USDOL/OALJ: Sarbanes-Oxley ("SOX") Whistleblower Digest: Protected Activity

For a review of appellate decisions discussing the whether fraud against shareholders is a required element of protected activity under SOX, see Fraud Against Shareholders . For a review of appellate decisions discussing the "definitively and specifically" standard, see Definitively and Specifically Standard

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FEDERAL COURT DECISIONS

 

SOX COVERS POST-TERMINATION PROTECTED ACTIVITY BY FORMER EMPLOYEE; PLAINTIFF'S DEPOSITION TESTIMONY IN LAWSUIT INVOLVING DEFENDANT COMPANY FOUND COVERED

In Kshetrapal v. Dish Network, LLC , No. 14-cv-3527 (S.D.N.Y. Feb. 27, 2015) (2015 WL 857911; 2015 U.S. Dist. LEXIS 24573) (case below 2014-SOX-23), the Defendants filed a Rule 12(b)(6) motion to dismiss the Plaintiff's post-termination SOX whistleblower claim. The court denied the motion. The Plaintiff's complaint alleged that the Plaintiff was a Vice President for International Marketing and Programming for the Defendant company. He reported his belief that a marketing agency retained by the Defedant company was submitting fraudulent invoices, and later refused to sign off on invoices he believed to be fraudulent. The Plaintiff alleged that the officers to whom he reported his belief of fraudulent invoicing were aware of the fraud, but continued to work with the agency in return for bribes, and reprimanded the Plaintiff. Following a later investigation, the Plaintiff's concerns were validated. The Plaintiff was later forced to resign.

The Defendant company's General Manager of Programming for International Department, who was one of the officers to whom the Plaintiff had initially reported his concerns, stayed on with the company and repeatedly referred to the Plaintiff's 'shady' business ethics" during conversations with other employees.

The Plaintiff was deposed in litigation between the Defendant company and the agency that allegedly engaged in fraudulent invoicing and bribery.

The Plaintiff later obtained a job with another marketing firm. The Defendant company placed online advertising with that firm; but the General Manager subsequently instructed against further business with the firm. The Plaintiff was offered a job as the head of a new cricket channel, but that offer was rescinded after an official with the Defendant company informed the channel that it did not want the Plaintiff at the helm. The Plaintiff alleged that the Defendant company provided a negative reference in violation of the company's neutral reference policy. Later, the Plaintiff's firm was informed by an official with the Defendant company that it was unwilling to work with the firm because it employs the Plaintiff, and that if the Defendant company placed advertisements with the firm, an extra layer of audit would be required because of the Plaintiff's prior unethical behavior.

In its motion before the court, the Defendant argued that the Plaintiff's SOX claim is limited to his pre-termination protected activities. The court disagreed. The court found that the statute was ambiguous as to whether "employee" included a former employee, and thus turned to other sources. The court noted:

The SOX regulations specifically define "employee" to include "an individual presently or formerly working for a covered person." 29 C.F.R. 1980.101 (emphasis added). Similarly, the Administrative Review Board ("ARB") recently held that an employee's post-termination whistleblowing can constitute protected activity under SOX. See Levi v. Anheuser Busch Inbev , 2014 DOLSOX LEXIS 42, at * 5 (ARB July 24, 2014)....

The court noted that it was unclear whether DOL interpretations were entitled to Chevron or Skidmore deference, but stated that it agreed with the DOL's assessment regarding coverage of former employees. The court found that the DOL interpretations comport with the purpose of SOX to combat corporate culture that discourages reporting of fraudulent conduct, and is consistent with the Supreme Court's broad construction of the term "employee" in Lawson v. FMR LLC , 134 S. Ct. 1158 (2014).

The court found that the third element of a SOX whistleblower claim, whether the plaintiff suffered an unfavorable personnel action, did not limit the scope of protected activity, and thus did not prevent coverage of the Plaintiff's deposition testimony under SOX. The court noted that the Defendants conceded that SOX coverage includes blacklisting.

ALLEGED BILLING FRAUD BY NON-PUBLICLY TRADED CONTRACTOR AGAINST ITS PUBLICLY TRADED CLIENT FOUND NOT TO BE WITHIN COVERAGE OF SOX UNDER LAWSON DECISION

In Gibney v. Evolution Marketing Research, LLC , No. 14-1 913 (E.D.Pa. June 11, 2014) (2014 WL 2611213), the Plaintiff brought a SOX whistleblower action against his former employer for wrongful termination. The Plaintiff alleged that the Defendant's planned billing practices relating to a publicly traded client (to which the Defendant - a non-publicly traded company - was a contractor) were fraudulent. The Defendant filed a motion to dismiss. The Plaintiff contended that as an employee of a contractor to a publicly traded company, and pursuant to the Supreme Court's decision in Lawson v. FMR LLC , 134 S.Ct. 1158, 188 L.Ed.2d 158 (2014), his activities were protected under SOX 1514A. The court reviewed the Lawson decision and found that it was clear that whistleblower protection extends to employees of private contractors or subcontractors for a public company. The Defendant, however, framed the issue as whether Lawson supports extending SOX protection to employees of private companies who report overbilling "fraud" not committed by the public company and not having any connection to fraud on shareholders. The court found the question to be close, and did not agree entirely with the Defendant's characterization of the issue presented. The court found, however, that the Plaintiff was advocating "an impermissibly broad definition of SOX protection that was neither intended by Congress nor contemplated by the Supreme Court in Lawson ." Slip op. at 10. The court noted that unlike Lawson , the instant case did not implicate the peculiar structure of the mutual fund industry. Second, the complaint did not allege fraud by the publicly traded company or that the Defendant contractor abetted fraud by the publicly traded company. Rather, the complaint alleged that there was fraud being committed against the publicly traded company. Congress, the court noted, "was specifically concerned with preventing shareholder fraud either by the public company itself or through its contractors." Id . at 11 (emphasis as in original). The court stated that it "does not believe SOX was not intended [sic] to reach the type of scenario at issue here: where there are allegations of fraudulent conduct between two companies who are a party to a contract, and one of those companies just happens to be publicly-traded." Id . at 12. Finally, the court noted that OSHA, the agency charged with enforcement of SOX, had found in this case that SOX does not extend coverage to the Defendant's alleged overbilling of its publicly traded client. The court therefore granted the Defendant's motion to dismiss.

SECTION 1514A's WHISTLEBLOWER PROTECTION INCLUDES EMPLOYEES OF A PUBLIC COMPANY'S PRIVATE CONTRACTORS AND SUBCONTRACTORS

In Lawson v. FMR LLC , No. 12-3 (U.S. Mar. 4, 2014), the U.S. Supreme Court reversed the decision of the First Circuit Court of Appeals which held that the term "an employee" in 18 U.S.C. § 1514A(a) refers only to employees of public companies.

PROTECTED ACTIVITY; EMPLOYEE ONLY NEEDS TO COMMUNICATE CONDUCT BELIEVED TO BE ILLEGAL, NOT WHICH LAWS WERE ALLEGEDLY VIOLATED

PROTECTED ACTIVITY; FACT THAT EMPLOYEE WAS PEFORMING THE DUTIES OF HER POSITION DID NOT REMOVE PROTECTION UNDER SOX

In Yang v. Navigators Group, Inc. , No. 13-cv-2073, (S.D.N.Y. May 8, 2014) ( 2014 WL 1870802), the Plaintiff filed a Sarbanes-Oxley Act (SOX) 18 U.S.C. § 1514A complaint and a Dodd-Frank Act, 15 U.S.C. § 78u-6(h)(1) complaint. The Plaintiff was the Defendant's Chief Risk Officer. She alleged that she was terminated in retaliation for repeated internal reporting of the Defendant's improper risk management control practices, which constituted shareholder fraud and violated federal securities rules and regulations. The Defendant moved to dismiss the claims on the ground that the Plaintiff's communications to her supervisors were not protected activity under SOX, and that she was not a Dodd-Frank whistleblower because she did not report the purported securities law violations to the SEC. The court treated the motion a FRCP 12(b)(6) motion to dismiss for failure to state a claim. While ruling on this motion, the court also considered the Plaintiff's motion to submit a second amended complaint.

"Definitively and specifically" standard not binding precedent; employee is not required to communicate to the employer which laws were allegedly violated - only which conduct was believed to be illegal

In regard to the SOX claim, the Defendant first contended that the Plaintiff's communications did not "definitively and specifically" relate to one of the categories of fraud or securities violations listed in section 1514A(a)(1), citing the Second Circuit's decision in Vodopia v. Koninklijke Philips Elecs., N.V. , 398 F. App'x 659, 663 (2d Cir. 2010) (summary order). The district court stated that the Second Circuit's adoption of the "definitive and specific" standard in Vodopia was not binding because in the Second Circuit, rulings by summary order do not have precedential effect. The court noted that the ARB had found this standard to be inappropriate, and stated that the ARB's determination was entitled to some level of deference in the federal courts. The court, however, made no determination whether the standard applied: "Regardless of whether it applies, the employee is not required to communicate to the employer which laws the employer's conduct allegedly violated. Andaya , 2012 WL 1871511, at *3 (citing Fraser v. Fiduciary Trust Co. Int'l , 417 F. Supp. 2d 310, 322 (S.D.N.Y. 2006)). The employee's communication need only "identify the specific conduct that the employee believes to be illegal." Ashmore v. CGI Grp. Inc. , No. 11 Civ. 8611 (LBS), 2012 WL 2148899, at *6 (S.D.N.Y. June 12, 2012) (emphasis added) (quoting Welch v. Chao , 536 F.3d 269, 276 (4th Cir. 2008)). Thus, Defendant's assertion--that the [Plaintiffs second amended complaint] does not provide any allegations plausibly suggesting that Plaintiff "communicated to Defendant that it had violated [certain SEC] rules" enumerated in Plaintiff's brief, 'is of no moment.'" Slip op. at 14 (footnote omitted). The court reviewed the allegations made in the Plaintiff's second amended complaint and found that "in complaining that relevant information did not appear in SEC filings as required, Plaintiff allegedly implicated SEC rules violations which are sufficient to state a plausible claim under SOX." Slip op. at 15 (footnote omitted).

Protected Activity; fact that plaintiff is merely discharging her duties does not remove protection under SOX

The Defendant further argued that the Plaintiff's communications could not be protected activity under SOX because the Plaintiff was hired as the Chief Risk Officer, "and reporting risk issues were 'part and parcel of her job.'" The court rejected this argument, noting that the ARB had held that "an employee may engage in protected activity even where the employee is discharging her duties." Barker , 888 F. Supp. 2d at 297 (citing Robinson v. Morgan-Stanley , ARB Case No. 07-070, 2010 DOLSOX LEXIS 7, at *26-27 (ARB Jan. 10, 2010))." Slip op. at 14-15. The court stated that because ARB determinations are entitled to some deference, the Defendant's job description argument was unavailing."

Reasonable Belief

The Defendant next argued that the Plaintiff did not reasonably believe that the Defendant's practices were unlawful. Looking to the Plaintiffs second amended complaint, the court found that the Plaintiff alleged that the Defendant's risk assessment understated the risk by 60% of the Defendant's assets to the board of directors and that other risk related information was not disclosed to the SEC and rating agencies, and that such information would impact actions taken by the board of directors and logically influence shareholders. The court concluded that it was not implausible that the Plaintiff believed that this reflected fraud on shareholders, and that the Plaintiff believed that it violated SEC rules. The court also noted that the Plaintiff did not need to prove a violation of the law to state a Section 1514A claim.

The Defendant argued that the Plaintiff did not subjectively believe that shareholder fraud was being committed because she did not explicitly so state. The Defendant pointed to two documents signed by the Plaintiff certifying that she knew nothing of fraudulent or untrue statements of material fact in certain financial information. The court again pointed out that the Plaintiff need not specify which laws she thought were violated, but rather only which specific conduct she believed to be illegal (as alleged in the second amended complaint). Although the Defendant also argued that the Plaintiff did not have an objectively reasonable belief that shareholder fraud was being committed, the court found that this was merely a rehash of arguments that it was part of the Plaintiff's job to identify risk management issues.

Accordingly, the court allowed the Plaintiff to amend her complaint, and denied the Defendant's motion for summary judgment on the pleadings.

