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Aug 30, 2013 by |

Whistleblower Protections for Those Who Report Fraud Internally is Being Debated in Court Cases

A crucial question about whistleblower protections is whether or not complaints must be lodged with the Securities and Exchange Commission to qualify.  Large corporations think that complaints should be required to be submitted to the Securities and Exchange Commission in order for whistleblowers to be protected.

In the past, large corporations had argued that employees should report wrongdoing internally with their companies prior to going to the Securities and Exchange Commission.  Corporations were alarmed that new whistleblower incentives would undermine internal fraud detection programs and lead to a barrage of regulatory actions.  Recently, in a probable attempt to mitigate liability, corporations are claiming that whistleblowers are not protected from retaliation if they did not report to the Securities and Exchange Commission.

 In a recent federal case, an executive sued a major corporation, and alleged that he was fired after reporting a potential securities violation internally.  The corporation fired the executive and stated that his termination had nothing to do with the complaint.  The corporation also stated that the executive did not qualify as a whistleblower because he did not report his allegations to the Securities and Exchange Commission.  The court ruled in favor of the corporation and not the executive.

In that case, the corporation stated that they encourage internal reporting and prohibit retaliation against employees who speak out.  The corporation also said that their position is that employees should report internally first, and if the company fails to respond, then it is appropriate for employees to report to the Securities and Exchange Commission.

Other large corporations have taken similar stances in recent legislation with former employees who claimed protection under whistleblower provisions.  One large corporation recently stated that congress made it clear that an employee qualifies as a whistleblower only when he/she provides information to the Securities and Exchange Commission.

The issue at question comes from Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created a rewards program for people who report securities violations to the Securities and Exchange Commission which lead to enforcement actions.  Whistleblowers can get up to 30% of any monetary penalty that the agency recovers.  That same section also prohibits retaliation against whistleblowers.  A dispute over the meaning of the language in the legislation is what has caused the dispute.  In one section it specifically defines a whistleblower as someone who reports information to the Securities and Exchange Commission, yet in another place it states that whistleblowers are protected from employer retaliation if they report in a variety of different ways.

Thus far, several United States district court judges have held that employees who report internally can be protected under the Dodd-Frank Act.  But, in a recent case, the Fifth Circuit held otherwise.

The arguments that large corporations are using in the recent cases is the opposite of the argument they were using when the Securities and Exchange Commission was having a discussion about how to implement the Dodd-Frank rules three years ago.

After the Securities and Exchange Commission released its proposed rules regarding whistleblower reward provisions the agency received dozens of letters from corporations who claimed that the legislation would undermine internal fraud detection measures.  The final legislation did not require any internal reporting requirements.  The final rules did add incentives for people to report problems through internal company channels in addition to reporting to the Securities and Exchange Commission.

The decision by the Fifth Circuit may have an impact on those incentives if that decision is followed by other circuits.  The ruling makes it less likely that a whistleblower would report  a potential securities violation internally without also reporting to the Securities and Exchange Commission.

Evans Law Firm, Inc. handles whistleblower/false claims, consumer fraud class actions, insurance and banking fraud, consumer product liability, elder abuse, and personal injury cases.  If you think that you have witnessed or are the victim of financial fraud by an insurance company, bank or individual then, contact Evans Law Firm, Inc. at (415) 441-8669 for a free and confidential consultation, or email

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