

Dueling Dodd-Frank interpretations. The Dodd-Frank claims required more analysis due to a circuit split on whether Dodd-Frank requires SEC reporting. The Fifth Circuit and some district courts have held that the plain language of the statute conditions whistleblower protection on reporting to the agency. The Second Circuit and other district courts have ruled that the statute is ambiguous and deferred to the SEC’s rulemaking, which does not require external reporting. The only district court within the Sixth Circuit to have ruled on the issue did so prior to either of the court of appeals decisions.

Defined term. Reviewing whether the statute is ambiguous, the court stressed that the provision protects whistleblowers, defined in the statute as “any individual who provides information relating to a violation of the securities laws to the Commission.” The drafters’ choice of a specific defined term rather than a generic term like “individual” or “employee” also suggested to the court that Congress intended to limit the scope of the anti-retaliation provision.

Limitation not superfluity. The district court was not persuaded by the Second Circuit’s conclusion that subsection (iii) of Dodd-Frank Section 21F(h)(1)(A), which protects some categories of internal reporting, is at odds with the definition of “whistleblower.” Although the whistleblower definition limits the effect of subsection (iii), the limitation does not render the provision superfluous. The district court also turned away from the Berman decision because the Second Circuit assumed that subsection (iii) would require simultaneous reporting to the SEC and another party. Like the dissent in Berman and the majority in Asadi, the court did not read the section as requiring simultaneous reporting.

Analogies to Affordable Care Act. The Second Circuit also relied on King v. Burwell (U.S. 2015), where the Court held that a provision of the Affordable Care Act subsidizing purchases of insurance on exchanges “established by the State” was ambiguous. Unlike in that case, the district court wrote, here a strict construction of the anti-retaliation provision would not controvert Dodd-Frank’s statutory scheme. Furthermore, King does not permit finding ambiguity when there is no ambiguity.

Legislative history and process. In the court’s view, the lack of legislative history is “somewhat telling”: Congress would have mentioned if using a particular definition was so integral to the statutory scheme. Although the Berman court focused on the fact that (iii) was a late addition to the statute, the district court interpreted this fact differently. “If clause (iii) was so integral to the statutory scheme of Dodd-Frank, it likely would have been in discussion from the start, rather than being a late-added provision.”

The case is No. 3:15-CV-00074.

Attorneys: Jackie Sharp, Jr. (Sharp Law, PC) for John S. Verble. Andrew J. Schaffran (Morgan, Lewis & Bockius LLP) for Morgan Stanley Smith Barney, LLC.

Companies: Morgan Stanley Smith Barney, LLC

MainStory: TopStory BrokerDealers DoddFrankAct FraudManipulation SarbanesOxleyAct WhistleblowerNews TennesseeNews

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