PROTECTED ACTIVITY; DISTRICT COURT APPLIES CHEVRON DEFERENCE TO ARB'S SYLVESTER DECISION; FACT THAT PLAINTIFF, AS PRINCIPAL ACCOUNTING OFFICER, WAS RESPONSIBLE FOR ACCURACY OF FINANCIAL STATEMENTS WEIGHED AS FACTOR IN OBJECTIVE REASONABLENESS OF HIS REPORT TO AUDIT COMMITTEE

In Stewart v. Doral Financial Corp. , 13-cv-1349 (D.Puerto Rico Feb. 21, 2014) (2014 WL 661587), the Plaintiff was a Senior Vice President and Principal Accounting Officer for a financial corporation. He sent a letter to the Defendant's Audit Committee about his concerns about SOX-required internal controls, and a concern that the Defendant would fail to accurately report financial information in the upcoming quarters as a result of comments and events personally perceived by him. The Defendant filed two motions to dismiss arguing, inter alia, that the Plaintiff had not engaged in protected activity under SOX Section 806. In deciding the motions, the preliminary question before the court was whether the ARB's decision in Sylvester v. Paraxel Int'l LLC , ARB No. 07-123, ALJ Nos. 2007-SOX-39 and 42, slip op. at 17-18 (ARB May 25, 2011) (2011 WL 2165854), was entitled to Chevron deference. The court determined that Chevron deference applied, despite the fact that the ARB had changed course in Sylvester , because two Circuit Courts of Appeals had granted such deference, and because the ARB had thoroughly outlined its reasons for its reversal of course. Thus, the court applied the Sylvester "reasonable belief" standard rather than the "definitively and specifically" standard of Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27, slip op. at 17 (ARB Sept. 29, 2006) (2006 WL 3193772). The court found no doubt that the Plaintiff met the "subjective belief" element of Sylvester analysis given his letter to the Chairman of the Audit Committee. The court then examined whether the Plaintiff met the element of the Sylvester analysis "whether a reasonable person, in the same factual circumstances and with the same training and experience as the [Plaintiff], would have held a reasonable belief that the conduct complained of constituted a violation of pertinent law." Slip op. at 16. The court noted that the Plaintiff was the Defendant's Principal Accounting Officer and was responsible for the accurate reporting of the Defendant's financial statements, general ledger and budget, and would be "would be implicated immediately if any oversight or inconsistencies were detected in any of [the Defendant's] financial disclosure statements." Id . The court was persuaded that sufficient facts had been alleged to show that a reasonable Principal Accounting Officer in the Plaintiff's position could have plausibly held a reasonable belief that a SOX violation was likely to occur (essentially a plan to "cook the books" and report inaccurate financial information).

PROTECTED ACTIVITY UNDER SOX SECTION 806; COMPLAINANT MUST PROVIDE INFORMATION THAT HE OR SHE REASONABLY BELIEVED VIOLATED ONE OF THE SIX PROVISIONS OF U.S. LAW ENUMERATED IN SECTION 806; INFORMATION PROVIDED BASED ON REASONABLE BELIEF OF VIOLATION OF A FOREIGN LAW IS NOT COVERED

In Villanueva v. U.S. Dep't of Labor , No. 12-60122 (5th Cir. Feb. 12, 2014), the Complainant filed a SOX whistleblower complaint alleging that his employer, a Columbia affiliate of a Netherlands limited liability company whose stock is publicly traded in the U.S., retaliated against him in violation of SOX § 806 for blowing the whistle on an alleged scheme to violate Columbian tax law. OSHA and the ALJ dismissed the complaint on ground that it would require impermissible extraterritorial application of SOX § 806. The ARB dismissed the complaint on the narrow ground that the Complainant's disclosures of alleged violations of foreign law did not have a sufficient connection to a violation of one of the six provisions of U.S. law enumerated in § 806.

On appeal, the Fifth Circuit did not reach the question of whether § 806 applies extraterritorially. Rather, the court found that the Complainant's claim did not fall within the scope of § 806's protection. The court noted that "§ 806 bars companies that are publicly traded in the United States from retaliating against a whistleblowing employee, but only if the employee seeking the statute's protection demonstrates that he provided information regarding conduct that he or she reasonably believed violated one of the six enumerated provisions of U.S. law. See 18 U.S.C. § 1514A(a)(1)(C); Allen , 514 F.3d at 476." Slip op. at 3. The court determined that "On review of the facts of the case . . . we conclude that Villanueva did not provide information regarding conduct that he reasonably believed violated one of the six provisions of U.S. law enumerated in § 806; rather, he provided information regarding conduct that he reasonably believed violated Colombian law. In other words, he failed to show that he engaged in protected activity under § 806." Slip op. at 3 (emphasis as in original).

PROTECTED ACTIVITY; FRAUD AGAINST SHAREHOLDERS IS NOT AN ELEMENT OF SOX COMPLAINT BASED ON REPORTED VIOLATIONS OF 18 U.S.C. §§ 1341, 1343, 1344, AND 1348

PROTECTED ACTIVITY; 10TH CIRCUIT EMPLOYS ARB'S SYLVESTER DEFINITION OF "REASONABLE BELIEF" AS INCLUDING BOTH A SUBJECTIVE AND OBJECTIVE COMPONENT

In Lockheed Martin v. Adm. Review Bd., USDOL , No. 11-9524 (10th Cir. June 4, 2013) (case below ARB No. 10-050, ALJ No. 2008-SOX-49), the Tenth Circuit affirmed the ARB's decision in Brown v. Lockheed Martin Corp. , ARB No. 10-050, ALJ No. 2008-SOX-49 (ARB Feb. 28, 2011), in which the ARB affirmed the decision of an ALJ that Lockheed violated Section 806 of the Sarbanes-Oxley Act by constructively discharging the Complainant after she engaged in protected activity.

Background

The Complainant worked as a Communications Director and brought concerns to Lockheed's Vice President of Human Resources that the Vice President of Communications was using company funds for illicit activities. The Vice President of Human Resources submitted an anonymous complaint on the Complainant's behalf. Upon questioning by the Vice President of Communications about who reported her, the Complainant revealed that she told the Vice President of Human Resources "a few things," but stated that she was not sure if her comments resulted in the complaint. Shortly thereafter, the Complainant received a lower performance rating. In a company reorganization, the Complainant's position was advertised, and when she applied, SHE was lambasted for doing so. The Complainant was told to vacate her office and either work from home or use the visitor's office (which doubled as a storage room), lost her title and supervisory responsibilities, and was told she could not attend a communications conference that she had attended in the past. When the Complainant came to work and found that someone else was using the visitor's office, she was told that the company was looking for a cubicle for her. The Complainant protested that as a Level 5 employee with a leadership position (an "L code" classification) she was entitled to an office, but was then told that her L code was in the process of being removed. At that point, the Complainant took medical leave for depression, and filed a forced discharge/constructive discharge complaint with OSHA. The ARB affirmed the ALJ's decision finding a constructive discharge in violation of AIR21. On appeal to the 10th Circuit, Lockheed argued that the ARB's findings of fact and conclusions of law were in error as to protected activity, unfavorable personnel action, and contributing factor.

Protected Activity

    -- Fraud against shareholders not an element of SOX complaint based on reported violations of 18 U.S.C. §§ 1341, 1343, 1344, and 1348

Lockheed argued that employee reports of mail and wire fraud that do not allege shareholder fraud are not protected under SOX Section 806. The court rejected this argument, finding that the phrase in 18 U.S.C. § 1514A(a)(1) "relating to fraud against shareholders" modifies only the phrase that immediately precedes it -- "any provision of Federal law." Thus, the court held that Complainants who report violations of 18 U.S.C. §§ 1341, 1343, 1344, and 1348 are not required to also establish that such violations relate to fraud against shareholders. Although the court found that the text was not ambiguous, even if it was, Chevron deference to the ARB's interpretation of SOX applied, even though the ARB had changed its previously expressed position. See Sylvester v. Parexel Int'l LLC , ARB No. 07-123, 2011 WL 2165854 at *15-16 (ARB May 25, 2011).

    -- Reasonable belief that reported conduct was a violation Lockheed argued that the ARB erred in concluding that the Complainant "definitely and specifically" communicated a belief that the Vice President of Communications engaged in mail or wire fraud. The court observed that Section 806 requires that, to be protected from retaliation, an employee must "reasonably believe" the conduct she reports violates one of the enumerated federal statutes or regulations. 18 U.S.C. § 1514A(a)(1). The court observed that the ARB had defined "reasonable belief" to include both a subjective and an objective component; an employee must actually believe in the unlawfulness of the employer's actions and that belief must be objectively reasonable. Sylvester , 2011 WL 2165854 at *11. And the court observed that the decisions of multiple Circuit Courts of Appeals were in accord with ARB standard. The court found that the conclusion of the ALJ and the ARB that the Complainant met the standard was supported by substantial evidence, and that Lockheed had not made a persuasive argument sufficient for the court to disturb the ALJ's credibility findings. The court did not reach the ARB's disavowing of the "definite and specific" standard for SOX complaints in Sylvester , 2011 WL 2165854 at *14-15, because it found that the complaint in the instant case met that standard.

Lockheed also argued that any belief that the Vice President of Communications' activities amounted to fraud was objectively unreasonable as a matter of law due to a lack of evidence that she acted with specific intent to defraud. The court stated that "While attempted concealment is one method of proving specific intent in a fraud case, it is not essential. For example, this court has also recognized intent can be inferred from whether a defendant 'profited or converted money to his own use.'" Slip op at 19 (citations omitted). The court found that the Complainant's allegations clearly amounted to a claim that the Vice President for Communications had converted company money to her own use. There was thus substantial evidence supporting the ALJ and ARB's findings that the Complainant reasonably believed that the Vice President of Communications had committed fraud and that she definitely and specifically communicated that belief to her superiors.

PROTECTED ACTIVITY; OBJECTIVELY REASONABLE BASIS FOR REPORT OF SUSPECTED INSIDER TRADING NOT SHOWN WHERE PLAINTIFFS HAD VERY LITTLE INFORMATION TO BASE THAT REPORT ON, AND HAD NOT SOUGHT TO OBTAIN ADDITIONAL EVIDENCE BEFORE REPORTING TO A STATE OFFICIAL

In Feldman v. Law Enforcement Associates Corp. , No. 5:10-CV-08-BR (EDNC June 28, 2013), the Defendant company was a manufacturer of security and surveillance equipment. SOX whistleblower complaints were brought by two former employees - the company's president and CEO, and a vice-president of sales and marketing. The relationship between the president/CEO and the company's founder and its board of directors became contentious, including in regard to the Plaintiffs' belief that possible export violations had occurred and needed to be reported to government agencies. Eventually the president/CEO was removed by the board of directors in a dispute over moving the company to a new location. The vice-president, who had a history of multiple sclerosis, was taken to the hospital the day of the board meeting that resulted in the president/CEO's removal. The vice-president did not return to his job, and after failing to respond to communications from the Defendant company, the company determined that the vice-president had voluntarily quit his job. The Defendants filed a motion for summary judgment.

The court assumed, without deciding, that the Plaintiffs engaged in protected activity under the "definitively and specifically" standard, when they reported to the board of directors and the federal government that the company's founder had involved the company in possible felonies relating to founder's separate export business, and when they engaged in certain other actions or refusals. The court noted that the Fourth Circuit had expressly adopted the "definitively and specifically" standard in Welch v. Chao , 536 F.3d 269, 275 (4th Cir. 2008), and that the ARB had explained why this standard was inappropriate in Sylvester v. Parexel Int'l LLC , ARB No. 07-123, ALJ Nos. 2007-SOX-39 and 42, 2011 WL 2165854, at *15 (ARB May 25, 2011). Because the court assumed, without deciding, that the Plaintiffs meet the higher definite and specific standard, it was not necessary to resolve whether the ARB's decision affected the Fourth Circuit precedent.

In regard to the Plaintiffs' report of suspected insider trading, the court found that the Plaintiffs failed to raise a genuine dispute of material fact as to whether they had both a subjective belief and an objectively reasonable belief that their report of possible insider trading was a violation of relevant law. Specifically, the court found that the Plaintiffs did not have an objectively reasonable belief that a violation had occurred because they had very little information on which to make the insider trading allegation, and despite the lack of evidence, they did not try to obtain additional evidence before reporting to a state agent.

PROTECTED ACTIVITY; OBJECTIVE BELIEF THAT PHARMACEUTICAL COMPANY'S PRESS RELEASE WAS MISLEADING FOUND SUFFICIENT TO WITHSTAND SUMMARY JUDGMENT BASED ON PLAINTIFF'S EDUCATION AND EXPERIENCE AS A CHEMIST AND HIS TESTIMONY AS TO THE OBJECTIVE BASIS FOR HIS BELIEF; PLAINTIFF'S TRAINING AND EXPERIENCE DID NOT SUGGEST THAT HE WOULD BE FAMILIAR WITH SECURITIES LAW OR SECOND CIRCUIT DOCTRINE ON "PUFFERY" AND "CORPORATE OPTIMISM" IN PRESS RELEASES

In Perez v. Progenic's Pharmaceuticals, Inc. , 10-cv-8278 (SDNY July 24, 2013) (2013 WL 3835199) (case below 2009-SOX-17), the Plaintiff was a chemist who was supporting development of Relistor, a pharmaceutical drug designed to treat postoperative bowel dysfunction or opioid-induced constipation. The Defendant and Wyeth Pharmaceuticals entered into a license and co-development agreement for commercialization of Relistor. After a phase two clinical trial on an oral formulation of the drug, the Defendant and Wyeth issued a May 22, 2008 joint press release stating that the trial "showed positive activity" and "statistically significant activity as assessed by the occurrence of spontaneous bowel movements and other efficacy measures." The then CEO of the Defendant was quoted as saying "We are pleased by the preliminary findings of this oral formulation." On July 16, 2008, Wyeth executives presented an update on Relistor development to an executive development council at Wyeth; no employees of the Defendant participated. The update noted that despite some dosages of the tablet formulation showing statistically significant results, some targets for the drug had not been met, and advancement to stage three clinical trials was not recommended. At the end of July 2008, the Defendant's general counsel received a copy of the Wyeth update, and he distributed it to five senior managers, not including the Plaintiff. The Plaintiff obtained a copy of the update, and on August 4, 2008 presented a memorandum to certain of Defendant's officers in which the Plaintiff stated that Wyeth and the Defendant were committing fraud against shareholders because representations made to the public were not consistent with the actual results of the clinical trial. The Defendant became concerned about how the Plaintiff obtained a copy of the Wyeth update, and eventually terminated the Plaintiff's employment when the Plaintiff refused to state how he obtained the update. The Plaintiff then filed a complaint with OSHA. OSHA dismissed the complaint, along with an earlier complaint regarding a different drug. The Plaintiff objected to the finding on the Relistor related complaint, and eventually filed his complaint in district court. The Defendant filed a motion for summary judgment.

