In the first federal ruling to examine the scope of an agency relationship between a publicly traded company and a non-publicly traded company necessary to trigger coverage under the whistleblower protection provision of the Sarbanes-Oxley Act, an Eastern District of Pennsylvania judge has allowed a former employee of the non-publicly traded subsidiary of a public company to proceed with his whistleblower suit.
In Wiest v. Lynch, U.S. District Judge Gene E.K. Pratter of the Eastern District of Pennsylvania ruled that plaintiff Jeffrey Wiest sufficiently showed that his former employer, the non-publicly traded Tyco Electronics Corp.—referred to in Pratter’s opinion as “Tyco”—acted as an agent of its publicly traded parent company, Tyco Electronics Ltd.—referred to in the opinion as “Tyco Limited.”
Pratter also let the suit proceed against Charles Dougherty, the president of Tyco business unit Wireless Systems, finding that Wiest “just barely” stated a claim against him by alleging he “‘was involved with activities constituting potential fraud on Tyco Limited stockholders and attempted violations of tax laws.’”
Pratter dismissed the complaint against Tyco’s chief executive officer, Thomas J. Lynch; executive vice president and chief financial officer, Terrence Curtin; and senior labor and employment counsel, Charles C. Post.
Wiest has alleged that Tyco retaliated against him after he circulated reports within the company detailing his suspicions of fraud and federal tax violations.
While Tyco had argued that Wiest was not protected under Section 806 because it was a non-publicly held subsidiary of publicly traded Tyco Electronics Ltd., Pratter said Wiest was able to show an agency relationship between the two entities.
Pratter relied heavily on the U.S. Supreme Court’s 2014 ruling in Lawson v. FMR LLC, which held that Section 806 covers “any officer, employee, contractor, subcontractor or agent of” a publicly held company.
But, noting that “no tribunal has considered the issue of the scope or nature of the required agency relationship” since the Lawson decision came down, Pratter also took guidance from the concurring opinion Deputy Chief Administrative Appeals Judge E. Cooper Brown wrote in the Administrative Review Board of the U.S. Department of Labor’s 2011 decision in Johnson v. Siemens Building Technologies.
In his concurrence in Johnson, Brown advocated interpreting Section 806 as covering “‘an agent of a publicly traded company engaged, on behalf of that company, in securities-related activities,’” according to Pratter.
Pratter found that the Lawson ruling took Brown’s rationale a step further.
“The main modification to Judge Brown’s view would be that, in addition to agency based on engagement ‘in securities-related activities,’ agency might also be based on types of services with regard to which fraud contemplated under Section 806 might be perpetrated (in essence, Judge Brown’s rationale),” Pratter said. “In other words, agency could also be based on the performance, inter alia, of accounting and tax services and the like, as here.”
According to Pratter, Wiest has alleged that the CEO and CFO of Tyco Limited had to approve certain expenditures before he, as Tyco’s accounting manager, could process them.
Pratter called this allegation a “strong indicator of an agency relationship regarding accounting and taxes between Tyco and Tyco Limited.”
“If, as Judge Brown observed, ‘outside of the employment law context, an entity will be held independently liable as a covered agent under Section 806 where it is established that the entity engaged in retaliatory conduct was serving as the public company’s agent with respect to securities-related matters,’… it seems clear enough from the allegations here that Tyco served as Tyco Limited’s agent with respect to accounting- and tax-related matters (and that Tyco took adverse action against Mr. Wiest),” Pratter said.
Pratter found that Wiest adequately showed that he suffered an adverse employment action and that his protected activity of reporting suspected wrongdoing within the company was a contributing factor to this adverse action.
Wiest had alleged that, after he raised concerns about Tyco improperly processing expenses, without the CEO’s approval, for events at the Atlantis Resort in the Bahamas and the Wintergreen Resort in Virginia, his direct reports and his manager began acting differently toward him without explanation, according to Pratter.
Wiest has also alleged that, just before leaving for a preplanned vacation, he was called into a meeting with the human resources department and accused of incorrectly reporting a gift of baseball tickets from a client, having an improper relationship with a female Tyco employee 10 years earlier and making comments of a sexual nature to some fellow employees, Pratter said.
When Wiest returned from his vacation, he alleged, he was isolated from his co-workers and told that the investigation of his alleged misconduct had become serious and that he should not bother with his upcoming performance review, according to Pratter.
Eventually, Wiest alleged, physiological and psychological symptoms of stress rendered him unable to do his job and required him to leave the company, according to Pratter.
Pratter said it was “clear that the facts as alleged by Mr. Wiest, when taken together with the reasonable inferences that can be drawn from them, paint a picture of a longtime employee with prior high performance ratings who, in a relatively short period of time, was charged (and he believed, rather baselessly) with several counts of misconduct, not given an opportunity to respond to these charges, told that the investigation was becoming increasingly serious, and that he should not bother with his upcoming performance review.”
Pratter added that, even if Wiest were held to an even stricter standard and required to prove that his employer knowingly sought to make his employment at the company intolerable, it’s too early to say he couldn’t meet that standard.
Pratter said that while Wiest’s “physiological responses might have been largely subjective … a jury could well find that his continuation with Tyco had become objectively intolerable” based on his description of the treatment he received from his co-workers.
According to Pratter, Wiest has adequately alleged that these retaliatory actions by Tyco were a response to his raising concerns about the improperly approved Wintergreen and Atlantis expenses.
“Indeed, when considered in conjunction with Mr. Wiest’s other allegations, the timing of the alleged events may support the inferences Mr. Wiest needs; at least, they do not preclude those inferences,” Pratter said. “The gravamen of Mr. Wiest’s complaint is that his persistent auditing of his higher-ups’ activities annoyed them enough to drive him out.”
Counsel for the defense, Michael A. Finio of Saul Ewing in Harrisburg, Pa., said he could not comment without his client’s approval.
Counsel for Wiest, Richard C. Angino of Angino & Lutz in Harrisburg, could not immediately be reached for comment Thursday afternoon.
(Copies of the 44-page opinion in Wiest v. Lynch, PICS No. 14-0572, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •