Whistleblowing Under Dodd-Frank Successfully Accomplished By Providing Information To Outside Counsel Who Then Report To The SEC
A recent post here discussed the new Dodd-Frank whistleblower provisions. Among them is a bounty program which entitles persons, either acting alone or jointly with others, who provide information of violations to the Securities and Exchange Commission to receive a portion of monies eventually recovered by the SEC. See 15 U.S.C. § 78u-6(a). There is also a companion anti-retaliation provision which protects a whistleblower from discharge if he or she either provides information of violations to the SEC or makes disclosures to others of information required under a defined and limited number of statutes, such as Sarbanes-Oxley. See 15 U.S.C. § 78u-6(h).
In an opinion of first impression, a district court recently held that a fired whistleblower could avail himself of the anti-retaliation provisions, and accompanying private right of action, even though he did not directly provide any information to the SEC or to other agencies within any of the other defined statutory categories. Egan v. TradingScreen, Inc., 2011 WL 1672066 (S.D.N.Y., May 4, 2011).
Egan, an employee of financial software company TradingScreen, had passed information to the company president about the CEO’s diversion of company assets. The president in turn communicated the information to independent Board members, who retained outside counsel to conduct an investigation. Counsel interviewed Egan, among others, and issued a report detailing the CEO’s improper actions, a report which was provided to the SEC. Both the president and Egan were fired by the CEO, and Egan brought a private damages action under the Dodd-Frank anti-retaliation provisions.
Egan, however, had not himself made any disclosure to the SEC, or to any other agency. The company and its CEO claimed that Egan was simply interviewed by outside counsel and that he was not the exclusive source of information in the hands of the SEC, disentitling Egan to rely on the anti-relation provisions. Yet, the district court denied a motion to dismiss the claim. Judge Sand held that Egan had acted jointly with outside counsel, the former president and the independent directors to provide the necessary information to the SEC.
The holding of Egan, if undisturbed on appeal, may substantially expand both the group of bounty-eligible and discharge-proof whistleblowers to include any number of corporate employees who are interviewed during an internal investigation and can later claim to have provided an incrementally new piece of information with the intention that it be communicated to the SEC. Arguably, the legislation was intended to focus its benefits more narrowly on those who actually communicate eligible information to the SEC, and other lower courts may well adopt a narrower construction.
(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)