The first ground for the summary judgment motion was the contention that the Plaintiff did not reasonably believe that the Defendant violated the provisions of law protected under SOX. The Defendant did not contest the Plaintiff's subjective belief in a violation, but claimed that the belief was objectively unreasonable. The district court evaluated the Plaintiff's training and experience, noting that he held a Ph.D. and master's degree in chemistry and worked for the Defendant for about four years, primarily on chemical formulations of Relistor. The court noted that the Plaintiff stated in deposition that he had reviewed more than just a few slides from the Wyeth update (the Defendant having alleged that the Plaintiff had relied on selective quotations from only five slides and had merely glanced at the full version of the update), and had also based his opinion on conversations with other employees on the Relistor team. On this basis, the court found that a reasonable jury could find that the Plaintiff's belief that the press release was misleading was formed on objectively reasonable basis. The court also observed that the Plaintiff did not appear to have any knowledge or training in securities law, and that a reasonable person with the Plaintiff's training and experience likely would not be familiar with the Second Circuit's doctrine with respect to the use of "puffery" and "corporate optimism" in press releases. Thus, the court denied the motion for summary judgment relating to protected activity.

The second ground for summary judgment was the contention that the Plaintiff could not show that his protected activity was a contributing factor in his firing. The court also denied this second ground, finding that the parties disputed the reason for the firing, that there was evidence suggesting hostility prior to any discussion of where the Plaintiff obtained the Wyeth update, and that there was temporal proximity between the protected activity and the Plaintiff's firing.

PROTECTED ACTIVITY; REVIEW OF SUMMARY JUDGMENT MOTION IN SOX WHISTLEBLOWER CASE

Background

In Leshinksy v. Telvent GIT, S.A. , No. 10-cv-4511, 2013 WL 1811877 (S.D.N.Y. May 1, 2013), the Plaintiff filed a complaint against several Defendants alleging that his employment was terminated in violation of the Section 806 whistleblower provision of the Sarbanes-Oxley Act. The Plaintiff's position was Vice President, Toll Systems. Following an acquisition of a company that developed and maintained software used in automated toll collection, the Plaintiff was assigned to the acquired company, although he remained formally employed by the acquiring company. During a discussion at a meeting concerning preparations for a bid for a toll system maintenance contract with the Triborough Bridge and Tunnel Authority division of the Metropolitan Transit Authority (MTA), the attendees discussed a strategy for winning the bid that involved possibly using two different overhead rates, one for external use and one for internal use. A few minutes after the end of the meeting, the Plaintiff went to the office of the President of the acquired company to object to the two overhead strategy, telling him that it "was unethical, certainly immoral and may even be illegal but I wasn't sure since I'm not a lawyer." The President became angry, accused the Plaintiff of not being a team player, and asked the Plaintiff to reconsider his objections. The Plaintiff left the office without further discussion. This was the only discussion the Plaintiff had with anyone at the Defendant companies about the two overhead strategy. When the bid was submitted to MTA, it did not use the two overhead strategy. Thereafter the Plaintiff was marginalised at work. The Plaintiff, both before and after the meeting with the President, had other difficulties at work, and managers became increasingly frustrated with his behavior and the caliber of his work. Several months later, the Plaintiff was laid off together with two other employees.

Summary Judgment Standard - Defendant's Burden is Higher in SOX Cases - Plaintiff Need Only Demonstrate a Prima Facie Case

The court first reviewed the framework for reviewing a summary judgment motion in a SOX case. The court recited the general framework for deciding a FRCP 56 motion, but noted that "[i]t is now well accepted that courts should construe Section 806 broadly." Slip op. at 10 (citation omitted). The court noted the burden shifting framework for Section 806 cases, and held:

   At the summary judgment stage, a plaintiff need only demonstrate that a rational factfinder could determine that Plaintiff has made his prima facie case. Assuming a plaintiff does so, summary judgment is appropriate only when, construing all of the facts in the employee's favor, there is no genuine dispute that the record clearly and convincingly demonstrates that the adverse action would have been taken in the absence of the protected behavior. Thus, the defendant's burden under Section 806 is notably more than under other federal employee protection statutes, thereby making summary judgment against plaintiffs in Sarbanes-Oxley retaliation cases a more difficult proposition.

Leshinksy , supra, slip op. at 10-11 (citation omitted).

Protected Activity - Rejection of "Specifically and Definitively" Test

The Defendants contended in their summary judgment motion that the Plaintiff's statement to the acquired company's President was plainly insufficient to constitute "providing information" under Section 1515A, as the Plaintiff did not use the word "fraud" and was not even sure if the two overhead scheme was illegal. The court noted that a "specifically and definitively" test had been adopted in Platone v. United States Dep't of Labor , 548 F.3d, 322, 327 (4th Cir. 2009), but that the U.S. Department of Labor, Administrative Review Board (ARB) had subsequently rejected the existence of such a test in Sylvester v. Parexel Int'l LLC , ARB No. 07-123, 32 IER Cases 497, 508 (ARB May 25, 2011). Finding that ARB decisions are entitled to some level of deference (albeit the level of deference was in dispute), the court stated that it agreed with the ARB that the "definitive and specific" test is inapplicable to SOX violations. Rather, the critical focus is on whether the employee reported conduct that he or she reasonably believes constituted a violation of federal law.

Protected Activity - Reasonable Belief Test

The court held that "[t]o demonstrate that a plaintiff engaged in a protected activity, a plaintiff must show that he 'had both a subjective belief and an objectively reasonable belief that the conduct he complained of constituted a violation of relevant law.'" Slip op. at 15, quoting Welch , 536 F.3d at 275 (internal quotation omitted).

 

• Objective reasonableness

In the instant case, the Defendants argued in the summary judgment motion that it was not objectively reasonable for the Plaintiff to believe that the two overhead scheme could possibly come to fruition. The court, however, found that there were sufficient facts for a reasonable factfinder to find otherwise.

 

• Rejection of Livingston "existing" violation analysis

The Defendants next argued that it would not have been reasonable for the Plaintiff to believe that a scheme was underway, pointing out at that there had been no agreement to carry out such a scheme and that the specifics of such a scheme had not yet been discussed or worked out. The court noted that the Fourth Circuit in Livingston v. Wyeth, Inc. , 520 F.3d 344, 352 (4th Cir. 2008), had indicated that a report could not concern a claim that a violation was about to happen upon some future contingency. The court observed, however, that the Third Circuit in Wiest v. Lynch , 710 F.3d 121, 133 (3rd Cir. 2013), following the ARB's lead in Sylvester , rejected the notion that a violation must be "existing" in order for a report to be protected. Rather, the court held that Section 806 protects communications about a violation that has not occurred as long as the employee reasonably believes that the violation is likely to happen. The district court stated that it agreed with the Third Circuit and the ARB "that imminent crimes, or at least crimes in their infancy, are within the scope of Section 806." Leshinksy , supra, slip op. at 19. The court stated: "It furthers the purpose of Section 806 to nip corporate wrongdoing in the bud, rather than permitting a scheme to blossom into a full-fledged crime before whistleblower protections take effect. Whistleblowers should not be asked to wait until executives have dotted the i's and crossed the t's before sounding an alarm." Id . at 19. Although the Defendants in the instant case argued that there were far too many contingencies between the discussion of the scheme and its implementation for a reasonable person to believe that the scheme was in progress or imminent, the court found that the discussion at the meeting had been sufficiently substantive for a reasonable person to believe that mail or wire fraud was imminent, if not already in progress.

 

• Subjective reasonableness - focus on Plaintiff's belief, not whether he shared that belief with a supervisor

The court stated that the "Plaintiff must also have had a subjective belief that fraud was taking place. After all, irrespective of whether Plaintiff reported a violation of the relevant law, "[i]t would make no sense to allow [a plaintiff] to proceed if he himself did not hold the belief required by the statute . . . ." Livingston v. Wyeth, Inc. , 520 F.3d 344, 352 (4th Cir. 2008)." Leshinksy , supra, slip op. at 21. The court found that the Plaintiff's statement to the President that he believed that the two overhead strategy "may even be illegal but I wasn't sure since I'm not a lawyer" was sufficient evidence for a jury to find that he was in fact concerned about the legality of the Defendants' conduct. The court agreed with the Defendants that the fact that the Plaintiff only reported his concern to the President of the acquired company was hard to square with his history of resisting improper actions by superiors, and did not follow his practice of relaying concerns to the President of the company which he was formally employed, who was a long-term friend. The court held however, that its "inquiry is whether there is sufficient evidence that Plaintiff had a reasonable belief, not whether he shared that belief with his superior." Leshinksy , supra, slip op. at 21 (citation omitted).

Protected Activity - Whether Reporting to the Wrongdoer Can Constitute Whistleblowing

The Defendants argued in their motion for summary judgment that, consistent with a line of cases decided under the Whistleblower Protection Act (WPA), disclosure of wrongdoing to the wrongdoer himself is not whistleblowing. The court rejected this argument finding that Section 1514A on its face indicates that such reporting is protected, and the fact that the WPA decisions relied on by the Defendants had been overturned by Congress, "compel the interpretation that a report by an employee to his supervisor is protected under the statute, even if that supervisor is implicated in the wrongdoing. A holding to the contrary would also contravene the very purpose of the Sarbanes Oxley's whistleblower provisions, by facilitating rogue supervisors hoping to silence employees, and discouraging employees otherwise inclined to raise concerns about the legality of company policy from doing so." Leshinksy , supra, slip op. at 24 (citation omitted).

THIRD CIRCUIT OVERTURNS "DEFINITIVELY AND SPECIFICALLY" STANDARD FOR PROTECTED ACTIVITY; "REASONABLE BELIEF" TEST APPROPRIATE FOR DETERMINING IF COMPLAINANT ENGAGED IN PROTECTED ACTIVITY

In Wiest, et al. v. Lynch, et al. , No. 11-4257, 2013 WL 1111784 (3d Cir. Mar. 19, 2013 ), the Third Circuit Court of Appeals reversed the District Court's holding that a SOX whistleblower complainant must show that the whistleblower's internal complaint must "'definitively and specifically' relate to one of the statutes or rules listed" in Section 806 in order for the communication to be considered "protected activity" under the first prong of establishing a prima facie case of retaliation. Instead, the Wiest court held that the complainant need only show that when making an internal complaint, the complainant had a subjectively and objectively reasonable belief that his employer's conduct constitutes a violation of an enumerated provision in Section 806.

Complainant Wiest brought an action under the whistleblower protection provisions of Section 806 of the Sarbanes-Oxley Act after he was terminated from his accounting department position with Tyco Electronics for allegedly refusing to approve certain corporate expenditures as business expenses. The District Court dismissed Complainant's complaint under Fed. R. Civ. P. 12(b)(6) because he failed to allege a prima facie case of discrimination. The District Court relied on the Administrative Review Board's holding in Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27, 2006 WL 3246910 (ARB Sept. 29, 2006), and held that Complainant did not sufficiently allege that his communication to Tyco's directors "definitively and specifically" relate to a rule listed in Section 806. On appeal, the Third Circuit reversed the District Court's dismissal, in part, stating that the ARB's decision in Sylvester v. Parexel Int'l LLC , ARB No. 07-123, ALJ Nos. 2007-SOX-39 and 42, 2011 WL 2165854 (ARB May 25, 2011), which abandoned the "definitively and specifically" standard, was entitled to Chevron deference. The Third Circuit held that the "reasonable belief" test articulated by the ARB in Sylvester is the appropriate standard with which to analyze whether a complainant's communication constituted "protected activity."

PROTECTED ACTIVITY UNDER SOX; THE COURT DISMISS THE PLAINTIFF'S SOX COMPLAINT BECAUSE THE CONTENT OF THE EVIDENCE THAT HE PROVIDED WITH HIS COMPLAINT DIRECTLY CONTRADICTED THE ALLEGATIONS IN THE COMPLAINT

In McManus v. McManus Financial Consultants, Inc. , No. 3:11-CV-00134-LRH-VPC , 2012 WL 937812 (D.Nev. Mar. 19, 2012), the plaintiff served as President of defendants McManus Financial Consultants, Inc. ("MCFI") and McManus & Co., Inc. ("MCI"), and his brother served as Executive Vice President of MCFI and MCI. Additionally, the plaintiff served as Chief Financial Officer ("CFO") of defendant Aeolus Pharmaceuticals, Inc. ("Aeolus"). After Aeolus sold investors shares in return for financing in October 2009, the investors sought to renegotiate the conversion price of the notes in November 2009. The plaintiff told Aeolus' CEO and Chairman that changing the conversion price and providing additional shares to investors for no consideration and without a new agreement would constitute securities fraud, but despite his warnings, Aeolus' Board of Directors approved the renegotiation and allocation of additional shares. The plaintiff, as CFO, had to sign the subsequent 8-K that Aeolus filed with the SEC, which stated that Aeolus lowered the share price "to correct a misunderstanding." Over the next few months, the plaintiff's salary was reduced and he was eventually terminated from Aeolus. He filed a complaint with OSHA alleging a violation of the Sarbanes-Oxley Act ("SOX"), and after 180 days passed without a resolution, he filed in district court.

