Court Dismisses Retaliation Claim, Citing Whistle-Blower's Failure to Report to SEC

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By Yin Wilczek

March 4 — Deepening the split between the federal district courts, the U.S. District Court for the Eastern District of Missouri March 2 dismissed a would-be whistle-blower's retaliation claim because he had not first reported his suspicions to the SEC.

Judge Ronnie L. White wrote that the plain language of the Dodd-Frank Wall Street Reform and Consumer Protection Act states that a whistle-blower must first make a report to the Securities and Exchange Commission to qualify for anti-retaliation protection.

One of the most contentious issues under Dodd-Frank's whistle-blower provisions is whether informants must first tip off the SEC before they may file anti-retaliation lawsuits against their employers.

The question has divided the federal district courts and even judges within the U.S. District Court for the Southern District of New York.

David Marshall, Washington-based partner at Katz, Marshall & Banks LLP who represents whistle-blowers, told Bloomberg BNA that the courts' continuing division poses a serious problem, not only for informants but also for their employers.

Only Appellate Ruling 

The U.S. Court of Appeals for the Fifth Circuit thus far is the only federal appeals court to rule on the issue. It concluded in July 2013 that a former G.E. Energy (USA) LLC employee, Khaled Asadi, couldn't sue his employer under Dodd-Frank's anti-retaliation provisions because he did not first approach the SEC.

In the wake of the ruling, the SEC has filed amicus briefs at the appellate level—most recently at the U.S. Court of Appeals for the Second Circuit—to clarify that under its rules, informants don't have to report potential misconduct to the agency to be protected.

In the case at issue, Fred Lutzeier, a former director at the Internal Audit Group in Citigroup Management Corp.'s Missouri offices, alleged among other claims that he was fired, after one year of service, as retaliation for whistle-blowing.

The employer, on the other hand, asserted that Lutzeier was terminated as part of a global re-organization. It also argued that the former director did not qualify as a whistle-blower, citing Asadi.

The court adopted the Fifth Circuit's reasoning in Asadi. Among other rationale, it agreed with Asadi that adopting a broader interpretation of Dodd-Frank would render the 2002 Sarbanes-Oxley Act's anti-retaliation provision moot.

“That is, plaintiffs would not have an incentive to file a Sarbanes-Oxley claim, which has a shorter statute of limitations and single (not double) back pay when plaintiffs could bring a Dodd-Frank Act claim instead,” it said.

`Minority' View 

Marshall said the court's decision reflected “what is clearly a minority view in the growing number of decisions that are rendered on this question”.

One problem with the Asadi position is that it encourages whistle-blowers to circumvent internal reporting mechanisms and run straight to the commission, Marshall said. He noted that as the SEC pointed out in its amicus briefs, the bounty program was structured to preserve internal reporting so that problems uncovered by employees can be effectively handled and addressed by companies, perhaps without ever involving the commission.

Most employees continue to report problems internally, and they need certainty in the law as to whether they will be protected against retaliation, Marshall continued. “Frankly, I’m glad to see the division” in the courts continuing so that the question can make “its way to the U.S. Supreme Court, where I'm confident internal whistle-blowers will win protection simply because the need for that protection is so overwhelming,” he said.

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