Section 806 of the Sarbanes-Oxley Act of 2002 (the “Act” or “SOX”) protects employees of public companies who “blow the whistle” by reporting conduct that they reasonably believe constitutes a violation of federal law relating to financial, securities or shareholder fraud. A number of important decisions recently have been handed down by federal courts addressing key issues, including whether an in-house attorney raising claims under SOX may use privileged communications as evidence in support of the claims, when an employee is considered to have engaged in “protected activity” under the Act, and procedural requirements under the Act. In addition, New York Governor David Paterson recently vetoed certain proposed legislation that would have expanded New York’s whistleblower laws.
Use of Privileged Information by In-House Counsel Who Assert SOX Claims
The United States Court of Appeals for the Ninth Circuit held recently that a married pair of intellectual property lawyers fired by International Game Technology (“IGT”), a publicly owned company specializing in gaming machines and related equipment, could proceed to trial on their claim that they were retaliated against for raising issues regarding a patent dispute involving the company. Van Asdale v. Int’l Game Tech., 577 F.3d 989 (9th Cir. 2009).
Shortly after the plaintiffs joined IGT, the company began merger negotiations with Anchor Gaming, a company that produced a slot machine with a “bonus wheel.” Before the merger occurred, Bally Gaming, a competitor of Anchor’s, began marketing a “Monte Carlo” slot machine with its own bonus wheel, but Anchor executives contended that the Bally device infringed on Anchor’s existing patent for similar equipment.
Several years after the merger was completed, Shawn Van Asdale was informed of a document describing an Australian version of the Monte Carlo machine that he believed invalidated Anchor’s patent and weakened any claims IGT might make against Bally. Shawn expressed concerns to IGT that Anchor had not disclosed the documents concerning the Australian machine before the merger with Anchor. Van Asdale claimed that at a meeting with IGT’s general counsel (who had previously served as Anchor’s general counsel), also attended by Lena Van Asdale, he raised the question of whether IGT shareholders were misled about the value of the Anchor patents when they approved the merger. Three days after that meeting IGT decided to remove Shawn Van Asdale from his position with IGT. IGT later terminated Lena Van Asdale on the ground that her demeanor became “odd” and “difficult” and because she supposedly requested access to sensitive information after her husband’s firing.
In response to IGT’s objections that the Van Asdales should not be permitted to pursue their SOX claims based on information that was within the scope of the attorneyclient privilege, the court held that IGT’s interest in confidentiality was not sufficient to require dismissal of the SOX allegations. The court noted that a district court has authority to supervise a trial to “minimize the possibility of harmful disclosures” of confidential information and added that “[n]othing in [the Act] indicates that in-house attorneys are not also protected from retaliation under this section, even though Congress plainly considered the role attorneys might play in reporting possible securities fraud.”
In another recent case involving an in-house lawyer seeking the protection of the Act, the Department of Labor’s (“DOL”) Administrative Review Board (“ARB”) determined that the attorney could rely on privileged information to support his whistleblower retaliation claim. Jordan v. Sprint Nextel Corp., DOL ARB No. 06-105 (Sept. 30, 2009). In that case, an in-house lawyer for Sprint Nextel alleged that his supervisor threatened to fire him and denied him a raise and promotion in retaliation for his having opposed the filing of “inaccurate information” with the SEC and reporting to his supervisor various concerns regarding Sprint’s alleged disregard of SEC rules. Sprint argued that the attorney-client privilege applied to prevent the attorney from relying on privileged information to support his SOX claim. The ARB rejected that argument, holding that Congress included in the Act a requirement that in-house attorneys report any “evidence of a material violation” of securities laws, and thus such attorneys are protected from employer retaliation under SOX, “even if it necessitates that attorney-client privileged communications be held admissible in a Section 806 whistleblowing proceeding.” Like the court in Van Asdale, the ARB noted that judges may subject privileged communications to protective, in camera, or other orders they may issue with the objective of providing appropriate protection of such communications.
Protected Activity Under the Act
Section 806 of the Act prohibits retaliation against an employee who reports any conduct the employee reasonably believes constitutes a violation of (1) federal criminal law provisions prohibiting mail, wire or bank fraud; (2) any rule or regulation of the Securities and Exchange Commission; or (3) any provision of federal law relating to fraud against shareholders. 18 U.S.C. § 1514A(a)(1). To qualify as having engaged in “protected activity” under the Act, a whistleblower must establish by a preponderance of the evidence that he or she had a reasonable belief that the acts complained of violated the laws specified in the Act.
