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Whistleblower claims under SOX and Dodd-Frank: recent developments - International Law Office

International Law Office

Employment & Benefits - USA

Whistleblower claims under SOX and Dodd-Frank: recent developments

October 23 2013

SOX application to contractors of publicly held companies
Conflicting Dodd-Frank decisions
Second Circuit clarifies burden of proof
Employee-friendly test on protected activity
Range of SOX violations


Section 806 of the Sarbanes-Oxley Act of 2002 (SOX) and Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act both extend whistleblower protection to certain individuals who report conduct that they reasonably believe constitutes a violation of federal law relating to financial, securities or shareholder fraud. As described in more detail below, the Supreme Court is expected to issue a decision on the important question of whether SOX protects whistleblowing activity by employees of private entities which are contractors to public companies. Moreover, a number of federal circuit courts have recently issued rulings on issues concerning key provisions of SOX and the Dodd-Frank Act.

SOX application to contractors of publicly held companies

The US Supreme Court recently granted certiorari to decide whether SOX whistleblower protections extend to employees of privately held contractors of public companies, such as accounting firms, mutual fund investment advisors and other private companies that provide services to public companies. Section 1514A of SOX prohibits a publicly traded company or "any officer, employee, contractor, subcontractor, or agent of such company" from discriminating against its employees for reporting potential securities violations.

Last year, the First Circuit decided in Lawson v FMR, LLC,(1) that the complainants did not have claims under Section 1514A because of their status as employees of private companies. The Lawson decision conflicts with decisions of the Department of Labour's Administrative Review Board, which held that SOX's whistleblower protections do extend to employees of private contractors.(2) The Supreme Court is expected to resolve this split of authority in ruling on the Lawson appeal.

Conflicting Dodd-Frank decisions

In Murray v UBS Securities LLC(3) the District Court for the Southern District of New York interpreted the anti-retaliation provisions of the Dodd-Frank Act broadly to extend whistleblower protection to individuals who report alleged wrongdoing internally within their company rather than to the Securities and Exchange Commission (SEC). The Dodd-Frank Act defines a 'whistleblower' as "any individual who provides, or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission".(4) However, the Dodd-Frank Act's provision regarding "[p]rotection of whistleblowers" prohibits discrimination against a whistleblower who makes disclosures that are "required or protected" under SOX or any other law, rule or regulation within the jurisdiction of the SEC.(5) The defendant in Murray argued that because the plaintiff made his reports of alleged wrongdoing to his superiors at UBS – and not to the SEC – he was not afforded protection under the Dodd-Frank Act. The court found the statute "ambiguous" and thus relied on the language of a rule promulgated by the SEC under the act,(6) which sets out a more expansive definition of 'whistleblower' and provides that an individual qualifies as a whistleblower even if he or she never reports information to the SEC. Accordingly, the court ruled that the plaintiff was a whistleblower for the purposes of Dodd-Frank and denied the defendant's motion to dismiss the complaint.

Just two months after issuance of the Murray decision, the Fifth Circuit ruled in Asadi v GE Energy (USA), LLC(7) that the anti-retaliation provisions in the Dodd-Frank Act protect only whistleblowers who disclose alleged fraud to the SEC. The Fifth Circuit determined that the text of Dodd-Frank "clearly and unambiguously" provides a single definition of 'whistleblower'. Consequently, it declined to consider the SEC's rule defining 'whistleblower' more broadly. The court further discussed the practical reason for its interpretation: broadly construing 'whistleblower' to provide a right of action under Dodd-Frank to individuals who make disclosures protected under SOX would render moot SOX's own anti-retaliation provision and administrative scheme – which, among other things, requires that claims be filed with the Department of Labour within 180 days after the employee becomes aware of the violation.

While the Fifth Circuit's decision in Asadi conflicts directly with Murray and other district court decisions, the Supreme Court may await further Circuit Court decisions before taking up the question as to whether individuals who report internally (without going to the SEC) can be protected under Dodd-Frank.

