Former Treasury Secretary Hank Paulson with former President George W. Bush. Paulson’s former firm, Goldman Sachs, was among many Wall Street firms that benefited from federal bailouts 10 years ago.

This week marks the 10th Annivesary of the start of the financial crisis of 2008. I originally wrote the post below about DRT v. Somers in March but decided not to publish it for some reason. Over the lunch hour I read this piece from Wall Street pundit/apologist Aaron Ross Sorkin that made a bunch of lame excuses about how our politcal leaders handled the afternmath of the financial crisis. After reading that article I thought it would be a good idea to dust off my DRT v. Somers post. 

The United States Supreme Court just made it harder for employees to pursue retaliation cases against financial institutions when they are fired for reporting fraud.

In a unanimous opinion in Digital Realty Trust v. Somers authored by Justice Ruth Bader Ginsberg, the United States Supreme Court agreed with the 5^th Circuit Court of Appeals that language within the Dodd-Frank Act that defined a whistleblower as someone who provided information to the Securities and Exchange Commission (SEC) excluded employees who merely reported concerns about fraud internally.

The reason this decision is disturbing is that two other circuit courts and the Securities and Exchange Commission interpreted Dodd-Frank to extend whistleblower protections to those covered under the whistleblower provisions of Sarbanes-Oxley “Sarbox”, Sarbox allows employees to bring whistleblower complaints if they are terminated in retaliation for internal complaints. In the Somers case, a federal trial judge and the 9^th Circuit Court of Appeals both agreed that Somers could bring a Dodd-Frank case for being fired for making an internal complaint. 

While Sarbox and Dodd-Frank cases tend to overlap there are some key differences that are relevant to an employee bringing a retaliation claim. A Sarbox complaint requires an employee file a claim with OSHA within 180 days of the retaliation. Dodd-Frank allows an employee to file directly in court within 6 years of the retaliation. While a Dodd-Frank claim in easier to bring than a Sarbox claim, Sarbox allows for emotional distress damages in addition to attorney fees, backpay and re-instatement, while Dodd-Frank allows for double back pay, attorney fee, re-instatement but no general damages. While retaliation cases might be less valuable under Dodd-Frank than they would be under Sarbox, the employee would still be able to make a claim even if they waited more than 180 days from the retaliation and even if they didn’t report to the SEC or file with OSHA.

The 9^th Circuit pointed out the fact that Sarbox claims included emotional distress damages while Dodd-Frank claims do not as one reason why an internal whistleblower could still bring a Dodd-Frank claim. Justice Ginsberg ignored the availability of emotional distress damages in Sarbox. Ginsberg seemed to be arguing that Dodd-Frank cases were more valuable, so they should require reporting to the SEC rather than just internal reporting. The 9^th Circuit was correct in rejecting that reasoning, but unfortunately their opinion is not the law.

The 9^th Circuit pointed out that Sarbox and Dodd-Frank have similar origins and purposes. University of Nebraska Law School Dean and whistleblower law expert Richard Moberly wrote that Sarbox and Dodd-Frank both encourage reporting of financial fraud.  Logically it makes sense that the whistleblower provisions of Dodd-Frank would add to provisions already within Sarbox as the laws have the same general purpose.

But Sarbox and Dodd-Frank have some differences in how they discourage fraudulent behavior. Sarbox is meant to punish employers who retaliate against whistleblowers, while Dodd-Frank encourages employees to report misconduct directly to the government by allowing employees to share in fines against the company.  Justice Ginsberg keyed on the difference between enforcement schemes under Dodd-Frank and Sarbox to argue the laws were distinguishable enough that internal reporting didn’t qualify as whistleblowing under Dodd-Frank.

By its language Somers only applies to Dodd-Frank whistleblower cases. Somers doesn’t overturn or even question precedent from anti-discrimination law (Title VII) and wage hour law (the Fair Labor Standards Act) that have permissive definition of protected activity that cover internal and informal opposition to unlawful conduct. But in less defined areas of retaliation and whistleblower law the Somers decision would certainly be persuasive authority to management-side lawyers who wish to narrowly define protected activity to defeat retaliation claims.

The SEC argued to keep internal whistleblowers covered by Dodd-Frank because internal reporting can fix problems without government intervention and for less expense. Even management-side firm Vedder Price stated in their analysis of the Somers decision that the decision could raise compliance costs because the decision would encourage employees to report directly the SEC rather than internally. It’s ironic conservative Justices like John Roberts, Samuel Alito, Clarence Thomas and Neil Gorsuch approve of expanding government intervention into private firms when more cost-effective solutions are available. Cynically it would appear that the Somers decision is a gift to management side lawyers. Whistleblowers cases are easier to defend as a result of Somers, but Somers could mean more administrative charges which means more billable hours.

The Somers decision is even more galling considering the Senate, with the support of 17 of 49 members of the Democratic caucus, voted to water down reforms under Dodd-Frank.  One criticism of Sarbox was that it didn’t root out fraud because it merely punished employers for firing whistleblowers rather than encouraging early outside reporting. To some extent, financial whistleblower law assumes that problems with financial markets is a problem of bad people who break laws rather than bad laws.

The Enron scandal is one that is largely attributed to accounting fraud. That is what Sarbox was passed to remedy. But the role of over-the-counter derivatives, in other words unregulated bets, on electricity markets is an under-appreciated cause of Enron’s downfall. Enron was a proponent of the Commodity Futures Modernization Act of 2000 because the reform made betting on electricity markets easier .  Enron was the canary in the coal mine when it came to the dangers of free-for-all financial speculation. Sarbox was at best a half-measure in response to Enron. Whistleblower laws can’t be relied upon to maintain our confidence in financial markets when the most dangerous financial practices are perfectly legal. Republicans and pro-business Democrats seem to be ignoring this conclusion.