In Fraser v. Fiduciary Trust Co. Int’l, No. 04 Civ. 6958, 2009 WL 260138 (S.D.N.Y. Aug. 25, 2009), the United States District Court for the Southern District of New York dismissed SOX claims brought by a former executive of Fiduciary Trust, holding that his general inquiries about the company’s business activities did not constitute activity protected by SOX. Fraser alleged that he was retaliated against after he (1) sent an e-mail to the president of Fiduciary Trust complaining about the firm’s decision to sell off certain bonds it held in its ERISA trust accounts, and (2) told his supervisor that a document listing the firm’s top ten relationships by revenue overstated Fiduciary’s assets under management. The court found that Fraser made informal complaints about Fiduciary’s business decisions rather than specific complaints about fraud. It held that none of the alleged activities by Fraser related “definitely and specifically” to the enumerated securities laws and thus were not “protected activity” under the Act. Moreover, even if Fraser’s alleged whistleblowing activities were protected under SOX, the court held that Fraser could not establish a causal connection between such activity and Fiduciary’s decision to terminate his employment, as Fiduciary determined that Fraser was attempting to establish and market an unauthorized hedge fund.
In a longstanding dispute, the United States Supreme Court declined to review a decision by the Fourth Circuit Court of Appeals, which did not extend the protection of the Act to an airline employee who claimed that she was discharged for complaining about fraud in the company’s method for determining pilot compensation. Platone v. U.S. Dep’t of Labor, 548 F.3d 322 (2008), cert. denied, __ S. Ct. ____, 78 USLW 3058 (Nov. 16, 2009). Platone complained to her supervisors that the pilots’ union had failed to satisfy its obligation to reimburse the airline when pilots had to miss flights to attend union meetings. Shortly thereafter, she was fired for failing to disclose her romantic involvement with a company pilot. She filed a SOX complaint with the DOL, claiming that the airline was involved in a fraudulent scheme to compensate pilots in the hopes of gaining union contract concessions. While Platone alerted her employer to a billing discrepancy, the court held that she “failed to identify to [the airline] why she believed the actions related to the discrepancies would violate securities laws and constitute a fraud.” Therefore, she was denied protection under the Act.
Recent Decision by S.D.N.Y. Judge Emphasizes Need for Strict Adherence to Procedural Requirements of SOX
The Act establishes a mandatory administrative procedure to be followed by a whistleblower who claims retaliation based on protected conduct. The employee must file his complaint with the DOL within 90 days of the alleged violation. 29 C.F.R. § 1980.103(d). Within 30 days of the date of the DOL’s notification of its findings and preliminary order, either the alleged violator or the complainant may file objections to the findings, the preliminary order, or both, and request a hearing on the record. 29 C.F.R. § 1980.106(a). “Objections must be filed with the Chief Administrative Law Judge.” Id. If no hearing is requested by either party, the preliminary order is deemed a final order that is not subject to judicial review. 29 C.F.R. § 1980.106(b)(2). Therefore, timely objections and requests for hearings are critical to preserve a right to judicial review.
In a recent decision, Judge Shira Scheindlin of the Southern District of New York found that a former compliance manager with American International Group Inc. (“AIG”), who claimed that she was fired for reporting a possible violation of federal law, waited too long to file her lawsuit under the Act. Lebron v. American Int’l Group, Inc., No. 09 Civ. 4285, 2009 WL 3364039 (S.D.N.Y. Oct. 19, 2009). In Lebron, the DOL issued preliminary findings rejecting Lebron’s claims under SOX and dismissing the complaint. The DOL’s order of dismissal informed Lebron that unless she filed objections and requested a hearing before a DOL Administrative Law Judge within 30 days of receiving the preliminary order, the preliminary finding would be “final and not subject to judicial review.” Although Lebron sent a letter to the DOL’s administrator objecting to the findings and requesting a hearing, she failed to file her objections with the Chief Administrative Law Judge, as required under the Act’s regulations, and took no other steps to appeal the findings before filing her action in federal court approximately two months after she received the DOL’s preliminary findings. Accordingly, the court dismissed the whistleblower claims.