Companies May Find High Court Whistleblower Ruling Costly

A U.S. Supreme Court ruling narrowing the scope of anti-retaliation protections for corporate whistleblowers could lead to a significant increase in the number of complaints filed directly with the U.S. Securities and Exchange Commission, a result companies may find costly, legal experts said.

In Digital Realty Trust Inc. v. Paul Somers, the court found that employees who bring securities law complaints against their companies must first take their allegations to the SEC, rather than filing their complaints internally, to be protected by anti-retaliation measures afforded under Dodd-Frank.

But most whistleblower complaints historically have first been reported internally, and legal experts say companies frequently benefit from that by getting out in front of the complaint before federal regulators are brought in to investigate, which often results in embarrassing revelations and expensive litigation.

“For some in corporate America, this may be viewed as a victory,” said Jordan Thomas, chair of [prior firm’s] SEC Whistleblower Representation Practice and a chief architect of the SEC’s whistleblower program while he worked at the agency. “But I believe they will come to regret this decision, because sophisticated whistleblowers will now report externally first because they don’t have the employment protections afforded when they report internally.”

Thomas told the National Law Journal, “I’m a former law enforcement person. I think law enforcement benefits when you have strong internal reporting and compliance systems. This decision, while good for business, is bad for investors because the SEC is losing its first line of defense.”

For whistleblower lawyers, the Supreme Court’s decision simplifies the analysis of whether tipsters should contact the SEC, Thomas said. The SEC, on the other hand, faces difficult decisions about how to proceed.

“The SEC has a big problem now. They’ve been encouraging people to report internally. Now they have to think twice about that because they’re essentially encouraging people to report internally and go into harm’s way.”