Second Circuit clarifies burden of proof

The Second Circuit Court of Appeals recently took the opportunity to "clarify the burden-shifting framework applicable to whistleblower retaliation claims under SOX" in connection with its review and affirmance of a decision by the ARB dismissing an executive's SOX claim based on his allegation that he was terminated three months after he questioned the company's failure to disclose certain aspects of the company's finances.(8) Joining other federal circuits, the Second Circuit confirmed that, to prove a SOX claim, a whistleblower must show by a preponderance of the evidence that:

  • he or she engaged in statutorily protected activity;
  • the employer knew that he or she engaged in the protected activity;
  • the employee experienced an adverse employment action; and
  • the protected activity was a "contributing factor" in the adverse action.

If a complainant can prove these four elements, then an employer may avoid liability by proving with "clear and convincing evidence" that it would have taken the same adverse action absent the protected activity.

Employers should note that that the burden on SOX defendants to rebut the employee's prima facie case with "clear and convincing evidence" is a substantially higher standard than that applied under Title VII, which requires an employer to articulate some legitimate, non-discriminatory reason for the adverse action.

Employee-friendly test on protected activity

Section 806 of SOX prohibits retaliation against an employee who reports any conduct that the employee "reasonably believes constitutes a violation" of:

  • federal criminal law provisions prohibiting mail, wire or bank fraud;
  • any rule or regulation of the (SEC); or
  • any provision of federal law relating to fraud against shareholders.(9)

In Wiest v Lynch,(10) the trial court had dismissed the SOX claim, finding that the complainant had failed to allege that his internal communications to management "definitively and specifically related" to a statute or rule listed in SOX. The Third Circuit reversed, ruling that, rather than enumerating each element of one of the laws set forth in Section 1514A(a)(1), whistleblowers need only have had a subjectively and objectively reasonable belief that their employer has violated or will violate a law or regulation enumerated in Section 1514A(a)(1).

Range of SOX violations

In Lockheed Martin Corp v Admin Review Bd,(11) complainant Andrea Brown made an ethics complaint about a senior executive at Lockheed Martin. Specifically, Brown claimed that the executive, who ran a pen pal programme between Lockheed employees and US soldiers in Iraq, had sexual relationships with soldiers, sent troops sexually explicit materials and used company funds to buy a soldier a laptop. She brought a SOX claim alleging that she had been constructively terminated because she had engaged in this alleged protected activity.

On appeal, the employer challenged whether Brown had engaged in protected activity under SOX, arguing that SOX protects employees who complain about mail or wire fraud only if the mail or wire fraud ultimately "relat[es] to fraud against shareholders". The Tenth Circuit disagreed and explained:

"The plain, unambiguous text of § 1514A(a)(1) establishes six categories of employer conduct against which an employee is protected from retaliation for reporting: violations of 18 U.S.C. § 1341 (mail fraud), § 1343 (wire fraud), § 1344 (bank fraud), § 1348 (securities fraud), any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders."

Thus, according to the Tenth Circuit's reading of SOX, the law protects whistleblowers who report conduct that could violate the statutory provisions listed in 1541A(a)(1), even if such violations are unrelated to fraud against shareholders.


Recent decisions, as well as the Supreme Court's decision to consider the breadth of SOX's whistleblower provision, serve as a reminder that courts generally take a broad view of what constitutes protected activity under SOX and the Dodd-Frank Act. Employers should ensure that training of management and human resources professionals involved in the investigation and assessment of potential whistleblower complaints underscores the scope of activities that may constitute protected activity.

For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100), fax (+1 212 715 8000) or email (kleblang@kramerlevin.com or rholtzman@kramerlevin.com).


(1) 670 F3d 61, 62-63 (1st Cir 2012).

(2) See, for example, Spinner v David Landau & Assocs LLC, No 10-111 (ARB May 31 2012).

(3) Murray v UBS Securities LLC, No 12-cv-05914JMF, 2013 WL 2190084 (SDNY May 21 2013).

(4) 15 USC § 78u-6(a)(6).

(5) 15 USC § 78u-6(h)(1)(A)(iii).

(6) 17 CFR § 24021F-2(b)(1).

(7) 702 F3d 620 (5th Cir 2013).

(8) Bechtel v United States Department of Labour 710 F3d 443 (2d Cir 2013).

(9) 18 USC § 1514A(a)(1).

(10) 719 F3d 121 (3d Cir 2013).

(11) 717 F3d 1121 (10th Cir 2013).

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