Because he only filed an OSHA complaint against Aeolus, the district court dismissed the plaintiff's claims against MCI and MFCI for failure to exhaust administrative remedies. As for his SOX complaint, the district court granted the defendant's motion to dismiss under FRCP 12(b)(6) because, after reviewing the Form 8-K at issue, "the court finds that the document contradicts Plaintiff's allegation that it failed to disclose to other shareholders two material facts: lack of a new agreement and/or consideration." McManus at *4. Instead, the court's review of 8-K revealed that "it specifies the terms of the amended conversion (including the adjustment of the conversion price and the number of new shares issued), and it specifically states that Aeolus will not receive any proceeds from the Issuance," which "directly contradict the plaintiff's allegations." Id.

AN ALLEGATION OF SHAREHOLDER FRAUD IS NOT A NECESSARY COMPONENT OF PROTECTED ACTIVITY UNDER SOX.

In Gladitsch v. Neo@Ogilvy , No. 11 Civ. 919 DAB, 2012 WL 1003513 (S.D.N.Y. Mar. 21, 2012), the plaintiff, an Associate Media Director, served on the company's IT Planning Team, and noticed in a proposal sent by one of the company's media service vendors that the vendor intended to substantial overcharge a client. The plaintiff immediately notified the Director of Media Management, and after she met with the vendor to discuss the proposed charges, it was revealed that the company had used the proposed pricing scheme for years. As a result, it appeared to the plaintiff that the company had overcharged the client by several million dollars. The plaintiff complained to her direct supervisors on the IT Planning Team, and when billing practices remained unchanged, she arranged a meeting to discuss the billing scheme with the company's Managing Director and other upper-level management. However, rather than correct the problem, the plaintiff alleged that her supervisors retaliated against her by threatening her and removing her from the client's account. Despite a history of consistently positive performance reviews, her next performance review criticized her performance, and specifically mentioned that she had been distracted by the company's billing practices. She also did not receive a promotion that she had been promised prior to discovering and complaining about the billing practices, and was instead demoted to a position she had held three years earlier

The district court rejected the defendants' argument that the plaintiff failed to engage in protected activity under SOX because she did not complain about fraud affecting shareholders or investors, explaining that "an allegation of shareholder fraud is not a necessary component of protected activity under Section 1514A." Id. at 7. As support for this position, the court cited the district court decisions in O'Mahony v. Accenture Ltd. , 537 F.Supp.2d 506, 518 (S.D.N.Y.2008) and Sharkey v. J.P. Morgan Chase & Co. , 805 F.Supp.2d 45, 57 (S.D.N.Y.2011), and the ARB's decision in Sylvester v. Parexel , ARB No. 07-123, 2011 WL 2517148 (May 25, 2011). Ultimately the court found that the plaintiff sufficiently alleged that she engaged in protected activity: the plaintiff "has alleged sufficiently that she reasonably believed that the pricing scheme, which overcharged IBM, violated an enumerated category of misconduct under SOX," and "her communications with supervisors identifies specifically the overcharges she believed to be unlawful." Id. at 8.

PROTECTED ACTIVITY UNDER SOX; PLAINTIFF'S COMPLAINTS TO HIS EMPLOYER ABOUT OPEN DISCUSSION OF STOCK PRICES AND PERSONELL ISSUES DID NOT DEFINITIVELY AND SPECIFICALLY RELATE TO A SOURCE OF LAW LISTED IN SECTION 1514A; PLAINTIFF'S BELIEF THAT OPEN DISCUSSION OF STOCK PRICES AT THE OFFICE ENCOURAGED INSIDER TRADING THAT WOULD DEFRAUD SHAREHOLDERS WAS NOT OBJECTIVELY REASONABLE.

In Andaya v. Atlas Air, Inc. , No. 10 CV 7878, 2012 WL 1871511 (S.D.N.Y. Apr. 30, 2012), the plaintiff served as the Director of the defendant's newly-created Project Management Office. In that capacity, he often reminded employees that because the defendant is a publicly traded company, they should not discuss its stock prices openly, because the plaintiff believed such discussions violated SOX and SEC regulations. The plaintiff also made a host of complaints to his superior about personnel issues, the IT department's use of a consultant, and management officials that accepted fees for speaking engagements. The plaintiff also objected when his superior discussed the company's stock price with the plaintiff and several other directors, because the plaintiff felt that doing so violated SOX and SEC regulations by "promote[ing] insider trading and wast[ing] corporate assets." Andaya at *1. Prompted by a written complaint about his management style from a group of his subordinates, the defendant's CFO made the decision to terminate the plaintiff's employment, and the plaintiff filed a retaliation complaint under SOX's whistleblower protection provision.

In deciding on the defendant's motion for summary judgment, the district court first found that the Dodd-Frank Act's amendment to Section 806 that clarified that SOX applies to subsidiaries of publicly traded companies applies retroactively, and therefore the defendant is a covered company under the statute. However, the court agreed with the defendant that the plaintiff failed to raise a question of fact regarding whether he engaged in protected activity, because he "failed to identify any way in which the conduct he complained about related to any conduct proscribed by" the sources of law listed in § 1514A(a)(1). Andaya at *4. As such, the plaintiff failed to satisfy the requirement that his communications to his employer "definitively and specifically relate to one of the listed categories of fraud or securities violations." Id. at *3. The court found his communications to his employer to be devoid of "allegations [of] criminal conduct, shareholder fraud, or fraudulent intent," and therefore the court determined it could not "conclude plaintiff complained of any fraud which would trigger Section 1514A(a)(1) liability." Id. at *4. Additionally, the court found that his belief that that staffing issues, company waste, management accepting speaking fees, and excessive consulting fees constituted fraud against shareholders was not objectively reasonable, nor was his belief that "open discussions of stock prices" constituted shareholder fraud. Id at *5. In short, "complaints largely related to internal corporate policies concerning corporate waste, personnel matters, and relationships with vendors are not the subjects courts have found covered by SOX." Id.

PROTECTED ACTIVITY UNDER SOX; PLAINTIFF RAISED A QUESTION OF FACT REGARDING WHETHER HER COMPLAINTS TO HER EMPLOYERS ABOUT REPORTING DISCREPENCIES - WHICH SHE DID IN THE ORDINARY COURSE OF HER JOB DUTIES - CONSTITUTED PROTECTED ACTIVITY, AND WHETHER SHE HAD A REASONABLE BELIEF THAT THE DISCREPENCIES VIOLATED A SOURCE OF LAW LISTED IN SECTION 1514A.

In Barker v. UBS AG , CA No. 3:09-CV-2084, 2012 WL 2361211 (D.Conn. May 22, 2012) (case below ALJ No. 2009-SOX-65), the plaintiff, an Associate Director that worked for the company's Equities COO, discovered reporting discrepancies related to the company's exchange holdings while working with the company's traders. After she communicated these discrepancies to senior management, management assigned her to "reconcile" the company's exchange holdings and create a list of holdings that were not accounted for on the company's balance sheet. After the project was finished, the COO presented the reconciliation project findings to the company's senior executives, but instructed the plaintiff not to discuss it with senior executives directly. As a result of the plaintiff's analysis, the company sold some of its exchange holdings, resulting in substantial revenue gains, and COO nominated the plaintiff for a "Thank You Award" for her work on the reconciliation project. Nonetheless, in subsequent months, the plaintiff felt that the COO had been overlooking her for projects, such that she felt she was being constructively discharged, although an internal investigation into her complaints found that she had not been treated unfairly. Shortly thereafter, the plaintiff's employment was terminated as part of the company's large-scale reduction in force, leading her to file a retaliation complaint under SOX.

The defendant's motion for summary judgment rested primarily on whether the plaintiff's communications about reporting discrepancies constitute protected activity under SOX. Primarily, the defendant argued that because the plaintiff did not "step outside [her] role" and was simply performing her job duties, she is not entitled to whistleblower protection. Barker at *5 (citing Riddle v. First Tennessee Bank , 2011 WL 4348298, at *8 (M.D.Tenn. Sept.16, 2011)). The court, however, acknowledged that the ARB ruled in Robinson v. Morgan-Stanley , ARB Case No. 07-070, slip op. at 24-25 (Jan. 10, 2010) that SOX "does not indicate that an employee's report or complaint about a protected violation must involve actions outside the complainant's assigned duties." Id. Even so, the plaintiff alleged that she did take steps beyond her normal duties in reporting the discrepancies, and thus the court found an issue of fact had been raised. Additionally, the court rejected the defendant's argument that the plaintiff did not have a reasonable belief that a violation had occurred. Instead, it found that "a reasonable jury could conclude that [the plaintiff] had a subjectively reasonable belief that UBS had violated the law by reporting inaccurate information to its shareholders and adequately conveyed those concerns to various members of management," and in light of her education and experience "a reasonable jury could find that Barker held an objectively reasonable belief" that a violation occurred. Id. at *5-6.

The court likewise rejected the defendant's argument that the plaintiff could not prove that her complaints contributed to the decision to terminate her employment, finding that she raised a genuine issue of material fact. Finally, while the company did present "convincing evidence that the firm was experiencing extreme financial hardship at the time Barker's employment was terminated, and a reduction in force was necessary," such evidence "does not explain why Barker in particular was selected for termination." Consequently, the defendant's motion was denied. Id. at *8-9.

PROTECTED ACTIVITY AND EMPLOYER KNOWLEDGE UNDER SOX; COMPLAINTS TO COWORKERS AND SUPERVISOR ABOUT THEIR ALLEGEDLY-ILLEGAL SCHEME WAS SUFFICIENTLY SPECIFIC TO CONSTITUTE PROTECTED ACTIVITY UNDER SOX

In Ashmore v. CGI Group Inc. , No. 11 Civ. 8611, 2012 WL 2148899 (S.D.N.Y. June 12, 2012), the defendant was a subcontractor of a public housing authority that provided services related to the administration of HUD's Section 8 project-based rental subsidy program. The plaintiff worked for the defendant's Rebid Assessment Team (RAT), which coordinated rebidding process for Section 8 administrative services contracts. While working in this capacity, the plaintiff allegedly caught wind of a scheme concocted by several RAT coworkers to violate HUD rules limiting the number of rental units that can be administered by a single public housing authority or private subcontractor. According to the plaintiff, he complained to his coworkers and supervisor about the scheme, and alleged in his complaint that he reasonably believed that his coworker's use of telephone lines and emails to implement the scheme violated federal mail and wire fraud statutes. The plaintiff alleged that he was first kicked off of RAT, and two days later was fired for opposing the scheme, leading him to file a retaliation complaint under SOX.

The defendant argued that the plaintiff's complaints to his fellow RAT members about the scheme was insufficiently specific to constitute protected activity under SOX. The district court stated that SOX required that the plaintiff "show that the information she provided about the conduct was not overly general," and that she "reported information [with] a certain degree of specificity." Id. (citing Lerbs v. Buca Di Beppo, Inc. , No. 2004-SOX-8, 2004 WL 5030304, *33-34, (ARB June 15, 2004)). According to the court, "the fact that [the plaintiff] did not specifically inform [the employer] of his belief that the scheme involved mail or wire fraud, or his reasons for thinking so, does not mean that the information he communicated was insufficiently specific to count as activity protected by § 806." Id. at *6. Citing Fourth Circuit's decision in Welch , the district court clarified that "what the specificity requirement instead demands is that 'employees' communications ... identify the specific conduct that the employee believes to be illegal.'" Id. (citation omitted). In the instant case, it was undisputed that the plaintiff specifically identified the conduct that he believed to be illegal in his disclosures (i.e. the scheme to avoid HUD's limit on unit administration), and the court found his disclosures sufficient to satisfy the specificity standard. Likewise, the court rejected the defendant's argument that the plaintiff's belief that the scheme constituted mail or wire fraud was unreasonable.

Because it believed the plaintiff's communications failed to sufficiently inform RAT members that they were violating federal law, the defendant also alleged that it did not have knowledge of the plaintiff's protected activity. The court disagreed, and explained that a plaintiff "does not need to demonstrate that his employer actually believed that what he said about the illegality of the company's conduct was true," but rather he must "demonstrate only that he did in fact communicate his reasonable belief to that effect to his employer ." Id. at *7. The plaintiff satisfied that standard here, and the court dismissed the defendant's motion accordingly.

PROTECTED ACTIVITY AND ADVERSE ACTION UNDER SOX; ONE PLAINTIFF'S COMPLAINTS ABOUT HER COWORKERS' CONDUCT WERE NOT SUFFICIENTLY RELATED TO BANK FRAUD TO CONSITUTE PROTECTED ACTIVITY UNDER SOX

In Guitron v. Wells Fargo Bank, N.A. , No. C 10-3461 CW, 2012 WL 2708517 (N.D.Cal. July 6, 2012), two bankers (Plaintiff Guitron and Plaintiff Klosek) alleged that they suffered retaliation after they reported to their employer that two of their coworkers were engaging in unlawful and unethical business practices related to customer account management.

