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In past columns, we have reviewed unanticipated consequences of Sarbanes Oxley’s whistleblower protection. One significant question has been how, in light of the statute’s remedial nature but its focus on remedying securities fraud, courts should construe its definition of protected activity. In particular, courts (and the Department of Labor administrative law judges who generally hear these cases at the outset) have struggled with SOX’s requirement that to be a protected whistleblower, the employee must complain about conduct that she “reasonably believes constitutes a violation of … any rule or regulation of the [SEC], or any provision of Federal law relating to fraud against shareholders.” [FOOTNOTE 1] Employees have sought to extend SOX’s whistleblower protection — with mixed success — to mere workplace matters, such as complaints about the company’s business decisions, or other complaints unrelated to what Congress sought to remedy in passing SOX. Thus, one court dismissed the complaint of a grocery stock clerk who claimed that he was retaliated against after he complained that his employer underpaid him, in the amount of one dollar an hour over a period of four weeks, allegedly in violation of the Fair Labor Standards Act. [FOOTNOTE 2] But the court also suggested that, if the numbers had been more significant, the result may have been different. These cases are disturbing enough. And, as SOX whistleblower cases become more commonplace, plaintiffs are invoking more legal theories to accompany their claims — sometimes with more success. Notably, a recent case in the Southern District of New York revived the rarely invoked exception to New York’s employment-at-will doctrine permitting breach of contract lawsuits where the employee is terminated in violation of an internal policy encouraging whistleblowers to come forward. The case, Fraser v. Fiduciary Trust Co. International, [FOOTNOTE 3] is interesting not only because it serves to remind employers of this hidden risk. It also illustrates the blunderbuss approach that putative whistleblowers are taking in these cases. Fraser was a vice president at the defendant, an investment management company and bank. In his first amended complaint, an instrument 110 pages long, he alleged a SOX whistleblower claim based on four separate alleged incidents. He also claimed discriminatory discharge, whistleblower, and fiduciary breach claims under ERISA. He included race discrimination claims under federal and New York State and City law. He further asserted securities fraud claims under federal and California law, and, to top it off, the breach of contract claim. Berman denied Fiduciary’s motion to dismiss an ERISA discriminatory discharge claim, and the race discrimination claims. But he dismissed without prejudice the securities law claims, certain other SOX whistleblower claims, ERISA breach of fiduciary duty and whistleblower claims, and the contract claim. Berman had directed that plaintiff submit an amended complaint that was more “streamlined and organized,” but Crotty (to whom the case was subsequently transferred) held that the “prolix, wandering style” of the 91-page, second amended complaint did not cure the deficiencies of the prior one. He dismissed the securities claims, the ERISA claims, and two of the SOX claims, but held that one SOX whistleblower claim — and the breach of contract claim — survived. The analysis of the SOX whistleblower claims reveals the razor’s edge on which these cases reside. The first revolved around a confidential memo that plaintiff prepared and sent to Fiduciary’s human resources department, and e-mails he sent to the company’s vice chairman and its former chief investment officer. Plaintiff had asserted that certain “large losses sustained across accounts could have been avoided if [a portfolio manager] had heeded [plaintiff's] advice for investment strategy and not taken a cavalier attitude toward [his] credit research.” He had also asserted that the portfolio manager wanted him to conceal and falsify year-end performance results. These assertions are similar to a great many ultimately unsuccessful SOX allegations: “If only the company had listened to me,” plaintiffs often claim, “it could have avoided a great business disaster.” What was fatal about the allegation here was that, as the Court put it, while plaintiff complained “that his advice was not followed … [it was] barren of any allegations of conduct that would alert Defendants that [plaintiff] believed the company was violating any federal rule or law relating to fraud on shareholders.” The Court also dismissed another, similar allegation: plaintiff alleged, among other things, that on the day before his termination, he sent an e-mail to defendant’s president and general counsel advising them that “investment performance had suffered because the New York office failed to implement a recommendation he proposed … to establish a long/short high-yield investment fund for Fiduciary clients.” He asserted that a far-too conservative investment posture allegedly violated the clients’ investment policy statement and the Third Restatement of Trusts. Again, the Court found that this was simply “more a complaint that [plaintiff's] advice was not being followed but contains no communication … indicating that [he] believed the company to be violating any provision relating to fraud on shareholders.” However, the Court found — while it was “a close call” — that another allegation of alleged SOX-protected whistleblowing stated a claim. Plaintiff alleged that he had sent an e-mail to Fiduciary’s president asserting that its New York office’s decision to sell WorldCom bonds from New York-based ERISA and trust management accounts was not equally disseminated to all accounts firm-wide. When plaintiff wanted to communicate this firm-wide, the portfolio manager allegedly instructed him not to do so. This, plaintiff asserted, resulted in substantial losses in Los Angeles ERISA and trust accounts holding WorldCom bonds. He claimed that this constituted a breach of fiduciary duty and a conflict of interest, and, he asserted, he became a victim of retaliation — the president, the portfolio manager, and another senior executive were “less sociable” and “less friendly.” [FOOTNOTE 4] The Court ruled that while Fraser did not expressly state in this e-mail that defendants engaged in illegal conduct related to fraud on shareholders, nevertheless, given its context, it was sufficient to satisfy the pleading requirement for a SOX whistleblower claim. Citing another district court case finding a similar “close call” in rejecting a motion for summary judgment, the Court stated: “It is evident that Plaintiff’s complaints do not rise to the level of complaints that were raised by Sherron Watkins at Enron. However, the mere fact that the severity or specificity of [his] complaints does not rise to the level of action that would spur Congress to draft legislation does not mean that the legislation it did draft was not meant to protect [him].” [FOOTNOTE 5] Finally, the Court applied an (until somewhat recently) rarely invoked exception to the employment at will doctrine. In New York, of course, at-will employees can generally be fired at any time, without reason. But where an employer has a well-established, written practice that specifies procedures and grounds for termination, the at-will doctrine may be modified, if the employee establishes detrimental reliance on a policy limiting the employer’s right to discharge, in accepting or continuing employment. [FOOTNOTE 6] This doctrine has been applied to what the courts have described as an employer’s “speak-up policy.” Thus, it was recently invoked when a plaintiff alleged he was terminated in violation of his employer broker-dealer’s compliance manual which encouraged employees to report complaints of misconduct or wrongdoing, and promised that such employees would not be retaliated against for having reported such conduct in good faith. [FOOTNOTE 7] The 2nd Circuit also recently accepted the doctrine when a bank manager alleged he was fired for reporting certain loans authorized by his supervisor that the employee believed were improper. [FOOTNOTE 8] It is undoubtedly a good practice for an employer to implement a “speak up” policy. Doing so may permit the employer to learn about inappropriate conduct early enough to address it. Some courts have even accepted the argument that an employee who fails to take advantage of such a policy may find himself without a SOX whistleblower remedy, much like the sexual harassment plaintiff who fails to take advantage of an internal policy that would investigate and potentially remedy such conduct. [FOOTNOTE 9] Nevertheless, with the new proliferation of corporate compliance programs in the wake of SOX’s passage, and considering that a putative whistleblower may file a SOX claim in federal court if there is no final administrative decision within 180 days after the claim is filed, it is reasonable to expect that, in New York, plaintiffs will routinely couple a whistleblower cause of action with a common law breach of contract claim. Philip M. Berkowitz is a partner at Nixon Peabody, where he heads the international labor and employment law practice team.


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