Lawyer Needn't Alert SEC Before Claiming Whistle-Blower Status

By Joan C. Rogers

Oct. 29 — The fired general counsel of a public company may sue individual directors as well as the company itself under the whistle-blower retaliation provisions of the Sarbanes-Oxley Act and the Dodd-Frank Act, although his SOX claims against all but one of the directors must be dismissed as untimely, the U.S. District Court for the Northern District of California decided Oct. 23.

Ruling on two issues that have split federal courts, Chief Magistrate Judge Joseph Spero held:

• Dodd-Frank whistle-blower protections kick in even if the individual makes his report internally and not to the Securities and Exchange Commission.

• Individual directors, not just the company, may be held liable for violating both the SOX and Dodd-Frank acts' whistle-blower retaliations provisions.


Foreign Bribery Concerns

The rulings came on a motion to dismiss a suit filed by Sanford S. Wadler, former general counsel of Bio-Rad Laboratories Inc.

Wadler alleges he was fired for alerting upper management to possible Foreign Corrupt Practices Act violations in China. The complaint asserts claims against Bio-Rad and individual directors under the whistle-blower provisions of the Sarbanes-Oxley Act, 18 U.S.C. §1514A, and the Dodd-Frank Act, 15 U.S.C. §78u-6.

Denying the motion to dismiss in most respects, Spero held that Wadler may go forward with his SOX and Dodd-Frank claims against Bio-Rad and Chief Executive Officer Norman Schwartz, as well as his Dodd-Frank claims against individual directors. He said Wadler's SOX claims against individual directors other than Schwartz weren't filed in time.

Internal Whistle-Blowers Protected

Spero concluded that Dodd-Frank whistle-blower protections aren't limited to individuals who report their concerns to the SEC. Spero accepted the SEC's position, as set forth in 17 C.F.R. §240.21F-2, that internal whistle-blowers are protected from retaliation under the act.

A majority of courts have concluded that the SEC interpretation is entitled to deference, and the reasoning of those decisions is persuasive, Spero found.

The internal reporting issue has divided the two federal appeals courts that have weighed in on the question so far:

▸Two years ago the Fifth Circuit held that Dodd-Frank's anti-retaliation provisions apply only to individuals who have provided information or assistance to the SEC.

▸More recently, a divided Second Circuit went the other way, ruling in a corporate whistle-blower's favor on the internal reporting issue. On Oct. 14 that court granted a stay which gives the defendants a chance to seek Supreme Court review.

Individual Liability

Spero also held that directors may be held individually liable for violating the SOX and Dodd-Frank Act's whistle-blower anti-retaliation provisions.

In regard to SOX, the magistrate judge said Congress's failure expressly to include directors in the list of corporate “agents” who may be held individually liable doesn't support the conclusion that it intended to shield directors who engage in retaliatory conduct from personal liability.

The “context and general purpose” of the statute “support the conclusion that the term `agent' is intended to encompass directors,” Spero wrote.

Spero also said Congress intended for the anti-retaliation protections of Dodd-Frank to be “at least as extensive” as the protections offered by SOX.

Michael J. von Loewenfeldt of Kerr & Wagstaffe LLP, San Francisco, is lead counsel for Wadler. Linda M. Inscoe of Latham and Watkins LLP, San Francisco, is lead counsel for the defendants.

To contact the reporter on this story: Joan C. Rogers in Washington at

To contact the editor responsible for this story: Kirk Swanson at

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