A recent decision from the District of Connecticut in a Sarbanes-Oxley whistleblower retaliation case sets forth a favorable pleading standard for SOX whistleblowers and underscores the broad scope of protected conduct under SOX. In Wiggins v. ING, Judge Hall held that the heightened Rule 9(b) pleading standard for fraud claims does not apply to SOX retaliation claims and a whistleblower can plead that she had a reasonable belief that her employer violated one of section 1514A’s enumerated fraud provisions without specifically alleging that she believed that the employer’s conduct satisfied all of the elements of the federal statute/SEC rule that was allegedly violated..

Wiggins’ SOX Claim

Eva Wiggins worked at ING Life Insurance and Annuity Company as an Operations Consultant. In her SOX complaint, Wiggins alleged that she disclosed irregularities in the processing of terminated retirement plans that reflected a lack of compliance with federal securities laws, including “frequent inaccuracies in market value assessments on retirement plans that were being terminated and sent to other providers, incorrect and inconsistent application of deferred sales charges, and deliberately failing to provide identified “problem” files for quarterly auditing procedures.” She also alleged that in retaliation for disclosing these irregularities to her supervisors and upper management, she “found herself shut out of the investigation of these violations, and subjected to negative evaluations, verbal and written warnings, and disparate treatment,” and that ING terminated her employment due to her whistleblowing.

Rule 9(b) Does Not Apply to SOX Whistleblower Claims

ING argued that Wiggins’ complaint should be dismissed because it lacked sufficient factual detail about “who engaged in the alleged conduct about which she claims to have reported; when that conduct occurred; or to what plan or plans the conduct related.” Judge Hall rejected this argument, concluding that Wiggins need only plead “enough facts to state a claim for relief that is plausible on its face.” And Judge Hall found that the requirement that a pleading contain “specific detail as to the who, where, when, or how” generally applies only under the heightened pleading standard for fraud claims, and that SOX whistleblower claims are not subject to the Rule 9(b) heightened pleading requirement.

Consistent with decisions of the Department of Labor Administrative Review Board and most of the federal appellate decisions construing SOX protected conduct, Judge Hall concluded that the “reasonable belief” standard set forth in the statutory text obviates any requirement for a SOX whistleblower to prove actual fraud:

ING’s argument overlooks the fact that section 1514A(a)(1) “protects an employee who `reasonably believes’ that conduct violates an enumerated statute.” Wallace v. Tesoro Corp., 796 F.3d 468, 480 (5th Cir. 2015). As such, there is room for a plaintiff to maintain a SOX whistleblower claim under Section 1514A, assuming he has satisfied the other pleading requirements, “even if the [complained of] conduct turns out not to be fraudulent.” Id.; see also Guyden v. Aetna, Inc., 544 F.3d 376, 384 (2d Cir. 2008) (“a whistleblower need not show that the corporate defendant committed fraud to prevail in her retaliation claim under § 1514A”). Because section 1514A protects the employee who acted under a reasonable belief that fraud was occurring — rather than protecting only those employees who report activity that is, in fact, fraudulent —”Federal Rule of Civil Procedure 9(b) does not apply because [Wiggins] brings a retaliation claim based on his reasonable belief of fraud rather than a claim necessitating proof of fraud.” Jin Huang v. Harman Intern. Industries Inc., Civil Action No. 3:14-cv-1263-VLB, 2015 WL 4601047, at *2 n. 3 (D. Conn. July 29, 2015); see also Wallace, 796 F.3d at 480 (“Although [the defendant] maintains that dismissal can be affirmed for failing to satisfy Rule 9(b), it is plain from the rule’s text that it does not apply to this [SOX] retaliation suit”). Thus, ING’s argument that the Amended Complaint must be dismissed because it does not meet the heightened pleading standard of Rule 9(b) is without merit, because SOX whistleblower claims do not need to be plead in accordance with this heightened standard.

SOX Whistleblowers Need Not Prove an Actual Violation of an Enumerated Fraud Provision in Section 806

In its motion dismiss, ING asserted that Wiggins failed to demonstrate that she has an objectively reasonable belief that ING was violating one of the enumerated fraud provisions in Section 806. The enumerated fraud provisions in Section 806 of SOX are: “section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.” Citing the ARB’s decision in Sylvester v. Parexel Int’l LLC, ARB No. 07-123, 2011 WL 2517148 (ARB May 25, 2011) and the Second Circuit’s decision inNielsen v. AECOM Tech. Corp., 762 F.3d 214 (2d Cir. 2014), Judge Hall concluded that “a SOX whistleblower plaintiff can state that she had a reasonable belief that her employer violated one of section 1514A’s enumerated provisions, without specifically alleging that she believed that the employer’s conduct satisfied all of the elements of the federal statute/SEC rule that was allegedly violated.” In addition, Judge Hall noted that “in order for a SOX whistleblower plaintiff to allege that she reasonably believed that her employer was violating one of the enumerated provisions, the plaintiff must allege that she believed, at least approximately, that her employer’s actions satisfied the elements of the enumerated provision allegedly violated.”

Judge Hall then found that several averments in Wiggins’ SOX complaint sufficiently pled the requisite standard of objective reasonableness:

  • For example, the Amended Complaint alleges that Wiggins raised concerns about inaccuracies in ING’s market value assessments (“MVAs”). Id. ¶ 15. In the next paragraph, the Amended Complaint states that Wiggins “believed that ING’s persistent determination of incorrect MVAs violated federal securities laws because she knew that federal securities laws required Defendants to maintain accurate books and records, establish adequate internal controls to ensure accurate reporting of financial information, and to act in the best interests of clients in accordance with fiduciary duty obligations.”
  • In alleging violations related to the MVAs, the Amended Complaint states that, “some of these [MVA] inaccuracies were incorrect by large dollar amounts, such as hundreds of thousands of dollars.” Am. Compl. ¶ 15. These allegations support the reasonable inference that a reasonable person in Wiggins’s position would view such inaccuracies as material, rather than trivial.
  • The Amended Complaint also alleges other behavior that supports a reasonable inference that Wiggins believed ING was acting with the requisite scienter. For example, the Amended Complaint alleges that, “[o]n certain occasions, ING management directed another employee to make artificial and fraudulent accounting adjustments in Defendants’ records to conceal the gains/losses that were caused by the incorrect MVAs.” Id. ¶ 17. . . . Given the Amended Complaint’s assertion that Wiggins was trained to understand the federal securities laws, and that she knew that those laws required ING to maintain accurate books and records, establish adequate internal controls, and uphold the fiduciary duties it owed its clients, the Amended Complaint contains facts sufficient to allow the reasonable inference that it would have been reasonable for a person in Wiggins’s position to believe that ING was violating these obligations.

Wiggins is consistent with a trend both at the Department of Labor and in federal courts of broadly construing SOX protected whistleblowing and rejecting prior decisions imposing a heightened standard of objective reasonableness. As a result of this trend, it has become difficult for employers to dismiss SOX whistleblower cases at the pleading stage on a motion to dismiss or at the close of discovery on a motion for summary judgment. Fortunately, non-economic damages under SOX are uncapped, and the phrase “special damages” under SOX has been interpreted to include not only emotional distress, but also reputational harm. Recent jury verdicts in SOX whistleblower cases, such as the $6M verdict in Zulfer and the $1.6M verdict in Perez, suggest that Section 806 of SOX can be a robust remedy for corporate whsitleblowers.