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District Court finds SEC Regulation on Dodd-Frank Not Entitled To Deference on Whistleblower Protections

December 10, 2015

Author: Kris D. Meade.

Another federal court has joined the Fifth Circuit on one side of a circuit court split, rejecting the SEC’s interpretation that a whistleblower need not report potential Dodd-Frank Act violations to the SEC to gain protection under the anti-retaliation provisions of the Dodd-Frank Act. Federal District Judge Thomas A. Varlan of the Eastern District of Tennessee reached that conclusion in a case brought by a former employee against Morgan Stanley, Verble v. Morgan Stanley Smith Barney LLC et al., Case No. 3:15-cv-00074 (E.D. Tenn.). Like other courts on this side of the appellate court split, Judge Varlan rejected the SEC’s position, finding that “the Dodd-Frank Act is unambiguous on th[e] issue” of whether conduct must be reported to the SEC and “consequently, the court will not give deference to the SEC regulation.” Because the former employee provided information to the FBI, but not the SEC, before his termination, “he does not qualify as a whistleblower as defined in Dodd-Frank and has no protection.”

Judge Varlan also dismissed the former employee’s other claims, including a Sarbanes-Oxley (SOX) retaliation claim. As to the SOX claim, the former employee failed to allege in his civil complaint that he had filed a SOX complaint with OSHA.  As a result, the court determined it lacked subject matter jurisdiction over the SOX claim.

With this most recent decision, the drumbeat has become louder for Supreme Court resolution of the circuit court split as to whether the SEC’s regulation is entitled to deference and, thus, whether a whistleblower may proceed with Dodd-Frank retaliation claims even when the whistleblower fails to report the alleged misconduct to the SEC.

Kris D. Meade
Partner – Washington, D.C.
Phone: +1.202.624.2854