Section 806 of the Sarbanes-Oxley Act of 2002 (the “Act” or “SOX”) protects employees of public companies who “blow the whistle” by reporting conduct that they reasonably believe constitutes a violation of federal law relating to financial, securities or shareholder fraud. Recent decisions interpreting the Act have addressed the requirement that a claimant have a “reasonable belief” that the reported conduct constitutes a violation of an enumerated law, whether the 90-day limitation period for filing a claim under SOX may be equitably tolled, and the Act’s application to non-public investment advisors for publicly-traded mutual funds. In addition, please see the article on the cover page of this Update regarding the changes implemented by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Protected Activity Under the Act
Section 806 of the Act prohibits retaliation against an employee who reports any conduct the employee “reasonably believes constitutes a violation” of (1) federal criminal law provisions prohibiting mail, wire or bank fraud; (2) any rule or regulation of the Securities and Exchange Commission; or (3) any provision of federal law relating to fraud against shareholders. 18 U.S.C. § 1514A(a)(1). To qualify as having engaged in “protected activity” under the Act, a whistleblower must establish by a preponderance of the evidence that he or she had a reasonable belief that the acts complained of violated the laws specified in the Act.
In a recent decision, the Second Circuit Court of Appeals affirmed the dismissal of a SOX lawsuit alleging that the defendant terminated an in-house intellectual property attorney for reporting that the company fraudulently obtained several patents. Vodopia v. Koninklijke Philips Electronics, N.V., 2010 WL 4186469 (2d Cir. Oct. 25, 2010). The Second Circuit held that, while the complaint claimed that the defendant obtained the patents by fraud and then valued them at $50 million, the plaintiff did not allege that the value the company assigned to them was ever reported to the public or shareholders. Thus, the plaintiff failed to allege that he reasonably believed he was reporting securities fraud, as opposed to patent-related malfeasance.
Recently, the Eleventh Circuit Court of Appeals joined several other circuit courts in holding that the Act requires a whistleblower to demonstrate both a subjective belief and an objectively reasonable belief that the company’s conduct violated an enumerated law. Gale v. Dep’t of Labor, 2010 WL 2543138 (11th Cir. June 25, 2010). In so ruling, the court agreed with the Department of Labor’s (“DOL”) finding that the plaintiff did not actually believe the company’s activities to be illegal or fraudulent. The court pointed to statements by the plaintiff indicating his lack of subjective belief. For example, although plaintiff “expressed reservations” about a proposed broker training program, he did not know at the time whether the company’s practices were prohibited by regulatory rules or the law. Likewise, although plaintiff testified that an incident made him feel “really uncomfortable” and “uneasy,” he admitted that he did not know at the time whether the company’s conduct was illegal, nor did he communicate to anyone that he felt it was illegal. Based on the conclusion that plaintiff had no subjective belief that his employer was engaging in any illegal or fraudulent conduct prohibited under the Act, the court affirmed the granted of summary judgment to defendant on the whistleblower claim.
SOX’s 90-Day Filing Deadline May be Tolled in Certain Instances
SOX requires that a complaint be filed with the DOL “not later than 90 days after the date on which the violation occurs.” 18 U.S.C. § 1514A(b)(2)(D). Several recent cases have addressed the issue of whether this short deadline may be modified or tolled under certain circumstances.
In Hyman v. KD Res. Inc., 2009-SOX-020 (Mar. 31, 2010), the claimant was permitted to proceed with his SOX claims even though he had filed his complaint with the DOL nearly 70 days after the 90-day time limitation had expired. Finding that the 90-day deadline is “not jurisdictional in the sense that noncompliance serves as an absolute bar to administrative action,” the DOL’s Administrative Review Board (“ARB”) held that the filing deadline is “subject to equitable modification, i.e., tolling or estoppel.” The ARB found in Hyman that in the months following the claimant’s termination of employment, the respondent’s officials and/or agents led the claimant to reasonably believe that he would be returned to his former employment or given a one-year consulting agreement, that he would be financially compensated for having been wrongfully terminated, and that the company would resolve the SOX compliance issues that he had raised. Those facts supported application of equitable estoppel to toll the running of the 90-day limitation period.
By contrast, in Warner v. Xcel Energy, 2008-ERA-002 (Mar. 29, 2010), the ARB refused to toll the limitations period based on the claimant’s argument that his employer misled him regarding the reasons for his discharge and delayed providing him with a copy of his personnel file. The ARB found that the employer did not conceal any retaliatory action from the claimant and the delayed production of the personnel records did not justify extending the filing deadline where the claimant waited 21 months after receiving those records to file his complaint with the DOL.
Finally, in Reid v. The Boeing Co., 2009-SOX-00027 (May 28, 2010), an Administrative Law Judge rejected the claimant’s argument that his time to file his complaint should be equitably tolled due to psychiatric issues exacerbated by Boeing’s conduct. The ALJ concluded that the evidence did not establish that the claimant’s medical condition constituted an “exceptional circumstance” preventing him from filing his complaint with the DOL on a timely basis.
SOX’s Application to Contractors and Subcontractors of Publicly-Held Companies
Liability under the Act may attach not only to a publiclytraded employer, but also to any officer, employee, contractor, subcontractor, or agent of any such entity. 18 U.S.C. § 1514(A)(a). Recently, a federal judge took the rare step of certifying the question as to whether whistleblower protection under SOX applied to an employee of a contractor or subcontractor of a public company when that employee reports activity that he reasonably believes violates the laws enumerated in SOX and such a violation would relate to fraud against shareholders of the public company. Lawson v. FMR LLC, ___ F. Supp. 2d ___, 2010 WL 3001185 (D. Mass. July 28, 2010). In Lawson, two former employees of Fidelity Investments – investment advisors for the Fidelity family of mutual funds – brought claims under SOX. The named defendants were privately-owned organizations that provided management and administrative functions for the operation of the mutual funds, which are publicly held companies supervised by a board of trustees that have no employees. In April 2010, the same judge had denied the defendants’ motion to dismiss the lawsuits, and the defendants then asked that the dispositive issues of SOX’s applicability be certified for interlocutory appeal to the First Circuit Court of Appeals.
Based on the conclusion that plaintiff had no subjective belief that his employer was engaging in any illegal or fraudulent conduct prohibited under the Act, the court affirmed the granted of summary judgment to defendant on the whistleblower claim.
An Administrative Law Judge rejected the claimant’s argument that his time to file his complaint should be equitably tolled due to psychiatric issues exacerbated by Boeing’s conduct.