On February 21, 2014, the District of Puerto Rico strayed from a prominent decision out of the First Circuit that employed the “definitively and specifically” standard governing protected activity under Section 806 of SOX, choosing instead to defer to the ARB’s rather expansive standard. Stewart v. Doral, No. 13-cv-1349 (D.P.R. Feb. 21, 2014). This decision underscores the conflicts in this evolving area of SOX jurisprudence and the attendant risks to employers saddled with SOX whistleblower retaliation claims.
Plaintiff Ronald Stewart (Plaintiff), who was a Senior Vice President and Principal Accounting Officer at Doral Financial Corporation (Bank), allegedly expressed concerns regarding “deficiencies in the Bank’s program of internal controls.” He allegedly sent a letter to the Bank’s Audit Committee stating that the Bank’s CEO’s statements expressing indifference to regulators and a down-sizing program without consideration for lack of internal controls could lead to “inaccurate disclosures of the company’s financial information.” According to Plaintiff, the CEO “asserted that he wanted the Bank’s leverage ratio above 9% even if it meant booking assets in later periods,” and that “regulators were not going to tell him what he could or could not do when all he was trying to accomplish was to raise the Bank’s capital by $200MM.” His employment was terminated weeks later, and he filed suit under the whistleblower protection provisions in Section 806 of SOX, asserting he was retaliated against for lodging his complaints.
Denying the Bank’s motion to dismiss, the court ruled that Plaintiff pled facts sufficient to meet the reasonable belief standard required to establish protected activity as articulated by the ARB in Sylvester v. Parexel, ARB No. 07-123, 2011 WL 2165854 (ARB May 25, 2011). According to the court, given the facts that led Plaintiff to believe that there were “imminent violations to the financial disclosure requirements set forth under Sarbanes-Oxley,” Plaintiff’s beliefs were reasonable because “if a public company ‘cooks the books’ and reports inaccurate financial information, the Principal Accounting Officer would be amongst the first individuals being investigated for potential Sarbanes-Oxley violations.” In so concluding, the district court chose not to employ the more exacting “definitively and specifically” standard that was previously embraced by an oft-cited First Circuit decision, and instead adopted the ARB’s reasonable belief standard.
This decision further adds to the confusion over the standard governing a determination of whether an employee engaged in protected activity under Section 806 of SOX. While some other courts (e.g., the Third Circuit, addressed in our post) have followed the ARB’s standard, various other federal courts, such as the Sixth Circuit and a recent decision by the Southern District of New York, have applied the more rigorous “definitively and specifically” requirement. We will continue to monitor developments in this area and keep our loyal readers up to date.