A sixth federal court has held that whistleblowers who make internal reports of securities violations are covered by the whistleblower protection provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) because such internal reports constitute “protected activity” under Dodd-Frank. In reaching its holding, the court agreed with the five other courts to review the question – as well as the official agency interpretation of the Securities and Exchange Commission (“SEC”). The decision was issued on October 16, 2013, by the U.S. District Court for the District of Massachusetts in the case of Ellington v. Giacoumakis.
The case was brought by Richard Ellington, who worked as a certified financial planner (“CFP”) for the New England Investment and Retirement Group, Inc. (“NEINV”), from 2005 to 2010. NEINV was owned and operated by Nicholas John Giacoumakis. Among other things, NEINV produced financial products for clients, including publications, analyses, and reports evaluating securities traded on the national securities exchanges, making NEINV subject to the provisions of the Investment Advisors Act of 1940 (“IAA”).
Over time, Ellington came to believe that NEINV was distributing misleading investment reports to existing and prospective clients. In July 2010, Ellington raised concerns with Giacoumakis and compiled a twenty-page report detailing the alleged infractions, which he then submitted to NEINV’s outside compliance firm, Commonwealth Financial Network (“CFN”). Less than two weeks later, Giacoumakis confronted Ellington, accused him of being a whistleblower, and demanded that he surrender his office keys. A few days thereafter, Giacoumakis terminated Ellington, purportedly for breaching the company’s policies on confidentiality by emailing himself documentary evidence supporting his allegations.
Citing the Fifth Circuit’s recent decision in Asadi v. G.E. Energy (USA), Giacoumakis argued that the Dodd-Frank anti-retaliation provision protects “whistleblowers” from retaliation, and elsewhere in the Act defines “whistleblower” as any individual who provides . . . information relating to a violation of the securities laws to the Commission.” (Emphasis added). Accordingly, Giacoumakis argued, Dodd-Frank only protects those whistleblowers who have already provided information to the SEC.
The district court disagreed, relying on the provision of Dodd-Frank which explicitly states that an employer may not retaliate against a whistleblower who makes disclosures protected by the Sarbanes-Oxley Act of 2002 (“SOX”). SOX provides protection against retaliation for whistleblowers who disclose their concerns about fraud internally. As a result, the SEC’s official interpretation of the statute – adopted by each of the courts that have analyzed the question – is that the Dodd-Frank whistleblower protection provision should apply to whistleblowers who report their concerns internally.
In weighing the Fifth Circuit’s interpretation against that of the SEC and the district courts, the court found that “[t]he SEC's construction is the more persuasive. It is apparent from the wording and positioning of [the Dodd-Frank anti-retaliation provision] that Congress intended that an employee terminated for reporting Sarbanes-Oxley violations to a supervisor or an outside compliance officer, and ultimately to the SEC, have a private right of action under Dodd-Frank whether or not the employer wins the race to the SEC's door with a termination notice.”