Recent Court Decision Expands View of Whistleblower Protection

The government has long been interested in the role that corporate insiders could play in addressing what has been perceived as systemic issues and a “corporate culture of silence.” In 2011, this interest has far from waned. The government continues to take affirmative steps to incentivize “whistleblowers” to come forward and disclose potential corporate misdeeds. Most recently, a federal district court has expanded the view of those who may qualify as whistleblowers. Commensurate with this expansion, companies may face an increase not only in reports of misdeeds, but claims against them for retaliation.

Attractive Awards and Protection for Whistleblowers

In January 2010, the U.S. Securities and Exchange Commission (the “Commission”) announced a system to encourage “greater cooperation from individuals and companies in the agency’s investigations and enforcement actions.”1 This “Enforcement Cooperation Initiative” made “a wide spectrum of tools available to the Commission and its staff for facilitating and rewarding cooperation by individuals, ranging from taking no enforcement action to pursuing reduced charges and sanctions in connection with enforcement actions.”2 Most recently, through the 2010 amendments to the Sarbanes-Oxley Act of 2002 (“SOX”), made possible by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Commission is permitted, in any action with sanctions over $1 million, to pay whistleblowers up to 30 percent (but not less than 10 percent) of the amount of the sanctions.3 According to the Commission’s 2010 annual report on its Whistleblower Program, over $451 million has already been designated to fund, among other things, the payment of awards.4 In this landscape, it is little wonder why so many have predicted an increase in disclosures to law enforcement by corporate insiders.5

The presence of a whistleblower raises for the corporation a number of issues and potential pitfalls that require careful consideration. One, among many, is the risk that any action taken by the company could be perceived as “retaliatory” against the individual and in violation of the protections statutorily afforded to whistleblowers. In such an instance, the company and its officers could find themselves not simply the subject of a civil lawsuit by the individual,6 but also face potential criminal penalties.7 In a decision rendered in January 2011 by a federal district court in New York, the risk of potential exposure to such liabilities was significantly expanded.

In a case of first impression, Judge Robert Sweet of the Southern District of New York ruled that the whistleblower protections of SOX extends to an employee who reports violations of federal law by third parties other than her direct employer. The holding in Sharkey v. J.P. Morgan Chase & Co. (“JPMC”), 1:10-cv-03824-RWS (S.D.N.Y. Jan. 14, 2011),8 departs from the traditional view – asserted by the defendants – that SOX’s whistleblower protections were designed for the limited purpose of protecting “employees of public companies from retaliation for reporting that their employers engaged in a violation of one of the enumerated statutes or regulations” (emphasis added). In rejecting the defendants’ narrow interpretation, Judge Sweet pointed to SOX’s legislative history, which evidenced that the statute “was enacted to counteract a corporate culture that ‘discourages employees from reporting fraudulent behavior.’” Judge Sweet further found that the language of the statute, “by its terms does not require that the fraudulent conduct or violation of federal securities law be committed directly by the employer that takes the retaliatory action.”

What Happened in Sharkey

The facts of the Sharkey case are essentially these: plaintiff Jennifer Sharkey, a former vice president in JPMC’s Private Wealth Management department, alleged that she was wrongfully discharged in retaliation for her recommendation to JPMC that it terminate its client relationship with a “high net worth” client, who “for more than 20 years generated quarterly returns of approximately $150,000 for JPMC.” Ms. Sharkey’s recommendation was allegedly based on her independent research into the client’s activities after JPMC’s compliance and risk management team had contacted her “to express their concerns regarding the client’s involvement in illegal activities, including allegations of mail fraud, bank fraud, and money laundering.”

In her pleadings, Ms. Sharkey alleged that her direct supervisor and other individually named defendants at JPMC, however, ignored her recommendation and pressured her to condone the client’s business activities. Ms. Sharkey further alleged that her refusal to do so reportedly resulted in retaliatory conduct by JPMC, which included removing her from client accounts, excluding her from important client meetings, refusing to pay her a 2009 bonus and ultimately, termination of her employment only six days after submitting her final client report and recommendation to JPMC’s compliance and risk management department. In support of this contention, Ms. Sharkey reported that an employee of JPMC’s Human Resources department informed her that the reason for her termination was not her job performance, but instead was the result of her direct supervisor’s inability to trust her anymore.

Ms. Sharkey timely filed her SOX complaint against JPMC and certain individual employees with the appropriate administrative agency and sought de novo review of its finding and preliminary order with the Southern District of New York. In response, the defendants moved, pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss the complaint, contending, among other things, that “the absence of any allegation that JPMC was violating any of the statutes or regulations enumerated in the SOX statute [was] fatal” to the plaintiff’s complaint. In other words, the defendants argued that SOX’s protections were “limited only to those employees that report their employer engaged in conduct prohibited by those statutes referenced in” the applicable whistleblower protection statute. As previously noted, Judge Sweet embraced a broader construction of the statute and, in so doing, found that Ms. Sharkey properly pled that she engaged in “protected activity” under SOX. However, the plaintiff’s failure to identify, with sufficient specificity, the “allegedly illegal conduct that form[ed] the basis of her whistleblower complaint,” compelled Judge Sweet to dismiss her complaint with leave to replead to address those deficiencies.

Proactive Review of HR Guidelines and Policies

In light of this ruling, companies are advised to review their human resource guidelines and practices, particularly as to whistleblowers, to ensure that they have a policy, and that current policies and procedures comply with the broad reading of the whistleblower protection provisions of SOX. Moreover, it would behoove companies, at least those subject to the jurisdiction of the district courts of the Southern District of New York, to take a more expansive view of who qualifies as a whistleblower so that companies may best protect themselves against a claim of retaliation.