On January 11, 2018, the Seventh Circuit Court of Appeals affirmed the trial court’s grant of summary judgment in favor of Orion Energy Systems, Inc. (“Orion”) on ex-CEO Neal Verfuerth’s (“Verfuerth”) aspirational Sarbanes-Oxley Act (“SOX”) and Dodd-Frank Act whistleblower claims.
After his termination in November 2012, Verfuerth claimed that he qualified as a whistleblower under both SOX and Dodd-Frank because, before his firing, he complained to Orion’s board of directors about a wide range of matters that allegedly evidenced violation of securities laws. Those matters included: (1) overbilling by outside counsel; (2) a potential patent infringement by one of Orion’s products; (3) potential conflicts of interest involving a member of the board and a company executive; (4) miscellaneous violations of internal company policy, like consumption of alcohol at an informal board meeting; (5) the board’s handling of a defamation suit brought by a former employee who had been accused of stock manipulation; and (6) the chairman of Orion’s audit committee allowing his CPA license to expire. The trial court granted Orion’s summary judgment motion.
In affirming the trial court’s grant of summary judgment in favor of Orion, the Seventh Circuit observed that Verfuerth’s “whistleblower” claims did not qualify as such under either SOX or Dodd-Frank. Specifically, the practices that Verfuerth claims he complained about were not “fraud” within the meaning of SOX. Nor could Verfuerth allege securities fraud because the directors failed to disclose his complaints to Orion shareholders. The Court said that theory would allow a person to become a whistleblower under SOX just by advising his or her colleagues about their own disclosure obligations but then doing nothing when they fail to follow that advice.
The Seventh Circuit was also unpersuaded by Verfuerth’s claim that he attempted to report his concerns directly to the SEC by making an online complaint. The SEC never received that complaint, nor did Verfuerth have any evidence that he actually submitted his complaint electronically. In any event, the Seventh Circuit observed that Verfuerth’s claims were nonsensical in that, as Orion’s CEO, he had the ultimate responsibility to report fraud to the SEC and admittedly failed to do so. Thus, if Orion’s failure to disclose the complained-of conduct amounted to securities fraud, then Verfuerth participated in that fraud when he knowingly filed SEC reports, during his tenure, that made no mention of those issues.
Ultimately, because Verfuerth’s Dodd-Frank Act whistleblower claim was entirely derivative of his SOX whistleblower claim, and his SOX claim failed, the Seventh Circuit affirmed summary judgment in favor of Orion on both counts.