Plaintiff Guitron complained to her supervisor that her coworker had allegedly opened or closed accounts without the customer's permission, and that other bankers were opening accounts with forms of identification that were not acceptable under company policy. As a result, Plaintiff Guitron alleged that her supervisor stopped referring business to her and harassed her when she requested time off. When her coworkers were not investigated, she contacted the regional Vice President, the company's human resources office, and the company's ethics hotline to report the conduct. Plaintiff Guitron's struggled to meet her sales requirements, and her relationship with her supervisor deteriorated, until her supervisor eventually dismissed her for insubordination.

Plaintiff Klosek worked under the same supervisor as Plaintiff Guitron, and also complained about unethical conduct, including opening and closing accounts without customer permission, forcing sales, and "shoving products down customers' throats." Guitron at *7. She alleged that this behavior violated both ethical rules and consumer laws governing fraudulent conduct. Plaintiff Klosek received poor performance evaluations and a verbal warning for failure to meet her sales goals, and she eventually went on extended medical leave due to work related stress. After she was terminated, she filed a joint SOX complaint with Plaintiff Guitron, alleging unlawful retaliation for reporting bank and mail fraud.

The defendants first argued in its summary judgment motion that the plaintiffs' complaints related to violations of internal company policies, not to bank fraud, and therefore did not sufficiently relate to the categories of law listed in Section 1514A. Following the "definitively and specifically" standard articulated by the Ninth Circuit in Van Asdale , the district court found that because the plaintiffs failed to allege in their original complaint that their reports were related to wire or mail fraud, they were prohibited from asserting the theory now in opposition to a motion for summary judgment. Guitron , 2012 WL 2708517, *14. Consequently, it analyzed the plaintiffs' complaints for a relation to bank fraud only. As to Plaintiff Guitron, the court found that she presented sufficient evidence showing that she complained that coworkers that were defrauding their employer in order to obtain bonuses, and therefore, she had raised "a genuine dispute of material fact as to whether [the] reports related to bank fraud." Id. However, as to Plaintiff Klosek, the district court found that her complaints about her coworkers' "overly aggressive sales techniques" were not related to bank fraud, nor did she exhibit a subjectively and objectively reasonable belief that her coworkers' conduct constituted bank fraud. Id. at *15. The court, therefore, granted summary judgment for the employer on Plaintiff Klosek's complaint for failure to raise a genuine issue of material fact as to whether she engaged in protected activity.

PROTECTED ACTIVITY; COMPLAINT THAT FOOD WAS LEFT OUT BEYOND EXPIRATION DATE

In Atwood v. MJKL Enterprises, LLC , No. CV-10-2783-PHX-GMS, 2012 WL 2919406 (D.Ariz. July 17, 2012), the Plaintiff worked at Carl's Jr. Restaurant, and was terminated for insubordination and violating company policy regarding sexual harassment. The court held that the Plaintiff's SOX claim failed because he did not allege he was retaliated against for complaining of securities violations; rather claimed fired for complaining that his supervisors left food out beyond its expiration date.

PROTECTED ACTIVITY UNDER SOX; PLAINTIFF'S ALLEGED COMPLAINTS TO HIS EMPLOYER WERE TOO VAGUE AND DID NOT DEFINITIVELY AND SPECIFICALLY RELATE TO A SOURCE OF LAW LISTED IN SECTION 1514A BECAUSE IT WAS UNCLEAR WHETHER HE COMPLAINED ONLY ABOUT THE ADVERSE ACTIONS HE SUFFERED, OR THE EMPLOYER'S ALLEGED SOX VIOLATIONS AS WELL

In Nordstrom v. U.S. Bank, N.A., Inc. , No. 3:11-cv-01554, 2012 WL 3000416 (S.D.Cal. July 23, 2012), the plaintiff, a loan officer, alleged that he suffered retaliation after he complained about his belief that the bank had inaccurately reported its financial condition to investors, inaccurately reported loan charges, provided inaccurate information to the bank's accountants, and committed additional violations of banking and securities rules and regulations. The plaintiff filed a common law claim for wrongful termination in violation of the public policy against whistleblower retaliation, citing Section 806 of SOX as evidencing that public policy.

Citing the Ninth Circuit's decision in Van Asdale , the district court stated that "an employee's communications must definitively and specifically relate to [one] of the listed categories of fraud or securities violations under 18 U.S.C. § 1514A" in order to constitute protected activity under SOX. Nordstrom at *4. In this case, although the plaintiff alleged that his employer violated SOX and other securities laws, he failed to allege that "he actually reported such violations to management or supervisors." Id. It was unclear from the plaintiff's allegations whether his complaints about the treatment that he endured were accompanied by complaints about the SOX violations that he allegedly perceived, and therefore the plaintiff's complaint was "too vague so as to not satisfy the 'definitive and specific' requirement outlined in Van Asdale ." Id. Consequently, his complaint was dismissed without prejudice.

PROTECTED ACTIVITY; NO PROTECTED ACTIVITY WHERE EMAILS TO OFFICIALS DID NOT STATE OR SUGGEST THAT RESPONDENTS HAD COMMITTED FRAUD OR VIOLATED SECURITIES LAWS

In Reamer v. U.S. Dept. of Labor , No. 11-3965, 2012 WL 5503369 (6th Cir. 2012) (case below ARB No. 09-053, ALJ No. 2009-SOX-3), the Sixth Circuit affirmed the ARB's dismissal of the Petitioner's SOX whistleblower complaint based on a finding that protected activity did not contribute to the Petitioner's discharge. On appeal, the Petitioner argued that two emails he sent to officials at his employer, Ford Credit and Ford Motor Company, were protected activity. The first email relayed concerns about a threatening telephone call that the Petitioner had received; an internal investigation into his relationship with a female employee; and his concern that the FBI was conducting a frivolous fraud investigation of a dealership. The court found that "Because this e-mail neither stated nor suggested that Ford had committed fraud or violated securities laws, it did not constitute protected conduct. See 18 U.S.C. § 1514A(a)(1)." The second e-mail raised the same concerns and asked Ford and the Board of Directors to investigate "the possibility that illegal acts may have been committed by employees of Ford Credit and Ford Motor Company." The court found that the reference to illegal acts appeared to relate to the threatening telephone call and the FBI investigation. The court found that these acts did not violate or relate to section 1514A and the ARB therefore properly concluded that this email was not protected activity under section 1514A.

PROTECTED ACTIVITY; FRAUD AGAINST SHAREHOLDERS AS ELEMENT OF SOX SECTION 806 COMPLAINT; PLAINTIFF'S OBJECTIVE AND SUBJECTIVE BELIEF ABOUT WHAT HIS COMPLAINTS WERE ABOUT AT THE TIME THEY WERE COMMUNICATED TO THE DEFENDANT

Noting a split in authority as to whether SOX Section 806 whistleblower complaints must relate to fraud against shareholders, but applying the Fourth Circuit decision in Livingston v. Wyeth, Inc. , 520 F.3d 344 (4th Cir. 2008), the court in Gauthier v. Shaw Group, Inc. , No. 3:12-cv-00274-GCM, 2012 WL 6043012 (W.D.N.C. Dec. 4, 2012), granted summary judgment against the Plaintiff where his claimed protected activity was raising concerns about the changing of an audit report conclusion from "ineffective" to "effective" relating to an audit of a steel supplier concerning a shipment of defective steel for use in safety-related applications, and electronically applying the lead auditor's signature to the report over his refusal to sign the report. The district court found that any fraudulent alteration of the audit report would not state a cause of action under SOX because it did not relate to fraud against shareholders. The Plaintiff's complaint of document falsification related to safety, not to finances or accounting. The court also found that the Plaintiff had reported to his employer complaints about violations of nuclear safety regulations, not securities violations. The same was true of the Plaintiff's subjective beliefs about the violations - he was concerned about violating ERA and NRC regulations. Both the Plaintiff's objective words and actions, as well as his subjective beliefs reflected that he did not believe that he was complaining of conduct that would constitute a fraud against shareholders at the time he communicated his concerns, but rather that he was seeking to rectify conduct that raised nuclear safety concerns and possible violations of the ERA or NRC regulations.

The court dismissed the Plaintiff's Dodd-Frank Act whistleblower complaint under Section 29F of the Securities and Exchange Act on the same grounds. The Plaintiff's ERA whistleblower complaint against his Employer, was not dismissed on summary judgment.

PROTECTED ACTIVITY; FAILURE TO PLAUSIBLY ALLEGE PROTECTED ACTIVITY IN RESPONSE TO FRCP 12(b)(6) MOTION; COURT APPLIES FRAUD AGAINST SHAREHOLDERS AND "DEFINITELY AND SPECIFICALLY" STANDARDS

In Nielsen v. AECOM Technology Corp. , No. 12 Civ. 5163(KBF), 2012 WL 6200613 (S.D.N.Y. Dec. 11, 2012) (case below ARB No. 12-073, ALJ No. 2012-SOX-13), the Plaintiff commenced a SOX Section 806 whistleblower action against his former employer, and the Defendants filed a FRCP 12(b)(6) motion to dismiss. The Plaintiff, who was employed as a Fire Engineering Manager, asserted that he engaged in protected activity when he reported that one of the employees under his supervision made procedurally improper approvals of fire safety designs. The district court described the standard for established SOX protected activity:

   Under the terms of the statute, a "protected activity" is conduct that the employee "reasonably believes constitutes" a violation of: (1) 18 U.S.C. §§ 1341, 1343, 1344, or 1348; (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). The Second Circuit has found that to constitute "protected activity," "'the employee's communications must definitively and specifically relate to one of the listed categories offraud or securities violations in 18 U.S.C. § 1514(a)(1).'" Vodopia , 298 F. App'x at 662-63 (quoting Van Asdale v. Int'l Game Tech. , 577 F.3d 989, 996-97 (9th Cir. 2009)) (alterations omitted) (emphasis in original). In addition, "the employee must have 'a subjective belief that the conduct being reported violated a listed law' and 'this belief must be objectively reasonable.'" Nance v. Time Warner Cable, Inc. , 433 F. App'x 502,503 (9th Cir. 2011) (quoting Van Asdale , 577 F.3d at 1000); see also Fraser v. Fiduciary Trust Co. Int'l , 396 F. App'x 734, 735 (2d Cir. 2010) (affirming the district court's dismissal of a SOX whistleblower claim because "the record evidence would not permit a factfinder to conclude that [the plaintiff] held both a subjectively and objectively reasonable belief that he was reporting conduct covered by the law.").

Nielsen , supra , slip op. at 10 (footnote omitted). The court found that the Plaintiff failed to plausibly allege that he reasonably believed that his reporting of his subordinate's rubberstamping approvals constituted a protected activity. Citing Riddle v. First Tenn. Bank, Nat'l Ass'n , No. 11-6277, 2012 WL 3799231, at *8 (6th Cir. Aug. 31, 2012), the court stated that the employee must have an objectively reasonable belief that the defendant intentionally misrepresented or omitted certain facts to investors, which were material and risked loss. Here, there was no allegation that the Defendants represented anything at all about its approval procedures for fire safety drawings to its shareholders. The court stated that "Without any allegations about defendants' statements to shareholders regarding the subject of plaintiffs reporting to AME management, there is no basis to find that defendants misrepresented anything--or omitted material facts--to its shareholders." Nielsen , supra , slip op. at 11 (citation omitted).

The court also found that the allegation that plaintiff "reasonably believed" that his reporting of improperly approved (or unapproved) fire safety drawings constituted a violation of the mail and wire fraud statutes was not plausible. The court stated: "Indeed, an 'objectively reasonable' employee could not believe that plaintiffs communications 'directly and specifically' related to any of the enumerated federal laws in 18 U.S.C. § 1514A(a)(I). See Vodopia , 398 F. App'x at 663." Nielsen , supra , slip op. at 11-12 (footnote omitted).

THIRD PARTY FRAUD UNDER SOX; SOX DOES NOT REQUIRE THAT THE FRAUDULENT CONDUCT OR VIOLATION OF FEDERAL SECURITIES LAW BE COMMITTED DIRECTLY BY THE EMPLOYER THAT TAKES THE RETALIATORY ACTION; SPECIFIC AND DEFINITIVE VIOLATIONS MUST BE THE SUBJECT OF THE SOX WHISTLE BLOWING CLAIM

In Sharkey v. J.P. Morgan Chase & Co. , No. 10-cv-3824 (S.D.N.Y. Jan. 14, 2011), the plaintiff sued her former financial service employer and individual defendants alleging claims under the whistleblower provision of SOX, § 1514A. While serving as Vice President and Wealth Manager, the plaintiff was notified by the compliance and risk management team that a long-term client may be involved in illegal activity, including mail fraud, bank fraud and money laundering. After an independent investigation the plaintiff concluded that the client was involved in illegal activity and recommended that the company terminate the client relationship. The individual defendants allegedly dismissed the plaintiff's concerns because they directly contradicted their own conclusions and her concerns exposed weaknesses in the company's risk processing procedures, particularly since the company had been doing business with the client for 20 years. As a result of her refusal to condone the client relationship, the plaintiff alleged that the individual defendants began retaliating against her by removing her from several client accounts, excluding her from important meetings involving her own clients, refusing to pay her a bonus for 2009, and ultimately terminating her employment.

