Despite the amicus backing of the SEC and testimony from a colleague that he had seen John Verble “in the black sedan with apparent FBI agents,” the Sixth Circuit found earlier this year in an unpublished opinion that Verble “failed to allege sufficient facts as to his Dodd-Frank retaliation claim to state a plausible claim for relief.” Earlier this week, the U.S. Supreme Court declined to review the case.
The Sixth Circuit specifically avoided the contentious question of whether those seeking remedies for retaliation must first have reported their information to the SEC. That question has divided the Fifth Circuit, which held in Asadi v. G.E. Energy (USA), LLC that the retaliation protections apply only to individuals who report misconduct to the SEC, from the Commission, which has declared by rule and in amicus filings that SEC reporting is not a prerequisite to retaliation protection (it is clear that only whistleblowers who report to the SEC are eligible for program awards). The Second and the Ninth Circuits have agreed with the Commission. As stated by the Ninth Circuit in Somers v. Digital Realty Trust, Inc., the SEC’s view “is consistent with Congress's overall purpose to protect those who report violations internally as well as those who report to the government.”
The Sixth Circuit’s narrow holding on the rather unusual allegations by Verble, and the decision by the high court to let the case stand, leaves the conflict between the circuits untouched. The appellants in Somers are still within the 90-day window to file a petition for certiorari, so the Supreme Court may yet attempt to resolve this dilemma in the short term.
The SEC argued in an amicus brief filed in Verble that an “examination of the relevant statutory language demonstrates, at a minimum, considerable tension and inconsistency within the text, thus revealing that Congress did not unambiguously express an intent to limit the employment anti-retaliation protections under [Exchange Act] Section 21F(h)(1) to only those individuals who report securities law violations to the Commission.” Because the statutory language is ambiguous, the SEC asserted that the Commission's rules dealing with retaliation represent a reasonable reading of the statute entitled to judicial deference under the Supreme Court’s 1984 decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.
The specific question of whether SEC reporting is a necessary precondition to the availability of an action for retaliation would have an impact on a limited number of litigants. The import of these cases may increase dramatically, however, if the high court expands its focus from whether courts should defer to the SEC’s rulemaking on retaliation to the much more significant question of whether Chevron deference remains a viable doctrine.
At trial, the U.S. District Court for the Eastern District of Tennessee dismissed Verble’s claim that Morgan Stanley Smith Barney wrongfully terminated him in violation of the Dodd-Frank Act due to his whistle-blowing activities. The district court, agreeing with the Fifth Circuit’s Asadi decision, found that Verble was not eligible for whistle-blower protection because he did not report his information to the SEC. The Sixth Circuit affirmed the dismissal, but avoided the SEC reporting question by basing its decision on the infirmities of Verble’s allegations.
It is a fair statement to say that John Verble was an unlikely plaintiff. He claimed that while employed as a financial adviser by Morgan Stanley Smith Barney, he became aware of illegal conduct by firm clients that caused him "high anxiety and a great moral concern." The firm allegedly learned that Verble was seen on more than one occasion "getting into a black sedan with tinted windows accompanied by what appeared to be Federal agents." Verble claimed that the branch manager called him into a meeting, asked him if he was wearing a wire and then threatened him by saying, "I am going to take you outside and whip your ass!"
Verble included in his complaint a long list of employees of a Morgan Stanley client who pleaded guilty to fraud, and claimed that he had called the FBI from a pay phone after the threat from the branch manager. The Sixth Circuit resoundingly rejected these claims, stating that “[m]ost of Verble’s allegations are conclusory allegations or legal conclusions masquerading as factual allegations, rather than non-conclusory allegations of fact.”
According to the court, there was nothing inherent in the pay phone call that differentiated it from any tip or report that anyone could make to the FBI. Verble did not say whether he was given any instructions, whether the FBI took any action in response to his call, or even to whom he spoke. As for the strangers in the black sedan, the court noted that Verble “does not even specify whether the people in the sedan actually were FBI agents.” The court also noted that the fraud convictions of the employees of the Morgan Stanley client listed by Verble in his complaint were well-publicized, and he did not explain how the convictions were related to any actions he took or how the convictions related to his Dodd-Frank retaliation claim. "Because Verble's complaint is entirely devoid of any factual material describing his work with any law-enforcement agency, including the FBI or SEC," concluded the court, "it does not allege enough facts to state a claim to relief that is plausible on its face."
It was not surprising given the odd facts and narrow holding that the Supreme Court decided to leave the Verble case alone, but the Ninth Circuit in Somers presents a clear conflict with the Fifth Circuit’s Asadi decision. If the Somers appellants decide to seek high court review, the Supreme Court might take the case to resolve this split between the circuits on whether the Dodd-Frank retaliation language is ambiguous and whether the SEC acted within its authority when it enacted Exchange Act Rule 21F-2. It is possible, though, particularly in light of the nomination of Tenth Circuit Judge Neil Gorsuch to fill the vacant Supreme Court seat that the court might use the case as a vehicle for examining the continuing viability of the Chevron deference doctrine.
Judge Gorsuch has openly expressed hostility to the notion of Chevron deference. In a 2016 decision, Gutierrez- Brizuela v. Lynch, he stated that:
There's an elephant in the room with us today. We have studiously attempted to work our way around it and even left it unremarked. But the fact is Chevron and Brand X permit executive bureaucracies to swallow huge amounts of core judicial and legislative power and concentrate federal power in a way that seems more than a little difficult to square with the Constitution of the framers' design. Maybe the time has come to face the behemoth.
According to Judge Gorsuch, Chevron's purpose and its effect appear to be at odds with the separation of legislative and executive functions. He suggests that the remedy for an agency dissatisfied with a federal court ruling would be to seek further judicial review or a legislative remedy. Congress will continue to pass statutes for executive agencies to enforce, he observed, and agencies will continue to offer guidance on how they intend to enforce those statutes.
While courts would consider agency expertise, they would incorporate agency determinations only when "it accords with the best reading of a statute." Judicial review would limit the ability of an agency to alter and amend existing law, he concluded, and deference to agency interpretations as we know it now would be a thing of the past.
Judge Gorsuch asked “what would happen in a world without Chevron?” He opined that “in a world without Chevron very little would change—except perhaps the most important things.” Those most important things may very well include a fundamental transformation of administrative law and a new balance going forward in the relationship between agencies and courts.
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