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Supreme Court decision in Digital Realty v Somers, limiting SEC whistleblower protections, hurts both whistleblowers and employers

The Supreme Court’s decision this week in Digital Realty Trust Inc. v. Somers to limit Dodd-Frank whistleblower protections not only hurts whistleblowers, but their employers as well, according to two SEC whistleblower lawyers at Phillips & Cohen LLP.

The Supreme Court ruled that the Dodd Frank Act’s anti-retaliation protections do not cover internal whistleblowers who suffer retaliation before they report to the SEC.

Phillips & Cohen partners Erika A. Kelton and Sean X. McKessy, both whistleblower attorneys, said that because employees have now been told they will not be protected unless they report their concerns to the SEC, they have less of an incentive to use internal channels to resolve the issue. That could be costly for employers.

“The decision undoubtedly will discourage employees from reporting their concerns through internal compliance systems and instead drive those employees to go first to the SEC so they will be covered under the law’s anti-retaliation provisions,” said Kelton, who represented three whistleblowers who received awards under the SEC whistleblower program, including an international whistleblower who received one of the largest SEC awards in program’s history, $32 million. “This is an instance where Wall Street and corporations lose far more than they win.”

McKessy, who was the founding Chief of the SEC Office of the Whistleblower and now represents whistleblowers, expressed similar views.

“It’s a bad day for whistleblowers,” McKessy said. “However, it’s also a bad day for Corporate America, particularly for those who have created strong internal compliance systems, because now individuals who suspect a securities law violation would be well advised to report directly to the SEC lest they forfeit fundamental anti-retaliation protections.”

At issue was whether individuals who report concerns about possible securities violations internally to their employers qualify as “whistleblowers” under the Dodd-Frank Act and therefore are protected by the law’s anti-retaliation provisions if the retaliation occurs before they go to the SEC.

Digital Realty Trust v Somers involved former Digital Realty executive Paul Somers, who was fired after he reported to his company that his supervisor had removed internal controls and hid certain expenditures on a project in Hong Kong. He then sued Digital Realty, saying he was protected from retaliation by Dodd-Frank’s whistleblower rules. Digital Realty countered by arguing that because Somers did not report his concerns directly to the SEC, he was not protected by Dodd-Frank.

The District Court of Northern California and the Ninth Circuit Court of Appeals sided with Somers. The Supreme Court, however, disagreed.

“The definition section of the statute supplies an unequivocal answer: A ‘whistleblower’ is ‘any individual who provides…information relating to a violation of the securities laws to the Commission,’” the opinion reads.

“As a result of this decision, we expect to see more whistleblowers come to us to report claims under the SEC whistleblower program first rather than reporting their concerns to their companies, so that they can be protected by Dodd-Frank’s anti-retaliation provisions,” McKessy said. “Whistleblowers need to take the Supreme Court decision into account so as to avoid the risk of losing the right to be protected from retaliation.”

The SEC whistleblower program allows private individuals to confidentially and anonymously submit information about securities fraud. If the whistleblower’s information results in an enforcement action of $1 million or more, the whistleblower will receive 10 percent to 30 percent of the total recovery as a reward.

The SEC has taken strong steps towards protecting whistleblowers’ rights to go to the SEC with their concerns, such as taking enforcement actions against companies that use restrictive employment and severance agreements to prevent whistleblowers from providing information about possible securities violations to the agency.

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