SOX Whistleblower Suits Allowed to Proceed Against Private Investment Advisor

A federal district court ruled on March 30, 2010, that Fidelity Investments ("Fidelity"), a private investment advisor to public mutual funds, is covered by the whistleblower provision of SOX. In Lawson v. FMR LLC, 2010 WL 1345153 (D. Mass. March 31, 2010), the plaintiffs alleged that their employment was terminated after they reported improper business activities at Fidelity. Fidelity responded by arguing that it was not a proper respondent under SOX because it is not publicly traded. Both an OSHA investigator and an Administrative Law Judge agreed with Fidelity and dismissed the plaintiffs’ claims.

Rather than appealing the decision of the Administrative Law Judge and obtaining a final decision of the Department of Labor, the plaintiffs sought de novo review of their SOX claims in federal district court. Fidelity argued that the plaintiffs should be collaterally estopped from seeking de novo review because an Administrative Law Judge had already issued a summary judgment decision that should be entitled to deference. The district court rejected this argument, holding that SOX plaintiffs are entitled to de novo review of their claims as long as a final decision has not been reached by the Department of Labor. This ruling was in accord with the Fourth Circuit’s recent decision in Stone v. Instrumentation Laboratory Co., 591 F.3d 239, 245-46 (4th Cir. 2009), which held that district courts must review SOX claims de novo unless a final agency decision has been issued by the Department of Labor.

The Lawson court then turned to the question of whether private investment advisors that perform services for public mutual funds are covered by SOX, and held that such non-publicly traded entities are covered by SOX because they are agents or contractors of the public mutual funds. Although Fidelity was not necessarily acting as the mutual funds’ agent for purposes of the plaintiffs’ employment or termination, the court held that this was not required for SOX coverage; rather, it was sufficient for purposes of SOX that Fidelity was the funds’ agent for other business purposes.

Notably, the Lawson court’s holding on the employer coverage issue is broader than that of the Administrative Review Board in Klopfenstein v. PCC Flow Technologies, 2004-SOX-11 (ARB Aug. 31, 2009), which held that nonpublic subsidiaries are covered by SOX as agents only if they act as agents for purposes of the complainant’s employment and termination. The Administrative Review Board’s decision remains precedent for purposes of SOX proceedings at the Department of Labor; however, district courts applying de novo review may reach a different result on this issue as the court did in Lawson.  

Administrative Law Judge Orders Reinstatement Even Though Not Sought in SOX Complaint

In Brown v. Lockheed Martin Corp., 2008-SOX-49 (ALJ Jan. 15, 2010), the Administrative Law Judge found a violation of SOX and ordered that the successful complainant be reinstated by the respondent, despite the fact that she never sought reinstatement in her complaint and argued that reinstatement would be inappropriate. The respondent did not appear to weigh in on the issue of reinstatement one way or the other.

Brown alleged that Lockheed Martin terminated her employment in retaliation for complaints she raised about her manager. Brown had reported that her manager was having affairs with soldiers she met through the company’s Pen Pal program and was expensing personal gifts and travel to the company, which expenses were then passed on to the U.S. government. After an evidentiary hearing, the Administrative Law Judge held that the complainant’s reports constituted protected activity because woven into the story of Brown’s reporting were elements of mail or wire fraud if proven, including the possible billing of the government for items purchased for personal purposes. The Administrative Law Judge held that the company terminated Brown’s employment at least in part based on her reporting activity.

Brown sought relief in the form of back pay, reimbursement of medical expenses and insurance premiums, emotional distress damages and front pay. Despite the fact that Brown did not seek reinstatement in her SOX complaint, the Administrative Law Judge concluded that this was the presumptive remedy under SOX, whereas front pay is a remedy only awarded in exceptional circumstances where reinstatement is proven inappropriate.

Brown made several arguments in support of her claim that reinstatement was inappropriate and that front pay should therefore be awarded. First, she argued that her relationship with Lockheed Martin was "pervaded by hostility," making a return to work impracticable. The Administrative Law Judge rejected this argument, noting that the one individual who harbored a retaliatory animus against Brown was no longer employed there. Second, she argued that she suffered emotional distress while employed by Lockheed Martin and implied that such distress would resume if she were reinstated. The Administrative Law Judge noted that front pay may be used as a substitute for reinstatement only when a complainant is physically unable to perform her job. Brown had not submitted any medical reports or records in support of such a claim. Third, Brown argued that there was no position to which she could be reinstated, because her former position had been eliminated. The Administrative Law Judge rejected this argument because there was evidence in the record that comparable jobs were available.

Thus, contrary to Brown’s wishes, the Administrative Law Judge held that Brown was entitled to immediate reinstatement. The Administrative Law Judge clarified that, should Brown decline a bona fide offer of reinstatement, the respondent’s back pay liability would end.

The Brown decision is of significance to employers because it demonstrates that even in cases where a complaint does not seek reinstatement, there is still a risk that an Administrative Law Judge will order reinstatement as the presumptive remedy under SOX.

Globalization of SOX-Type Whistleblower Protections

In the years since the passage of SOX, several countries have enacted their own versions of SOX, or at least certain provisions of SOX. Meanwhile, in Europe, multinational financial services companies are still struggling to reconcile their obligation under SOX Section 304 to establish an anonymous reporting mechanism with prohibitions against such systems in certain EU member states. These developments are discussed below.

China: The Basic Standard for Enterprise Internal Control for Chinese companies, otherwise known as China SOX or C-SOX, became effective in July 2009. Similar in some respects to SOX, under C-SOX, listed companies must conduct self-evaluations of their internal controls, must publish an evaluation report on an annual basis and must hire external auditors to audit the effectiveness of their internal controls. Japan: Japan’s Financial Instruments and Exchange Law became effective on April 1, 2008. Although commonly called "J-SOX," this law does not completely mirror SOX, but it does include provisions similar to Sections 302 and 404 of SOX, which deal with certification of internal financial controls. The law requires listed companies to implement assessments of internal controls over financial reporting and for such assessments to be audited.

Canada: After SOX was enacted, Canadian Securities Commission Administrators proposed Multilateral Instrument 52-110, which covers Audit Committees and includes an identical provision to SOX 301. It requires that the audit committee establish procedures for anonymous submission of complaints or concerns regarding auditing or accounting matters.

Europe: Through a series of letters published in 2006, the SEC and EU Working Party 29 ("WP 29") have attempted to reconcile the apparent conflict between SOX’s requirement that companies provide an avenue for anonymous reporting and EU data privacy laws which prohibit certain anonymous reporting systems. The agencies have opined that concurrent compliance may be achieved by ensuring that certain steps are taken, such as encouraging employees to engage in confidential rather than anonymous reporting, taking special precautions when processing anonymous reports, notifying employees of their rights under the system, ensuring data security and deleting or archiving personal data as soon as possible upon the completion of an investigation or legal proceedings.

Notwithstanding WP 29’s guidance, Spain and Portugal’s data protection authorities have now banned anonymous reports to whistleblower hotlines. France’s Supreme Court has also weighed in, and while not going this far, issued a decision in December 2009 limiting the permissible uses of whistleblower hotlines within France to reports of financial or accounting irregularities.

On the other hand, the guidelines published by Germany, Belgium, Ireland and the Netherlands on the issue of anonymous reporting under SOX are similar to WP 29’s guidance in terms of the types of reporting permitted, making concurrent compliance with both sets of laws feasible.

The United Kingdom has not issued specific guidelines for whistleblower hotlines or anonymous reporting. Compliance with the WP 29 guidance appears sufficient to comply with UK data protection laws.