On Tuesday, September 25, the U.S. District Court for the District of Connecticut ruled that the definition of “whistleblower” under the Dodd-Frank Act encompasses individuals who make disclosures required or protected under the Sarbanes-Oxley Act or the Securities Exchange Act of 1934. Plaintiff’s Richard Kramer’s case against former employer Trans-Lux is the first Dodd-Frank claim to survive a motion to dismiss in federal court. Kramer v. Trans-Lux Corp., 3:11cv1424 (D. Conn. Sept. 25, 2012). Scott Oswald and Nick Woodfield, principals with The Employment Law Group, represent Mr. Kramer.
Kramer served as Vice President of Human Resources and Administration for Trans-Lux for eighteen years. He reported to Chief Financial Officer Angel Toppi. Kramer and Toppi comprised Trans-Lux’s pension plan committee. Trans-Lux’s pension plan requires at least three members on the committee, and Kramer repeatedly advised Toppi that the committee needed at least one additional member. Toppi repeatedly rejected Kramer’s advice. In addition to serving on the committee, Toppi served as the sole trustee of the pension plan. Kramer was concerned that this created a conflict of interest.
On four occasions between 2008 and 2011, Trans-Lux amended its pension plan. On two of those occasions the two-person committee approved the amendments, although the plan requires approval by a three-person committee. In addition, Toppi failed to bring the 2009 amendments to the board of directors for approval and failed to file them with the SEC.
In March 2011, Toppi ordered Kramer not to notify the Pension Benefit Guaranty Corporation that the company had missed a contribution. This notification would have resulted in an immediate penalty to Trans-Lux. Later that month, Kramer notified Trans-Lux executives of all his concerns with Trans-Lux’s failure to adhere to its pension plan. In May 2011, he brought his concerns to the board of directors’ audit committee. Finally, he sent two letters to the SEC, notifying them of Trans-Lux’s violations.
As soon as Kramer expressed his concerns, Trans-Lux executives began to retaliate against him. They reprimanded him, reassigned his subordinates to other executives, stripped him of his responsibilities, and finally terminated him.
“Whistleblower” Under Dodd-Frank
Trans-Lux argued in its motion to dismiss that Kramer did not report Trans-Lux’s violations in the manner that the SEC requires, and therefore did not meet the definition of a “whistleblower.” Kramer argued that individuals who make disclosures that are required or protected under the Sarbanes-Oxley Act or the Securities Exchange Act of 1934 meet this definition regardless of the manner in which they make their disclosure.
The court agreed with Kramer’s argument, citing to a final rule promulgated by the SEC on August 12, 2011. The court explained:
Trans-Lux’s interpretation would dramatically narrow the available protections available to potential whistleblowers. In order to have provided information in the manner provided by the SEC, an individual would have either had to submit the information online, through the Commission’s website, or by mailing or faxing a Form TCR (Tip, Complaint or Referral). Mailing a regular letter is insufficient…. Such a reading seems inconsistent with the goal of the Dodd-Frank Act, which was to “improve the accountability and transparency of the financial system,” and create “new incentives and protections for whistleblowers.”
The court found that Kramer’s disclosures were required under Sarbanes-Oxley and relate to violations of securities laws and therefore are protected under Dodd-Frank regardless of the manner in which they were made. The court further clarified that the Dodd-Frank Act expands the protections of Sarbanes-Oxley, and that this expansion is a permissible construction of the statute.
Related U.S. District Court Decisions
On April 3, 2012, the U.S. District Court for the Middle District of Tennessee confirmed that the term “whistleblower” includes individuals who make internal disclosures of security law violations, as long as the disclosures are made in accordance with the “certain laws within the SEC’s jurisdiction.” Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 993 (M.D. Tenn. 2012). However, the court found that plaintiffs Ron and Beverly Noller were not whistleblowers under Dodd-Frank, because their employer does not issue stock and was not subject to the SEC’s jurisdiction. Id. at 997.
On May 4, 2011, the U.S. District Court for the Southern District of New York reached the same decision as the Noller court regarding internal disclosures and therefore granted plaintiff Patrick Egan leave to amend his complaint to include a claim for retaliation under Dodd-Frank. Egan v. TradingScreen, Inc., 10 CIV. 8202 LBS, 2011 WL 1672066 (S.D.N.Y. May 4, 2011).
On June 28, 2012, the U.S. District Court for the Southern District of Texas declined to decide whether plaintiff Khaled Asadi met the definition of a “whistleblower” under Dodd-Frank for making protected disclosures under Sarbanes-Oxley. Asadi v. G.E. Energy (USA), LLC, CIV.A. 4:12-345, 2012 WL 2522599 (S.D. Tex. June 28, 2012). Instead, the court decided that the statute did not protect plaintiff Asadi’s disclosures because they occurred outside of the United States. Id.