In a case of first impression, the United States District Court for the Southern District of New York held that the whistleblower provision of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") protects employees who report fraudulent conduct or securities law violations by third parties from retaliation. In Sharkey v. J.P. Morgan Chase & Co., 2010 U.S. Dist. LEXIS 139761 (S.D.N.Y. Jan. 14, 2011), the court concluded that the plaintiff, Jennifer Sharkey ("Sharkey"), could bring a whistleblower claim against her former employer, J.P. Morgan Chase ("JPMC"), even though the entity accused of violating the securities laws was not JPMC but a third party. Sharkey claimed that JPMC retaliated against her after she reported her concerns that one of JPMC's clients had violated the securities laws.
Plaintiff Jennifer Sharkey was employed as a vice president and wealth manager in JPMC's private wealth management department. As part of her responsibilities, Sharkey managed relations with certain "High Net Worth" clients, one of which had been a client with JPMC for over 20 years and generated quarterly returns of approximately $150,000. Shortly after Sharkey was assigned to work with the client, members of JPMC's compliance and risk management team contacted her to express their concern that the client had violated the securities laws. Specifically, the risk management team suspected that the client was involved in mail fraud, bank fraud, and money laundering.
In response, Sharkey researched the client's activities and concluded that the client was indeed engaged in illegal activities. Sharkey informed her superiors and recommended that JPMC terminate its relationship with the client. Sharkey claimed that her superiors reached a different conclusion as to the legality of the client's conduct and were also concerned that, if true, Sharkey's concerns would expose weaknesses in JPMC's procedures. According to Sharkey, her concerns were largely ignored and her superiors pressured her to condone the client's conduct. Sharkey further claimed that her superiors retaliated against her by removing her from several client accounts, excluding her from important meetings, and refusing to pay her a bonus in 2009.
Undeterred, Sharkey initiated an internal audit of the client's affairs and submitted a final audit report again recommending that JPMC terminate its relationship with the client. A copy of the report was forwarded to Sharkey's superiors. Shortly thereafter, JPMC terminated Sharkey's employment without warning or prior notice. Sharkey alleged that JPMC's human resources department told her that the reason for her termination was not job performance, but her supervisor's feeling that Sharkey could not be trusted.
Sharkey filed a complaint against JPMC and a number of JPMC employees claiming that they had violated Sarbanes-Oxley's whistleblower provision.
The Trial Court
JPMC filed a motion to dismiss Sharkey's whistleblower claim, asserting that Sarbanes-Oxley does not protect employees who report violations of the securities laws by third parties and that an employee can only bring a whistleblower claim if his or her employer was the entity that purportedly engaged in illegal activity.
The court explained that in order for a plaintiff to establish a Sarbanes-Oxley whistleblower claim, he or she must demonstrate that: (1) the plaintiff engaged in a protected activity; (2) the defendant knew or suspected that plaintiff engaged in a protected activity; (3) the plaintiff suffered an adverse employment action; and (4) the circumstances raise an inference that the protected activity contributed to the adverse employment action.
The central inquiry in this case was whether Sharkey engaged in a protected activity. Specifically, the key issue was whether the Sarbanes-Oxley whistleblower provision protects an employee who reports illegal activities by third parties. The court noted that this case was a case of first impression because all of the prior Sarbanes-Oxley whistleblower cases involved instances in which the plaintiff's employer was accused of violating the securities laws. None of these cases addressed whether the whistleblower provision protects an employee who reports securities law violations by third parties.
The court reviewed the language of the whistleblower provision, which precludes an employer from retaliating against an employee who provides information or "otherwise assist[s] in an investigation regarding any conduct which the employee reasonably believes constitutes a violation" of the securities laws. Based on this language, the court concluded that the whistleblower provision "does not require that the fraudulent conduct or violation of federal securities law be committed directly by the employer that takes the retaliatory action."
The court also relied on the provision's legislative history. Noting that the whistleblower provision was designed to put an end to a "corporate code of silence" by encouraging and protecting employees who report fraudulent activity, the court determined that it should be given a broad interpretation. The court also stated that interpreting the whistleblower provision broadly was consistent with congressional intent, which was to sweep broadly to "protect an employee of a publicly traded company who took reasonable action to try to protect investors and the market." The court thus concluded that Sharkey engaged in a protected activity when she reported her concerns about the client's illegal activity to her superiors at JPMC.
Although the court dismissed plaintiff's whistleblowing claim for a technical deficiency with the pleadings, it clearly upheld the viability of this type of claim.
- Bottom Line
Employers should ensure that they have appropriate policies and procedures in place to respond to employee allegations of misconduct. An employer should promptly investigate such allegations, whether they implicate the employer directly or pertain to the employer's clients, vendors or others affiliated with it. Employers should also use extreme care when taking any adverse action against an employee who raises such allegations, in order to avoid a retaliation claim.
Click here for a link to the Sharkey decision.