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First Dodd-Frank Whistleblower Case May Impact Internal Investigations

By | May 10, 2011

[Update:  The case against TradingScreen was ultimately dismissed.  Interested readers should refer to subsequent case history.]

Egan v. TradingScreen Inc. (S.D.N.Y. May 4, 2011) is the first case dealing with the Dodd-Frank Act’s whistleblower provisions that we are aware of.  Plaintiff Patrick Egan was employed by TradingScreen.  It seems to fall into the category of “bad facts make bad law.”  Plaintiff uncovers allegations of serious misconduct, reports it, is fired by the person responsible for the misconduct, and then has his retaliatory discharge claim opposed.  What court is not going to go out of its way to find protection for the Plaintiff?

More specifically, Plaintiff learned that TradingScreen’s CEO, Philippe Buhannic, was diverting corporate assets.  Plaintiff reported the conduct to TradingScreen’s President, who informed the independent directors.  The independent directors hired Latham & Watkins to conduct an investigation, which confirmed Plaintiff’s allegations.  Buhannic somehow gained control of the board of directors, which prevented Buhannic from being fired.  Two of the independent directors assured plaintiff he would not be fired.  Nevertheless, Buhannic fired plaintiff.

Plaintiff asserted he was entitled to relief under the retaliatory discharge provisions incorporated into the whistleblower provisions of the Dodd-Frank Act.  The court noted anti-retaliation provisions of the Dodd-Frank Act explicitly prohibit retaliation against whistleblowers that provide information and testimony to the SEC. In addition, they also protect whistleblowers that make disclosures falling into one of four categories: “disclosures that are required or protected under the Sarbanes-Oxley Act . . . the Securities Exchange Act of 1934 . . . section 1513(e) of title 18, United States Code, and any other law, rule, or regulation subject to the jurisdiction of the Commission.”  These latter provision do not require that disclosure be made directly to the SEC.

While the court disregarded many of the Plaintiff’s arguments for whistleblower protection, the court looked closely at Plaintiff’s arguments his that disclosures were protected by 18 U.S.C. § 1513(e), which prohibits “interference with the lawful employment or livelihood of any person” who provides truthful information “to a law enforcement officer” relating to the commission of federal offenses.  According to the court, a claim of whistleblowing under section 1513(e) relies on the question of whether Plaintiff or anyone acting jointly with him did in fact report to the SEC.

Plaintiff argued that he acted jointly with the attorneys from Latham to reveal Buhannic’s malfeasance.  Plaintiff’s claim posed the following question: Is a prospective whistleblower covered by the Dodd-Frank Act if he gave information to attorneys who he alleges on information and belief reported it to the SEC?  Defendants countered that the Latham attorneys merely interviewed Plaintiff and that the complaint does not state that he was a source of substantial information, that he hired the Latham attorneys, or directed their actions. The court noted that this argument would effectively rewrite the phrase “acting jointly” in the Dodd-Frank Act to require leadership, hiring, or direction of any investigation or effort to report information to the SEC.  According to the Court, the plain text of the statute merely requires that the person seeking to invoke a private right of action to have acted with others in such reporting, not that he or she led the effort to do so.

The court also discussed that defendants’ claim that the Latham attorneys merely interviewed Plaintiff is belied by the allegations in the complaint.

The question remained as to whether Latham reported the matters to the SEC.  The court found that given the surrounding circumstances it could be plausibly alleged that the misconduct was reported.  The court granted Plaintiff leave to amend his complaint to make appropriate allegations.

Given the foregoing, it is likely practices in internal investigations will be modified so that witnesses are clearly advised that those conducting the investigation are not acting jointly with a person that potentially may provide whistleblower type information to prevent claims of retaliatory discharge.

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Contact Steve Quinlivan for more information.