Court Rules that SEC Whistleblower Must Submit Information to the SEC in order to Sue for Retaliation under Dodd-Frank

A federal district court has ruled that in order to bring a claim for retaliation under the Dodd-Frank Act’s securities whistleblower retaliation provisions, the purported whistleblower must submit information to the Securities and Exchange Commission.  In Egan v. Tradingscreen, Inc., (No. 10 Civ. 8202, (S.D.N.Y., May 4, 2011 and September 12, 2011))  the plaintiff, Patrick Egan, learned that the chief executive officer of his employer was diverting the company’s assets to another company that the CEO owned. Plaintiff reported this conduct to TradingScreen’s president, who informed the board of directors and to independent counsel who conducted an investigation. Although the investigation revealed that Plaintiff was correct in his allegations, the CEO subsequently gained control of the board of directors, which subsequently forced Plaintiff to resign.  

Egan sued for retaliation under 15 U.S.C. s. 78u-6. Upon review of the complaint, and a subsequently permitted amended complaint, Judge Leonard Sand found that the statute requires a disgruntled employee report conduct in violation of the securities laws to the Securities and Exchange Commission in order to be covered by the retaliation provisions.  Although the court allowed for an indirect disclosure to the SEC through third parties, Plaintiff had insufficiently alleged that an indirect disclosure through, for example, independent counsel, had occurred.  The Court also acknowledged certain statutory exceptions to disclosure to the SEC, but found  that none applied in this instance.  

Although Judge Sand’s decision is only precedential in the Southern District of New York, individuals considering whistleblower claims against their employer must factor in the applicability of the retaliation provisions when considering reporting securities violations internally before going to the SEC.  Securing counsel to review claims prior to taking action can maximize the relief a whistleblower may obtain as a result of reporting a claim.