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SDNY Blows the Whistle

Judge William Pauley of the Southern District of New York (“SDNY”) held late last month that the anti-retaliation provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) does not extend to conduct abroad, significantly limiting the potential reach of protections afforded under Dodd-Frank.

Declares foreign employees out of bounds of the Dodd-Frank Anti-Retaliation Provision

Written by Vinson & Elkins LLP Partner Amy Riella, Associate Yousri Omar and Law Clerk Morgan Miller

Judge William Pauley of the Southern District of New York (“SDNY”) held late last month that the anti-retaliation provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) does not extend to conduct abroad, significantly limiting the potential reach of protections afforded under Dodd-Frank.[1] This provision, which is part of a broader set of regulations intended to encourage whistleblowers to report potential violations of the securities laws directly to the Securities and Exchange Commission (“SEC”), provides a cause of action for employees who are “discriminate[d]” against in any manner by an employer as a result of their attempts to report potential violations of the securities laws by their employer.[2]

In limiting the reach of the provision, Judge Pauley dismissed a suit brought by Meng-Lin Liu, a former employee of Siemens China Ltd., a subsidiary of Siemens A.G.  Siemens is a German engineering and electronics company that paid a combined total of $800 million in fines to the SEC and the Department of Justice (DOJ) in 2008 for violations of the anti-bribery and books and records provisions of the Foreign Corrupt Practices Act (“FCPA”).[3] The Siemens settlement remains the most significant FCPA settlement in history in terms of penalties, even without including the additional over $1 billion in penalties paid abroad by Siemens for the same conduct.

According to Liu, the enhancements made to the Siemens’ anti-bribery compliance program that Siemens implemented as a condition of its 2008 settlement with U.S. regulators failed to completely take root in China.  Liu, the former Division Compliance Officer of Siemens China’s healthcare division, alleges that the division routinely engaged in a kickback scheme through which inflated bids to sell medical imaging equipment to hospitals were used to conceal bribes to North Korean and Chinese officials.[4] Liu first raised concerns about the deals in 2009.[5]  Over the next year, Liu persisted in raising concerns through emails, presentations, and eventually at a town hall meeting before the President and the CEO of Siemens China.[6] In response, he claims, he was chastised, demoted, and ultimately fired.[7] Following his termination in May 2011, Liu reported possible FCPA violations by Siemens China directly to the SEC.[8]

Liu’s trajectory from concerned employee to failed claimant under the anti-retaliation provision mirrors that of Khaled Asadi, a former G.E. energy employee who also sued his former employer under the provision.[9] A former GE-Iraq Country Executive, Asadi raised concerns about potential FCPA violations with his supervisors in 2010.[10] In a 2012 suit brought in the Southern District of Texas, Asadi alleged his supervisors responded to his concerns by giving him a negative performance review and eventually terminating his contract.[11]  As in Liu, the U.S. District Court in Asadi dismissed the case on the grounds that the anti-retaliation provision does not apply to conduct abroad.[12]

In limiting the territorial reach of the anti-retaliation provision, Liu and Asadi mark a growing trend in American jurisprudence. Sparked by the Supreme Court’s 2010 Morrison v. United States decision, the legal trend appears to be moving toward limiting the reach of the U.S. Securities and Exchange Act to domestic conduct.[13]  Both the courts in Liu and Asadi applied the presumption established in Morrison that, unless a statue gives a “clear indication” of its application to foreign conduct, as for example in the case of the FCPA, “it has none.”[14]

Given the silence of the anti-retaliation provision as to its territorial reach, as contrasted to the SEC’s clear authorization under Section 929P(b) to bring enforcement actions for conduct outside the United States, the Asadi court concluded that the anti-retaliation provision at issue in the Liu case does not apply to foreign conduct.[15] In his opinion,  Judge Pauley extends this logic further, reasoning that adopting a broader reading of the anti-retaliation provision also would potentially destroy the prevailing presumption under Morrison that “United States law . . . does not rule the world” by enabling the U.S. to intrude too far into the employment laws of other nations.[16] In light of the clarity of Morrison’s presumption against the foreign application of statutes, as well as the decided contrast between the anti-retaliation provision and Section 929P(b) of the Dodd-Frank Act, it is possible that the additional courts analyzing this issue will  follow the reasoning in Liu and Asadi to limit the Dodd-Frank anti-retaliation provision to conduct within the United States.

