ComplianceMay 10, 2011

Personal SEC Contact Not Needed From Whistleblower

The U.S. District Court for the Southern District of New York has ruled that a whistleblower need not personally contact the Securities and Exchange Commission to claim retaliation protection under the Dodd-Frank financial reform law.

Reported by Rebecca Moore

The court first ruled that the anti-retaliation provisions in the Securities Whistleblower Incentives and Protection provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act require a plaintiff’s disclosures to be made to the SEC or that they fall under one of four categories of disclosures delineated by 15 U.S.C. § 78u-6(h)(1)(A)(iii) that do not require reporting to the SEC as a predicate to filing suit. The court then decided that the plaintiff need not personally make such disclosures, reported a memo from law firm Seyfarth Shaw LLP.

According to the memo, in Egan v. TradingScreen, Inc., Case No. 10-cv-8202 (S.D.N.Y.), Patrick Egan was the head of sales for the Americas of TradingScreen when he allegedly learned that the CEO was diverting corporate assets to another company that he solely owned. Egan reported that alleged conduct to TSI’s President, who then informed members of the Board of Directors. The Board hired a law firm to conduct an investigation, which confirmed Egan’s allegations of misconduct. The CEO subsequently terminated Egan’s employment.

The court rejected the defendants’ motion to dismiss, claiming that Egan could not invoke those provisions because he never personally contacted the SEC regarding the CEO’s alleged misconduct. The court held that “[t]he plain text of the statute merely requires that the person seeking to invoke the private right of action have acted with others in such reporting, not that he or she led the effort to do so.” Thus, the court concluded that Egan’s cooperation with the law firm’s investigation was sufficient to allow him to take advantage of Dodd-Frank’s protections if he could also show that the law firm subsequently provided the information to the SEC.

The court also determined that Egan’s disclosures did not fall under any of the four categories that do not require reporting, so he needed to show that the alleged misconduct was reported to the SEC. It granted Egan leave to amend his complaint to plead facts supporting his knowledge that the law firm reported its findings to the SEC.