Last month, the U.S. Supreme Court issued its decision in Digital Realty Trust v. Somers, in which it unanimously held that Dodd-Frank’s anti-retaliation provisions don’t count if the case involves a violation of securities law that has not been reported to the SEC first. While the decision is a victory for employers, corporate America will certainly lose the war of engendering employee trust, creating better and more robust compliance and even saving themselves greater fines and penalties when the SEC comes knocking.

The decision negatively impacts attempts to create a best practices compliance program, a key part of which is an internal reporting mechanism (i.e., the Justice Department and Securities and Exchange Commission’s Hallmark 8 of an Effective Compliance Program). CCOs and compliance practitioners encourage reporting to not only comply with the DoJ/SEC Ten Hallmarks and U.S. Sentencing Guidelines on internal reporting, but to create more effective compliance and a better culture in their organizations. Now, much of that work may be for naught, as employees have no legal incentive to report internally. Indeed, they may be fired for doing so.

The Somers decision cuts off corporations from their best sources of information—its own employees. Now companies will have less ability to detect and then remediate any problems before they become legal violations or keep legal violations from expanding. In addition to not being informed of issues closer to the ground, businesses whose employees have blown the whistle to the SEC are now automatically behind the eight-ball with the Commission. Even if they have the information from another source, and do self-disclose, they cannot receive credit for it, because the SEC already knew about it.

The Somers decision was correct from the legal perspective. The negative effects, however, may long weigh on CCOs, compliance functions, and companies. Sometimes getting something you think you want is much worse for you than not getting it.

Companies want to do whatever they can to spot problems internally. Now, they may have to both investigate and remediate while simultaneously dealing with SEC investigations. Through robust internal reporting, businesses have the ability to catch problems much more quickly. If such a securities law violation is not reported internally, but an employee whistleblows to the SEC, the problem could get much worse. It could also appear to the SEC that the company was actively trying to hide a problem—or at the very least was not looking for one—because if an employee provides tips to the SEC, it is obvious that someone in the company knew about it. So, the question then becomes: Why didn’t management?

Next, if an employee goes to the SEC to report an issue, yet does not report the facts to his organization, he may become bulletproof from termination; and all along, the company does not even know about it. Even if the employee disclosed to the company after his initial disclosure to the SEC and then started showing up two hours late or became unproductive for some other reason, it would be more likely than not that his supervisor would be unaware of the fact that no disciplinary action could be taken.

Finally, the decision demonstrates what can happen with a company’s legal department does its job—which is to protect the company by trampling on compliance. Corporate legal departments most usually take an employment law approach to unmask and terminate whistleblowers so the authorities and regulators will not receive any more information. At the very least, such whistleblowing employees are usually isolated, so they do not have access to additional information. This type of approach works to destroy trust in an organization and this will certainly negatively impact corporate American going forward.

The Somers decision was correct from the legal perspective. The negative effects, however, may long weigh on CCOs, compliance functions, and companies. Sometimes getting something you think you want is much worse for you than not getting it.

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