While the Asadi and Liu decisions have helped to clarify the reach of the anti-retaliation provision, how the limitation of the anti-retaliation provisions will impact the whistleblower rewards provision remains to be seen.  Dodd-Frank incentivizes employees to directly report potential securities violations to the SEC, in return for the potential to obtain significant monetary rewards for successful SEC prosecutions based on original information they provided, arguably incenting whistleblowers to ignore internal compliance channels in favor of direct reporting to the SEC.[17]  Specifically, the whistleblower award program allows the SEC to provide an award of between 10% and 30% where the penalties in the enforcement action exceed $1 million.  Most recently, on October 1, 2013, the SEC announced the largest award ever granted under the whistleblower program, a staggering $14 million.[18]  As the identity of whistleblowers is protected by the statute, it is unclear whether foreigners already have qualified for awards under the provision.

Rather than help to clarify the scope of the whistleblower rewards provisions, the Asadi and Liu decisions create a greater confusion.  In affirming the district court’s decision in Asadi the Fifth Circuit implied that the court would construe the whistleblower provisions of Dodd-Frank as a coherent whole, thereby potentially rendering foreign employees ineligible for awards.[19]  Conversely, in his decision Monday, Judge Pauley stated that a person outside the United States may still serve as a whistleblower for purposes of the awards provision, even if he or she does not qualify for protection under the anti-retaliation provision.[20]

Because of the availability of significant monetary awards, companies operating abroad should maintain effective internal reporting mechanisms that will encourage foreign employees to report compliance concerns internally rather than to enforcement agencies. This is particularly critical in the context of potential FCPA violations, where whistleblowing not only undermines internal reporting mechanisms and the ability to take corrective and remedial measures, but also jeopardizes cooperation credit for self-reporting potential violations to the government.[21]  Moreover, as the Asadi and Liu cases suggest, many employees may seek to first report compliance concerns internally, despite the incentives contained in Dodd-Frank for direct reporting to the SEC.  Effective responsive steps and attention to companies’ anti-retaliation policies may help to mitigate the risk that employees take their concerns to U.S. regulators, rather than allow companies the opportunity to investigate and address internally.

[1] See Liu v. Siemens A.G., 13 Civ. 317 (SDNY Oct. 21, 2013), [hereinafter “Liu”].

[2] 15 U.S.C. § 78u-6(h)(1)(A).

[3] See Department of Justice Press Release, “Siemens AG and Three Subsidiaries Plead Guilty to Foreign Corrupt Practice Act Violations and Agree to Pay $450 Million in Combined Criminal Fines,” (Dec. 15 2008)).

[4] Liu at 1-2.

[5] Liu at 2.

[6] Liu at 2-3.

[7] Liu at 2-3.

[8] Liu at 3.

[9] See Asadi v. G.E. Energy, No. 4:12-345, 2012 WL 2522599 (S.D. Tex, Jun. 28, 2012), aff’d on other grounds, Asadi v. G.E. Energy, 720 F.3d 620 (5th Cir. 2013) [hereinafter “Asadi”].

[10] Asadi at 1-2.

[11] Asadi at 2.

[12] Asadi at 4.

[13] 130 S. Ct. 2869, 2877 (2010) [hereinafter “Morrison”].

[14] Liu at 5; Asadi at 4 (quoting Morrison at 2878).

[15] Asadi at 5.

[16] Liu at 4 (quoting Kiobel v. Royal Dutch Petroleum, 133 S. Ct. 1659, 1664 (2013)).

[17] See The Dodd Frank Act § 922a(b)(1)(2010).

[19] See Asadi v. G.E. Energy, 720 F.3d 620 (5th Cir. 2013).

[20] See Liu at 6.

[21]See Dep’t of Justice & Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act, 54 (2012).

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