Retaliation Suit Advances Despite Lack of SEC Report

By Phyllis Diamond

Oct. 29 — A securities firm employee who allegedly was constructively discharged after refusing to cover up a securities law violation stated a claim under the Dodd-Frank Act's whistle-blower anti-retaliation provisions, the U.S. District Court for the Northern District of California concluded Oct. 28.

Adopting the “majority view,” Judge Lucy Koh said plaintiff Karen Connolly is covered by the statute, even though she didn't first report her concerns to the Securities and Exchange Commission.

The court also concluded that Connolly's claims under the Sarbanes-Oxley Act weren't filed within the applicable limitations period. However, it said the plaintiff may seek to amend her complaint to show equitable tolling.

The court recounted that Connolly resigned from defendant WHJR Associates in December 2012 after allegedly refusing to engage in a cover-up of Financial Industry Regulatory Authority rule violations involving customer accounts. In March 2014, she sued her former employers, claiming she was constructively discharged in violation of SOX and Dodd-Frank Wall Street Reform and Consumer Protection Act whistle-blower anti-retaliation protections, among other causes of action.

The defendants moved to dismiss, saying Connolly wasn't entitled to whistle-blower protection. Specifically, the court said, the defendants claimed Connolly wasn't protected under Dodd-Frank because she didn't report the alleged violations to the SEC. As to Connolly's SOX claim, they argued that the lawsuit was untimely, WHJR isn't a public company within the scope of the statute, and Connolly didn't engage in any protected activity.

The court said the defendants acknowledge that there is a split of authority as to whether a Dodd-Frank whistle-blower must report directly to the SEC. It also noted the SEC's position that direct reporting is not required.

The court concluded that the SEC's interpretation of the statute “is a reasonable one that warrants deference” and allowed Connolly's Dodd-Frank claim to proceed.