The defendants moved for summary judgment alleging that the plaintiff's actions did not constitute protected activity under SOX because the illegal activity she reported was that of the employer's client and not the employer. In the plaintiff's view, reporting violations of federal law by third parties other than the employer is covered by SOX. Interpreting the SOX statute broadly, the district court found that "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." Sharkey at 5.

The defendant's also asserted that the plaintiff's complaint failed because it only refers to "illegal activities" and does not "specifically or definitively" state how the third party client allegedly violated any of the laws or regulations enumerated in SOX. The defendants also argued that the plaintiff failed to allege facts supporting her "reasonable belief" that illegal activities occurred. The district court found that the plaintiff had failed to identify the allegedly illegal conduct that formed the basis for her whistleblower complaint. The court concluded that "because of the SOX requirement that specific violations must be the subject of the whistle blowing and because of the absence of such specificity, the Complaint fails to state a SOX claim." Sharkey at 8.

PROTECTED ACTIVITY UNDER SOX - NO INDEPENDENT MATERIALITY REQUIREMENT; LOW CONTRIBUTING FACTOR STANDARD

In Barker v. UBS AG , No. 3:09-cv-2084(CDF) (D. Conn. Jan. 26, 2011) (2011 WL 283993) (case below 2009-SOX-65), the plaintiff sued UBS for discrimination and retaliation under the Sarbanes-Oxley Act's whistleblower provision. As an employee of UBS, the plaintiff was assigned the task of reconciling UBS's existing exchange seat share with former company records when she discovered that certain of UBS's historical exchange seat holdings had been improperly accounted for, or not accounted for at all, on UBS's balance sheets. UBS realized approximately $80 million from the sale of exchange seats that had previously been overlooked. The plaintiff alleged that during the following year she experienced a pattern of adverse treatment (poor performance reviews and sudden, undesirable assignments) that ultimately led to her termination. UBS filed a motion to dismiss, which the court denied, holding that Barker adequately pled a prima facie SOX whistleblower claim.

The court found that the plaintiff engaged in protected activity within the meaning of SOX because she had both a subjective and objectively reasonable belief that UBS's failure to properly record the exchange seat shares could subject the company to federal liability. Barker at 6. The court found that Barker's complaint indicated that she informed various individuals at UBS that she believed the failure to disclose the exchange seat assets on UBS balance sheet was a significant problem. The court rejected UBS's assertion that the plaintiff could not adequately plead a SOX shareholder fraud claim because the discrepancy she discovered was not material, reasoning that § 1514A of SOX does not contain an independent materiality requirement. Id . at 7. The court clarified that the plaintiff does not need to prove fraud was actually material, but rather that she had an objectively reasonable belief that it was material.

The court also held that the plaintiff pleaded a plausible claim that her protected activity was a contributing factor in the termination of her employment. UBS argued that the plaintiff could not demonstrate any "contributing factors" because she was rewarded by management for her work on the exchange seat project; she was encouraged by UBS personnel to complete the seat exchange audit; and UBS was in financial hardship, like many other banks in the winter of 2008, when she was terminated. The court noted that the contributing factor standard is low, and an employee's participation in protected activity need only be one factor in the termination decision.

NO PROTECTED ACTIVITY UNDER TITLE VII; LACK OF SUBJECT MATTER JURISDICTION IN DISTRICT COURT OVER SOX CLAIMS FILED PRIOR TO THE EXPIRATION OF THE 180-DAY INVESTIGATIVE PERIOD AT DOL

In Martin v. Wyndham Vacation Resorts , No. 4:09-cv-0589 (D.S.C. Feb. 7, 2011), adopted Martin v. Wyndham Vacation Resorts , No. 4:09-cv-0589 (D.S.C. Mar. 15, 2011), the district court granted the defendant's motion for summary judgment when the plaintiff failed to show that the conduct he reported amounted to an unlawful employment practice under Title VII. The court found that the plaintiff failed to establish a prima facie case of retaliation because he failed to show that he engaged in protected activity. The plaintiff claimed that he heard female employees claim that they had been sexually harassed by other male employees; however, the plaintiff did not claim to have personally observed this alleged harassment, nor did he present evidence that he reported these complaints to anyone. The plaintiff also failed to present sufficient evidence that the single incident he did witness and report was so severe and pervasive that it created a hostile work environment. The court found that the plaintiff provided insufficient evidence as to the frequency of the conduct, its severity, whether it was physically threatening or humiliating, or whether it unreasonably interfered with the victim's work performance.

The district court further held that it did not have subject matter jurisdiction over the plaintiff's SOX claim because the plaintiff filed his claim in district court prior to the expiration of the 180-day investigative period. Under SOX, a person who alleges retaliation in violation of SOX must first file a complaint with the Secretary of Labor, and cannot file an action for de novo review of the claim in district court until 180 days after the complaint was filed with the Department of Labor.

NO PROTECTED ACTIVITY UNDER TITLE VII WHEN ALLEGED ACTIVITY POST-DATED THE TERMINATION OF EMPLOYMENT; PRIMA FACIE CASE FOR RETALIATION UNDER SOX; PROTECTED ACTIVITY

In Cloke-Browne v. Bank of Tokyo-Mitsubishi UFJ, Ltd. , No. 10 Civ. 2249 (S.D.N.Y. Feb. 9, 2011), the district court granted in part and denied in part the defendants' motion for summary judgment. The court found that the plaintiff's retaliation claims under 42 U.S.C. § 1981 and Title VII of the Civil Rights Act of 1964, failed as a matter of law because the plaintiff did not "allege facts that would amount to a protected activity under the relevant statutes with which he [could] demonstrate a relevant causal relationship." Slip. op. at 7. The court found that the complaints allegedly filed by the plaintiff to the EEOC, OSHA, the New York Commission of Human Rights and the Office of Corporation Counsel of the City of New York between June and August of 2009, qualified as protected activity, however, all his complaints post-dated the termination of his employment and the last alleged act of discrimination or retaliation. The court, therefore, granted the defendant's motion for summary judgment on these claims.

The court denied the defendant's motion for summary judgment on the SOX claims finding that the plaintiff stated a prima facie case for retaliation. The plaintiff alleged that he repeatedly warned the defendants and other senior management of his reasonable belief that serious violations of the securities laws and the company's obligations as a publically-traded company were occurring or might occur. The plaintiff alleged that he reported to his superiors that he believed the defendants were not calculating, nor were they publicly reporting, accurate risk levels, and thus, the defendants were defrauding shareholders. The plaintiff also claimed that he distributed a 12-page report to his superiors to inform them of the erroneous risk calculations and other deficits. The court found that the plaintiff's alleged expressions of concerns about the company's publically-reported financial health were sufficient to allege plausibly protected activity under Sarbanes-Oxley. The court held, accordingly, that the plaintiff pleaded sufficient facts to allege causation and stated a prima facie case of retaliation under SOX against the defendants.

PROTECTED ACTIVITY UNDER SOX; PLAINTIFF'S POST-EMPLOYMENT ACTIVITY NOT PROTECTED ACTIVITY UNDER SOX

In Feldman v. Law Enforcement Assoc. Corp. , No. 5:10-CV-08-BR (E.D.N.C. Mar. 10, 2011), the district court denied the employer's motion for summary judgment on the plaintiffs' SOX claims to the extent that they relied on actions taken by the plaintiffs prior to their respective employment termination dates. The defendants did not challenge the second, third and fourth elements of the plaintiffs' SOX claim, and therefore the court addressed whether the plaintiffs had sufficiently pled that they engaged in protected activity. First, the court found that disclosures regarding reasonably perceived violations of SEC rules governing internal control standards [15 U.S.C. § 78m(b)(5)] can constitute protected conduct under SOX. Second, the court found that because the plaintiffs alleged that they disclosed possible insider trading to federal authorities, the court need not address whether one of the defendant's had "supervisory authority" over the plaintiffs when they discussed insider trading issues with him. Third, the Court agreed with the defendants that the plaintiffs' post-employment conduct could not constitute protected activity under the statute because the plaintiffs failed to demonstrate that an employer-employee relationship existed between the dates the plaintiffs were terminated and the date they were removed as directors of the board. Therefore, the court found that the plaintiffs' SOX claims must be dismissed to the extent that they rely on post-employment actions.

SUMMARY JUDGMENT FOR EMPLOYER UNDER SOX AND FIRREA; CLEAR AND CONVINCING EVIDENCE UNDER FIRREA; NO PROTECTED ACTIVITY UNDER SOX

In Mann v. Fifth Third Bank , Nos. 1:09-cv-014, 1:09-cv-476, 2011 WL 1575537 (S.D. Ohio Apr. 25, 2011) (case below ALJ No. 2009-SOX-51), the plaintiff, a former Vice President, sued his former employer, Fifth Third Bank ("Bank"), under the Financial Institution Reform Recovery and Enforcement Act ("FIRREA''), SOX, and under Ohio common law for wrongful termination of employment in violation of public policy. The plaintiff alleged that he was terminated for reporting violations by the Bank to his superiors and the Bank's regulators. The Bank filed for summary judgment, contending that the plaintiff was fired for sending unprofessional emails and engaging in retaliatory conduct towards a subordinate.

To establish a prima facie case under FIRREA, the plaintiff must prove:

that he provided information to a Federal Banking agency regarding either a possible violation of any law or regulation, or gross mismanagement, gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety by the depository institution or any director, officer, or employee of the institution; and (2) that his disclosures were a contributing factor in Defendants' decision to fire him, which may be proved circumstantially by showing that Defendants had actual knowledge of plaintiff's disclosures and that the decision to fire him was made close enough in time that a reasonable inference can be drawn that it was a contributing factor in Defendants' decision.

Mann v. Fifth Third Bank , 1:09-cv-014 at 3. The court found that the plaintiff satisfied the first prong because he reported the Bank's possible violations to the local Federal Reserve examiner. On the second prong, the Bank argued that the plaintiff could not prove that his disclosures were a contributing factor in the decision to terminate his employment because: (1) in the employment termination process there was no evidence that the plaintiff's complaints were a factor, and (2) the disclosures to bank regulators failed lacked temporal proximity to his termination. The plaintiff claimed that he first reported the possible violations in late 2005 or early 2006 and he was fired in late 2008. The Bank argued that his alleged whistleblowing was too remote in time to be a contributing factor in his termination, thus failing to satisfy the requirements for proof by circumstantial evidence under 5 U.S.C. § 1221(e)(1)(A) and (B). The plaintiff responded that he continued to report possible violations to bank regulators up to the time of his termination in September 2008. The court concluded that a reasonable person could conclude that the plaintiff's disclosures were a contributing factor in his dismissal.

Because the Vice President established a prima facie case under FIRREA, the burden shifted to the Bank to rebut his claims by showing, by clear and convincing evidence, that they would have terminated his employment without his disclosures to regulators. The Bank put forth significant evidence that the plaintiff was fired for repeatedly sending intemperate emails to his fellow Fifth Third employees. He was given a warning and corrective counseling when his offensive emails first came to light. Six months later, he was fired after sending similar name-calling missives. The court concluded that the evidence was overwhelming that the Bank would have fired the plaintiff for his repeated inappropriate emails even in the absence of his disclosures to regulators.

On his SOX claim, the Bank submitted that the plaintiff could not establish the first or fourth elements of a prima facie retaliation complaint. Additionally, even if the plaintiff could make a prima facie case of retaliation, the Bank argued that summary judgment was appropriate because clear and convincing showed they would have fired him irrespective of his whistleblowing. The court found that while the plaintiff subjectively believed that the conduct that he reported constituted shareholder fraud, the fact that the Federal Reserve regulators did not appear to consider them to be violations mitigates against finding that belief objectively reasonable. The court concluded that a reasonable person in the plaintiff's position would not believe that the Bank's actions constituted shareholder fraud. Therefore, the plaintiff's alleged whistleblowing was not protected activity under SOX and failed to present a prima facie case for retaliation.

PROTECTED ACTIVITY; WHISTLEBLOWER PROVISION UNDER SOX DOES NOT PROTECT EMPLOYEES FROM RETALIATION WHEN THEY DISCLOSE INFORMATION REGARDING DESIGNATED TYPES OF FRAUD TO THE MEDIA

In Tides v. Boeing Co. , 644 F.3d 809 (9th Cir. May 3, 2011), two former employees brought suits against their former employer, claiming that they were terminated in violation of SOX's whistleblower provision. Following consolidation of the actions, the district court granted summary judgment for the employer, and the employees appealed. The Ninth Circuit held that by its express terms, the SOX's whistleblower provision, 18 U.S.C. § 1514A(a)(1), protects employees of publicly traded companies who disclose certain types of information on to the three categories of recipients specifically enumerated in the Act - federal regulatory and law enforcement agencies, Congress, and employee supervisors. Leaks to the media are not covered.

The plaintiffs, who both worked as auditors in Boeing's Information Technology SOX Audit group, claimed that Boeing managers pressured auditors to rate Boeing's internal IT controls and procedures for financial reporting as "effective." The plaintiffs separately began expressing concerns to management about the alleged pressure, as well as what they perceived to be auditing practice deficiencies that could potentially violate SOX. A few months later a reporter from the Seattle Post-Intelligencer contacted the plaintiffs for an interview about Boeing's SOX compliance. Although Boeing's corporate policy required employees to refer news media inquiries to Boeing's communications department, the plaintiffs spoke with the reporter directly, and sent her internal emails and other company documents. Boeing's policy also prohibited employees from releasing company information without prior review and authorization. After an investigation, Boeing terminated the plaintiffs for violating company policy.

