Second Circuit extends whistleblower protections to cover individuals who report wrongdoing internally before reporting to the SEC.

On September 10, 2015, the U.S. Court of Appeals for the Second Circuit ruled  that the whistleblower protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”) protects those individuals who report wrongdoings internally, prior to making a report to the Securities and Exchange Commission (“the SEC”), from retaliation by their employers.

The lawsuit involved Daniel Berman, former Finance Director of Neo@Ogilvy North America, who claimed he was fired because he reported accounting irregularities, including delayed payments and improperly recognized revenues, to his superiors. Berman was terminated in April 2013, made a report to the SEC in October 2013, and filed a civil suit in the United States District Court for the Southern District of New York in January 2014.

The issue was whether the Act protected Berman from retaliation by his employer even though he did not make a report to the SEC prior to his termination. The district court declined to provide Berman protection, dismissing the case and holding that in order for the Act to apply, an individual must first report suspected wrongdoing to the SEC. The Second Circuit reversed and remanded the matter for further proceedings, holding that the Act is ambiguous as to the issue of protection in this case and deferring to the SEC’s interpretive rule, which provides protection to individuals in Berman’s situation.

The anti-retaliation provisions of the Act provide protection only to individuals who report information “to the Commission,” Previously, this provision applied only to those who reported wrongdoing to the SEC before any retaliation by their employer. However, the Court determined that when this provision is read in conjunction with the Sarbane Oxley Act of 2002, which provides protections for certain types of internally reported disclosures relating to accounting practices, parties in Berman’s situation would be protected despite failing to notify the SEC prior to retaliation.

The Court’s interpretation, which is in alignment with the SEC’s, will allow employees who report suspected wrongdoings to their employer to be protected from retaliation by their employer even if they have not made any report to the SEC. In making its decision, the Court acknowledged that many employees make preliminary internal reports because they are required to by contract, or because they consider preliminary internal reporting a safer and more effective avenue for change. Without widening the scope of protection from retaliation to include preliminary internal reporting, the Court determined that the purpose of the Act would be severely limited.

There is a split in courts across the country regarding this issue. Some courts have followed the Second Circuit’s approach, while others have ruled that the Act should be strictly construed. Strict construction, according to these courts, mandates that only parties who report wrongdoing to the SEC prior to retaliation should be protected. The split among circuits could make this issue ripe for Supreme Court review in the near future.

Francis P. Karam, Esq. P.C. currently represents one of the original whistleblowers to file a claim under the Dodd-Frank Act, and has extensive expertise in representing whistleblowers and other witnesses to corporate fraud. For more information, please contact our office.

Francis P. Karam Named one of “Legal Who’s Who of 2014″ by Corporate Responsibility Magazine

Corporate Responsibility Magazine chose Frank Karam as one of the “best and brightest in the legal community” listed on the magazine’s Legal Who’s Who of 2014. Nominees where chosen from the three practice areas of securities, employment law, and environmental law. Many lawyers made the list for their participation in litigating major, high impact cases. The magazine also reached out to a panel of business people and asked them to nominate outstanding lawyers they have worked with. Franks Karam was chosen for his work in Confidential Witness defense in the case City of Pontiac General Employees’ Retirement System v. Lockheed Martin Corp.

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SEC Protects Whistleblowers Against Restrictive Language in Confidentiality Agreements

The Securities and Exchange Commission (“SEC”) continues to take strides to protect whistleblowers.[1] On April 1, 2015 the SEC announced its first enforcement action against a company for using “improperly restrictive language” in agreements. The SEC determined language in the agreements had the potential to stifle whistleblowing in violation of the whistleblower protection provisions of the Dodd-Frank Act regulations.

Technology and engineering firm KBR, Inc. required witnesses in certain investigations interviews to sign confidentiality statements. These confidentiality statements stated that the witness could face disciplinary action, including termination, if they discussed matters of the investigation with outside parties without prior approval from KBR’s legal department. The SEC found these terms were in violation of Rule 21F-17, which forbids companies from taking any action that could interfere with a whistleblower reporting possible violations to the SEC.

Although it appears that there were no specific occurrences of KBR preventing employees from reaching out to the SEC about specific securities laws violations, the SEC determined that the company’s provisions in the confidentiality statements had the potential to deter whistleblowing. Along with a $130,000 fine, KBR Inc. has agreed to amend its confidentiality statements, and to add language to clarify to employees that they are free to report possible violations of federal law or regulations to the SEC and other federal or government agencies without any prior approval.

Employers who use such agreements should be aware of how the Dodd-Frank Act is being enforced and how to draft confidentiality agreements and other employee contracts that are compliant with the SEC’s Rules. Language should reflect that employees are free to report securities violations to the SEC or other government agencies.

Employees who have signed such agreements should be aware of language that may be in violation of the Dodd-Frank Act or SEC Rules. Employees should also be aware that regardless of language in such agreements, they can and should contact the SEC or other government agencies regarding possible securities violations without the fear of retaliation by their employer.

Francis P. Karam, Esq. P.C. currently represents one of the original whistleblowers to file a claim under the Dodd-Frank Act, and has extensive expertise in representing whistleblowers and other witnesses to corporate fraud. For more information, please contact our office.

[1] When an employee notifies the government of a wrongdoing by their employer, they are a whistleblower.