Dodd Frank – Implications Of The Final Rules On Internal Reporting Procedures (Part III)

Internal Reporting Alone May Constitute Protected Conduct, If The Report Was Communicated To The SEC By Others, Or The Internal Report Falls Within The “Catch-all” Provision

In Egan v. TradingScreen, Inc., NO. 10 CIV. 8202 LBS, 2011 WL 1672066 (S.D.N.Y. May 4, 2011), the court addressed whether the plaintiff must personally transmit his complaint to the SEC for it to be protected under Dodd-Frank. Egan was the company’s head of sales for the Americas. In early 2009, he allegedly learned that the CEO was diverting corporate assets to another company that he solely owned. In January 2010, believing that the CEO’s behavior was jeopardizing the company’s business, Plaintiff reported it to the President of the company, who then contacted the Board of Directors (Board). The Board hired an outside law firm to conduct an investigation, in which Plaintiff participated. The investigation confirmed Plaintiff’s allegations. Shortly thereafter, the CEO terminated Egan’s employment.

The court considered whether Dodd-Frank’s anti-retaliation provisions require a plaintiff personally to report information to the SEC. Though Egan never personally and directly reported any information to the SEC, he claimed he was protected since he initiated the inquiry and disclosed information in interviews with the law firm conducting the investigation. Egan claimed he was “acting jointly” with the law firm because he expected the law firm to report the information to the SEC. The court agreed with Egan, noting that “[t]he plain text of the statute merely requires that the person seeking to invoke the private right of action have acted with others in such reporting, not that he or she led the effort to do so.” It thus found Egan’s cooperation with the law firm’s investigation sufficient to allow him to invoke Dodd-Frank’s protections – provided he demonstrate that the law firm did in fact provide the information to the SEC. Thus, the court refused to dismiss Egan’s case. Instead, it gave him permission to file an amended complaint pursuant to its opinion.
Egan then filed an amended complaint, but still did not specifically allege in his pleading that the law firm actually did provide the information to the SEC. Accordingly, at that point, Egan’s lawsuit was dismissed for failure to state a claim under Dodd-Frank. See Egan v. TradingScreen, Inc., NO. 10 CIV. 8202 LBS, 2011 WL 4344067 (S.D.N.Y. Sep 12, 2011).

Note also that an internal report may be protected under Dodd-Frank if it was “required or protected under the Sarbanes–Oxley Act of 2002 (15 U.S.C. § 7201 et seq.), the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.), including section 10A(m) of such Act (15 U.S.C. § 78f(m)), section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.” 15 U.S.C. § 78u–6(h)(1)(A)(iii).

Hat tip: An outstanding article that covers the law and final regulations in comprehensive fashion is Dodd-Frank and the SEC Final Rule: From Protected Employee To Bounty Hunter, ST001 ALI-ABA 1487 (July 28-30, 2011), which was written by Littler Mendelson, P.C. lawyers John S. Adler, Edward T. Ellis, Barbara E. Hoey, Gregory C. Keating, Kevin M. Kraham, Amy E. Mendenhall, Kenneth R. O’Brian, and Carole F. Wilder. This post is partially derived from that article.

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