The Ninth Circuit held that the plaintiffs' disclosures to the Post-Intelligencer reporter did not constitute protected activity under SOX Section 1514A(a)(1). The Ninth Circuit did not address the issue of whether the information disclosed by the plaintiffs "definitively and specifically" related to one of the listed categories of fraud or securities violations, or whether the plaintiffs established a genuine issue of fact as to whether Boeing's proffered reason for their firing was a pretext for unlawful discrimination.

In Tides v. Boeing Co ., 123 S.Ct. 518 (Oct. 31, 2011), the Supreme Court of the United States declined to review the Ninth Circuit's decision.

NO PROTECTED ACTIVITY UNDER SOX

In Nance v. Time Warner Cable, Inc. , 433 Fed.Appx. 502, 2011 WL 1749065 (9th Cir. 2011), the Ninth Circuit affirmed the District Court's grant of summary judgment in favor of Time Warner Cable ("TWC") where the plaintiff failed to establish that he engaged in protected activity under SOX § 1514A. The plaintiff alleged that he engaged in protected activity under SOX because he brought to light accounting misstatements and SEC violations in TWV's financial reports.

The court concluded that the issue about which the plaintiff communicated with his superiors did not relate to one of the listed categories of fraud or securities violations. The plaintiff told his superiors about inconsistencies between the way Comcast and TWC calculated their subscriber counts prior to the purchase of Comcast by TWC. None of the plaintiff's statements linked the inconsistency to fraud or to a securities violation, nor did the plaintiff suggest that TWC was violating SEC regulations by not reporting the problem. In his email informing his superior of the exceptions he intended to make, the plaintiff identified one of the other exceptions as a possible SOX violation, but made no similar statement about the subscriber count issue. When the plaintiff disclosed to another TWC official that he believed the information should be disclosed, he reasoned that the information "impacts other partners in the partnership," but did not claim that failure to disclose it would constitute a securities law violation.

The court concluded that the plaintiff's statements about the subscriber count inconsistency demonstrated that, at the time, he did not have a subjective belief that TWC was engaging in fraudulent or illegal activity. Additionally, the court concluded that the plaintiff's purported belief that TWC had engaged in fraudulent or illegal activities would not have been objectively reasonable.

PROTECTED ACTIVITY UNDER SOX; PLAINTIFF'S COMPLAINTS TO EMPLOYER AND REFUSAL TO ACT DID NOT DEFINITIVELY AND SPECIFICALLY RELATE TO LAWS ENUMERATED IN SOX

In Wiest v. Lynch , 2011 WL 2923860, CA No. 10-3288 (E.D.Pa. July 21, 2011), Mr. Wiest, who worked in the company's accounts payable department, alleged that certain event expenditures were being improperly treated under internal reimbursement standards, and he therefore refused to process them. He also claimed that processing the expenditures would violate SEC rules and regulations, tax laws, and constitute unethical conduct. Mr. Wiest, therefore, sent email communications to his supervisors requesting further analysis of the expenditures, and for one expenditure, requested formal approval from certain individuals before processing the payments. After Mr. Wiest continually expressed his concerns regarding event expenditures to management, the company's human resources department launched investigation into his allegedly improper conduct. Specifically, human resources investigated allegations that Mr. Wiest had failed to report a gift he received from a vendor, had made inappropriate sexual comments to coworkers, and had engaged in an inappropriate relationship with a coworker ten years earlier. Mr. Wiest subsequently went on medical leave due to the stress of the investigation, and was terminated seven months later. Mr. Wiest and his wife, as co-plaintiffs, filed a complaint under 18 U.S.C. § 1514A claiming that his termination violated Section 806 of SOX.

The district court granted the employer's motion to dismiss the complaint, finding that the plaintiffs' complaint did not allege sufficient facts demonstrating that Mr. Wiest engaged in protected activity under SOX. Citing the ARB's decision in Platone , the district court stated that an employee's communication must relate "definitively and specifically" to one of the statutes or rules listed in Section 806. While the employee does not have to cite a specific statute, the employee "must express an objectively reasonable belief [that] there has been shareholder fraud," and must communicate that his concern "is linked to an objectively reasonable belief that the company intentionally misrepresented or omitted certain facts to investors, which were material and which risked loss." Wiest at *4. The court, therefore, reviewed each of the emails that the plaintiffs' provided as evidence of protected activity to determine "whether the content of the emails gives rise to a reasonable inference that [Mr. Wiest] provided information to his supervisors that definitively and specifically conveyed his objectively reasonable belief that conduct constituting shareholder fraud had either taken place or was in progress." Id. at *5.

The court analyzed each of Mr. Wiest's emails to his employer regarding the disputed expenditures, finding that his "communications simply provided information and suggestions to ensure proper tax and accounting treatment of the Atlantis event expenses." Id. at *6. As such, "they did not rise to the level of 'definitively and specifically' conveying a reasonable belief that a violation of the laws and regulations listed in § 1514A was taking place." Id. Focusing on the text of the emails, the court found that Mr. Wiest "did not identify, describe or suggest that the questioned expenses were potentially fraudulent," or that the company was at risk of committing a SOX violation. Id.

Additionally, with regard to the plaintiffs' argument that his refusal to process expenditures constituted protected activity under SOX, the court cited a pair of ARB cases in finding that a refusal to act without an accompanying explanation as to the employee's reasons for the refusal does not generally "provide information" under § 1514A. When Mr. Wiest refused to process the event expenditure payment, he did not explain that he was refusing to act because he believed processing the payment would potentially defraud shareholders, and therefore, the court found that his refusal did not "definitively and specifically" alert his employer of his reasonable belief of a violation.

Lastly, as to Mr. Wiest's complaints in his emails that processing expenditures would violate internal policies, the court clarified that raising complaints regarding internal policy violations is not sufficient to constitute protected activity under SOX, absent some additional explanation to the employer that failure to follow internal procedures would implicate shareholder fraud or constitute a SOX violation.

PROTECTED ACTIVITY UNDER SOX; PLAINTIFF'S AMENDED COMPLAINT CONTAINED SUFFICIENT FACTUAL DETAIL REGARDING HER ALLEGED PROTECTED ACTIVITY AND REASONABLE BELIEF TO AVOID DISMISSAL FOR FAILURE TO STATE A CLAIM

In Sharkey v. J.P. Morgan Chase & Co. , 805 F.Supp.2d 45 (S.D.N.Y. Aug. 19, 2011), the plaintiff reported to her employer that a client ("Suspect Client") had engaged in fraudulent and otherwise-illegal activities, and she believed those activities violated several of the anti-fraud statutes enumerated in SOX and put the company's shareholders at risk. Her communications culminated in a "final report," in which the plaintiff recommended "that J.P. Morgan exit its relationship with the Suspect Client due to the concerns [that she] had previously reported." Id. Because of these complaints, the plaintiff alleged that she was terminated and otherwise retaliated against in violation of Section 806 of SOX.

The district court previously dismissed the plaintiff's complaint for failure to describe the illegal activity that plaintiff reported with sufficient specificity, Sharkey v. J.P. Morgan Chase & Co. , No. 10-cv-3824 (S.D.N.Y. Jan. 14, 2011), and granted the plaintiff leave to replead her SOX claim. The plaintiff's amended complaint provided a lengthy, detailed description of her communications with her employer regarding the Suspect Client and the factual basis for her believing that the Suspect Client had violated on or more of the sources of law listed in § 1514A.

The defendant's argued in its motion to dismiss that the district court lacked jurisdiction over the amended complaint because it contained new allegations that were not included in the plaintiff's original complaint with OSHA. The plaintiff countered that her amended complaint simply provided a more detailed, amplified description of the allegations asserted in her OSHA complaint. The district court clarified that each separate and distinct claim must first be pled to OSHA before the claim reaches a district court, but that does not mean a plaintiff may elaborate on the factual basis underlying those claims in a district court complaint. It is enough that the plaintiff asserted her claims - "including specific adverse employment actions, protected activity, and the general nature of the facts that formed Plaintiff's belief in violations of the enumerated statutes giving rise to the protected activity" - in a timely OSHA complaint, and any her amended complaint "only amplifies factual allegations for claims administratively pled." Sharkey at 52-54. Consequently, the district court found that it had jurisdiction to rule on the plaintiff's amended complaint.

The defendant also claimed that the amended complaint nonetheless failed to state a claim under SOX because the plaintiff did not identify which specific source of law she believed the Suspect Client had violated. The district court explained that the plaintiff is not required to show an actual violation of the law, and instead, the "myriad of allegations" presented in the plaintiff's amended complaint could lead a reasonable person to believe that the Suspect Client was engaged in a source of law listed in §1514A. Also rejected was the defendant's argument that the plaintiff's amended complaint still failed to describe the illegal conduct that she reported to her employer with sufficient specificity to determine whether her complaints "definitively and specifically" related to a law identified in § 1514A. Reviewing the allegations in the amended complaint, the court disagreed, finding that the plaintiff sufficiently alleged that she communicated specifically-described concerns to the defendant. Moreover, contrary to the defendant's assertion otherwise, the court found that the amended complaint satisfactorily alleged that the defendant's knew about the basis of her complaints. Consequently, the defendant's motion to dismiss was denied.

NO PROTECTED ACTIVITY UNDER SOX; PLAINTIFF DID NOT STEP OUTSIDE HIS ROLE AS AN INVESTIGATOR WHEN HE REPORTED EMPLOYEE MISCONDUCT THAT HE DISCOVERED DURING AN INVESTIGATION TO HIS EMPLOYER, AND MISCONDUCT PLAINTIFF REPORTED DID NOT RELATE TO FRAUD AGAINST SHAREHOLDERS

In Riddle v. First Tennessee Bank , No. 3:10-CV-0578, 2011 WL 4348298 (M.D.Tenn. Sept. 16, 2011), the plaintiff, a Corporate Security Investigator, investigated issues regarding an employee's alleged misuse of the corporate credit card, and after interviewing the employee, the plaintiff suspended the employee for making improper cash advances. The next day, the plaintiff's supervisors advised him that the employee's advances were not, in fact improper, but the plaintiff did not accept their conclusion, and wrote up the employee for a violation of the Bank Bribery Act. The plaintiff continued to complain about his supervisors' refusal to report the employee's alleged Bank Bribery Act violations to the United States Treasury Department's Financial Crimes Enforcement Network. The plaintiff's supervisors issued the written performance counseling to the plaintiff for his performance failures during the investigation, such as poor judgment and communication, and misunderstanding the guidelines for making cash advances.

Prior to this investigation, the plaintiff had received warnings for additional performance issues, including interfering with another investigator's investigation, failure to follow investigation protocol, and failure to maintain a professional appearance and demeanor at work. After the mishandled cash advance investigation, the plaintiff made false statements to company employees regarding the company's internal reporting system, which the defendant feared would deter employees from reporting policy violations and suspicious activity through the designated channels. The defendant, therefore, terminated the plaintiff's employment for continued failure to use good judgment.

First, the district court rejected the plaintiff's attempt to "bootstrap" an alleged Bank Bribery Act violation into the "catch-all" provision of § 1514A, which covers allegations of fraud against shareholders. Stating that "an employee's complaint must definitively and specifically relate" to one of the categories enumerated in § 1514A in order to constitute protected activity, the court disagreed with the plaintiff's assertion that a violation of "the Bank Bribery Act is, 'at its core', a fraud against shareholders," and even so, the plaintiff offered not made the showing that the fraudulent actor possessed the requisite "scienter" to substantiate a shareholder fraud allegation. Riddle at *8-9. Consequently, his complaints to his supervisors about the employee's cash advances did not sufficient relate to the laws listed in § 1514A to constitute protected activity under SOX.

Additionally, the district court rejected the plaintiff's assertion that his protests against his supervisors' refusal to further report the employee's allegedly improper behavior constitutes protected activity under SOX. Although the plaintiff reported the employee's misconduct to his supervisors, he did not "step outside his role" as an investigator and take additional action, which the district court stated was necessary to establish protected activity. In short, the district court found that the plaintiff's performance of his job duties, without more, was not enough to constitute protected activity under the statute.

oreover, the district court found that even if he subjectively believed that the subject of his investigation had violated the Bank Bribery Act, a reasonable person in his position would not have believed that the employee's cash advances, which were common bank practice within the employee's division, violated the Bank Bribery Act. As such, the court found it objectively unreasonable to believe that criminal activity was occurred.

Finally, the district court stated that even if the plaintiff could establish a prima facie allegation under SOX, the employer had produced clear and convincing evidence that it legitimately terminated the plaintiff's employment because he repeatedly exercised questionable judgment.

NO PROTECTED ACTIVITY UNDER SOX; PLAINTIFF'S COMPLAINTS ABOUT UNETHICAL COWORKER CONDUCT DID NOT RELATE TO THE LAWS ENUMERATED IN SECTION 806 OF SOX, AND PLAINTIFF DID NOT REASONABLY BELIEVE THAT THE CONDUCT SHE REPORTED CONSTITUTED A VIOLATION OF AN ENUMERATED LAW

In Miller v. Stifel, Nicolaus & Co., Inc. , 812 F.Supp.2d 975 (D.Minn. Sept. 20, 2011) (case below ALJ No. 2009-SOX-57), the plaintiff, an Investment Executive and Financial Advisor, made numerous complaints to her employer about several of her coworkers' allegedly illegal or improper activities. She complained to her employer about coworkers that had allegedly used and sold marijuana on company property, used the copy machine for personal printing, accessed an off-limits area at the office, had affairs, and spent too much time traveling. She also complained about the employer's storage of potentially sensitive files, and its alleged failure to pay a postage bill. At her request, the plaintiff was transferred to a new branch, where she immediately had difficulty meeting her production requirements, and her performance problems continued over the next several years.

A few months before her termination, the plaintiff's key client complained to the defendant that the plaintiff had engaged in overly aggressive trading, causing it suffer large monetary losses, and therefore removed all of its accounts with the defendant. In the course of investigating the client's allegations, the defendant discovered that the plaintiff's trading activities were inconsistent with company trading policies, and consequently it terminated the plaintiff's employment.

Stating that only activity "definitively and specifically relate[d] to one of the six enumerated categories of misconduct contained in [Section] 806," is protected under SOX, the district court found that none of the plaintiff's complaints to her employer - which largely concerned personnel matters and alleged ethical lapses of coworkers - implicated any of the categories of activities protected by Section 806. Additionally, the district court found no evidence that the plaintiff had a reasonable belief that the conduct she reported constituted a violation of an enumerated source of law. Finally, even assuming the plaintiff's complaints could amount to protected activity under SOX, she did not offer sufficient evidence suggesting that her complaints contributed to the decision to terminate her employment. Consequently, the district court granted summary judgment for the employer.

PROTECTED ACTIVITY UNDER SOX; ARB'S DECISION IN SYLVESTER ABROGATING REQUIREMENT ANNOUNCED IN PLATONE THAT EMPLOYEE COMPLAINTS MUST "DEFINITIVELY AND SPECIFICALLY" RELATE TO A SOURCE OF LAW LISTED IN § 1514A IS NOT CONTROLLING LAW FOR A UNITED STATES DISTRICT COURT, AND THE COURT DID NOT ERR IN DISMISSING A COMPLAINT FOR FAILURE TO MEET THE PLATONE STANDARD WITHOUT CONSIDERING THE SYLVESTER RULING.

In Wiest v. Lynch , CA No. 10-3288, 2011 WL 5572608 (E.D.Pa. Nov. 16, 2011), three months after the court dismissed the plaintiffs' complaint for failure to proper plead that Mr. Wiest engaged in protected activity under SOX, Wiest v. Lynch , 2011 WL 2923860, CA No. 10-3288 (E.D.Pa. July 21, 2011) (not reported), the court denied on the plaintiffs' motion for reconsideration, which argued that because the ARB's decision in Sylvester v. Parexel Int'l LLC , ARB No. 07-123, 2011 WL 2165854, *14-15 (ARB May 25, 2011) abrogated the ARB's previous requirement in Platone v. FLYi, Inc. , ARB No. 04-154, 2006 WL 3246910, *8 (ARB Sept. 29, 2006) that an employee's communication relate "definitively and specifically" to a source of law listed in § 1514A, the court should revisit whether Mr. Wiest's email communications with his supervisors constitute protected activity under Section 806 of SOX. The court explained that the plaintiffs' burden on their motion for reconsideration is to demonstrate either "(1) an intervening change in the controlling law; (2) the availability of new evidence which was not available when the court issued its order; or (3) the need to correct a manifest injustice stemming from a clear error of law or fact." Wiest at *2 (citations omitted). The plaintiffs did not argue that new evidence was now available, and the court therefore limited its focus to the first and third theories for reconsideration.

The district court found that the ARB's decision in Sylvester did not constitute an intervening change in controlling law. First, the Sylvester decision was published nearly two months before the district court dismissed the plaintiffs' complaint on July 21,2011, and therefore the plaintiffs had ample opportunity to bring Sylvester to the court's consideration prior to dismissal. Second, the court clarified that ARB decisions are not binding authority on a United States district court, and thus, the Sylvester decision is not "controlling law." Third, even if Sylvester were binding on the district court, the district court's July 2011 decision dismissing the plaintiffs' complaint did not rely exclusively on Platone , and instead invoked a myriad of federal district and appellate court case law in applying the "definitive and specific" standard.

Additional, the district court found that its failure to consider the Sylvester decision prior to the July 21, 2011 decision did not amount to manifest injustice or clear error. The court did not "overlook" the Sylvester decision because the plaintiffs failed to bring it to the court's attention, and because the plaintiffs' complaint contained "inherent deficiencies - irrespective of the posture of the Sylvester decision," the court did not err in dismissing the complaint. Wiest at *5.

PROTECTED ACTIVITY; IN ORDER TO BE OBJECTIVELY REASONABLE, THE PLAINTIFF'S COMPLAINTS MUST TIE THE ALLEGED WRONGFUL ACTION 'DEFINITIVELY AND SPECIFICALLY' TO ONE OF THE LAWS ENUMERATED IN SOX SECTION 1514A

PROTECTED ACTIVITY; EVEN IF THE PLAINTIFF HAD OBJECTIVELY REASONABLE BELIEF THAT HIS SUPERVISOR MADE AN ERROR THAT RESULTED IN A MATERIAL MISSTATEMENT OF THE DEFENDANT'S INCOME, SUMMARY DECISION IS WARRANTED WHERE PLAINTIFF PRESENTED NO EVIDENCE TO SHOW THAT THE SUPERVISOR ACTED WITH INTENT TO MISLEAD COWORKERS OR SHAREHOLDERS

In Xie v. Hospira, Inc. , No. 10-cv-06777 (N.D. Ill. Sept. 2, 2011) (case below 2010-SOX-32), the court granted summary judgment against the Plaintiff based on the finding that the Plaintiff, a CPA, failed to offer evidence "definitively and specifically" tying his supervisor's actions to one of the laws enumerated in SOX section 1514A(a)(1), and therefore, no reasonable jury could find that the Plaintiff's belief that his supervisor violated one of those laws was objectively reasonable. The Plaintiff offered evidence to show that the supervisor failed to comply with certain of the Defendant's internal policies. The court, however, found that the Plaintiff's evidence failed to suggest that the documents at issue were given to shareholders or otherwise made public, or were in any way material to shareholders. The evidence might have shown negligence, but the court stated that mere negligence does not constitute a violation of federal law relating to fraud against shareholders. The court noted the Plaintiff's argument that the internal control violations led indirectly to fraud against shareholders by enabling the supervisor to book fraudulent income. The court found this the argument not to be persuasive because the Plaintiff's bookings theory was not well explained and appeared to constitute an arbitrary comparison of unrelated accounting figures, and because the Plaintiff offered no evidence or coherent argument linking the bookings to the supervisor's purported non-compliance with the Defendant's internal control standards.

The Plaintiff also accused the supervisor of concealing a $6 million accounting discrepancy during a management meeting. The Plaintiff, however, had no personal knowledge of what was said during the meeting, and based his accusation on body language and assumed reticence on the part of the supervisor at the meeting. The court found that even if the Plaintiff could show that the supervisor failed to inform others about the accounting discrepancy, there was no evidence from which a reasonable jury could find that this conduct constituted a fraud against shareholders. The court noted that the Plaintiff's rebuttal had shown that the discrepancy was the result of a simple calculation error that the Plaintiff was able to resolve. The court found that because the Plaintiff was able to fix the error, there was no reasonable basis to conclude that the error resulted in harm to shareholders. Although the Plaintiff argued that the error was not actually corrected and still resulted in a $1.4 million discrepancy on the Defendant's 2008 financial statements, the court found no evidence or comprehensive argument to link the discrepancy with a publicly filed financial statement. Finally, the court noted that even if the Plaintiff reasonably believed that the discrepancy resulted in a material misstatement of the Defendant's income, he had offered no evidence suggesting that the supervisor acted with intent to mislead his coworkers or the Defendant's shareholders, citing Allen , 514 F.3d at 480 ("In cases involving the sixth 'catch-all' category [from section 1514A(a)], we conclude that the employee must reasonably believe that his or her employer acted with a mental state embracing intent to deceive, manipulate, or defraud its shareholders.").

PROTECTED ACTIVITY UNDER SOX; OBJECTIVE BELIEF STANDARD; RESPONDENT'S GENERAL COUNSEL

In Harkness v. C-Bass Diamond, LLC , No. CCB-08-231 (D.Md. Mar. 16, 2010) (case below 2007-SOX-81), the plaintiff sued C-Bass Diamond alleging that the company retaliated against her for engaging in protected activity in her position as General Counsel. The plaintiff alleged that she engaged in protected activity when she reported that the company's President and Corporate Executive Officer had informed an outside investor of non-public information that the company was about to restate its earnings. At the time of the disclosure the company was in the process of becoming a publicly-traded company. The plaintiff asserted that she reasonably believed that this disclosure might be a violation of Regulation FD, 17 C.F.R. § 243.100-243.103. Prior to reporting the violation, however, the plaintiff did not investigate whether Regulation FD applied to the company, even though she knew that SEC had not yet approved the company's application to become a publicly-traded company. Neither did the plaintiff ask members of her legal staff or the company's outside counsel to conduct research on this threshold question.

C-Bass filed a motion for summary judgment arguing that the plaintiff did not engage in protected activity and could not prove causation. The District Court granted C-Bass's motion for summary judgment. The Court found that in light of the plaintiff's professional experience and the legal resources available to her, her belief that the company was in violation of Regulation FD was not objectively reasonable, and therefore, her report to her supervisor does not constitute protected activity under the SOX.

NO PROTECTED ACTIVITY UNDER SOX; ACTUAL OR SUBJECTIVE BELIEF

In Gale v. U.S. Dep't of Labor , No. 08-14232 (11th Cir. June 25, 2010)(unpublished)(case below 2006-SOX-43), a former chief operations officer of a financial services company, who allegedly was discharged in retaliation for activities protected under the whistleblower provision of Sarbanes-Oxley Act, filed a complaint with OSHA. The former employee alleged that he was terminated because he, among other things, provided information and opposed decisions made by company officers relating to waste and misuse of corporate monies that resulted in loss of stockholders equity and because he raised concerns regarding the violation of SEC rules and regulations in the operation of a broker business by the financial services company.

OSHA determined that the company did not violate SOX because it was not a covered employer. The administrative law judge granted the employer's motion for summary judgment finding that a genuine issue of material fact existed as to the company's covered status; however, there was no factual basis that the former employee had an actual or subjective belief that the company committed illegal or fraudulent acts prohibited by SOX. On appeal, the ARB affirmed the ALJ's findings. The Court of Appeals affirmed the ARB's ruling holding that the decision was supported by substantial evidence that the former employee did not engage in protected activity.

NO PROTECTED ACTIVITY UNDER SOX WHEN THERE IS NO ALLEGATION THAT PATENT FRAUD AFFECTED INVESTORS; DEFINITIVELY AND SPECIFICALLY STANDARD

In Vodopia v. Koninklijke Philips Elec. NV , No. 09-4767-cv (2d Cir. Oct. 25, 2010)(per curiam)(unpublished)(case below 2007-SOX-40) , the U.S. Court of Appeals for the Second Circuit ruled that a federal District Court properly dismissed a lawsuit by a former in-house lawyer who alleged that he was fired for warning that patents acquired by his employer were obtained through fraud, since he failed to state a plausible claim for relief under the Sarbanes-Oxley Act. Noting that several courts have required that a whistleblower's complaint must "definitively and specifically" relate to one of the act's enumerated categories of fraud or securities law violations, the appeals court stated that the former employee failed to make such an allegation about his former employer.

The plaintiff claimed that the company assigned a $50 million value to worthless patents that were obtained through fraud on the Patent Office. The plaintiff argued on appeal that his lawsuit plainly alleged fraud upon shareholders by virtue of his claim that the company was "knowingly assigning an eight figure value to worthless patents." The appeals court was not persuaded by these arguments. The court said that his federal district court complaint "clearly centers on" his concern that patents were invalid, not on the company's valuation of the patents. "[M]ore important, the complaint does not allege that the $50 million value assigned to those patents was ever reported to the public or to shareholders." Observing that there was nothing in the plaintiff's lawsuit that alleged he had reported potential securities fraud - as opposed to patent-related misconduct - the court held that he had not stated a viable claim for relief under Sarbanes-Oxley. The Court concluded that the plaintiff's complaint "does not plausibly allege the first, necessary element of a section 1514A claim," and the Court affirmed the trial court's dismissal of the lawsuit.

PROTECTED ACTIVITY UNDER SOX; CONTACTS WITH MEDIA

In Tides v. The Boeing Co. , Nos. C08-1601 and 08-1736 (W.D.Wa. Feb. 9, 2010), when the Plaintiffs became convinced that the Defendant was not taking their concerns about the company's auditing culture seriously enough, they contacted a newspaper reporter and provided her with information and documents. When the Defendant became aware of the contact and disclosures, it placed the Plaintiffs on suspension and referred the matter to a corrective action review board. The board voted to terminate both of the Plaintiffs, who were informed of the decision. The Plaintiffs then filed SOX whistleblower complaints with OSHA, and eventually the matter was filed in federal district court.

The court granted summary judgment in favor of the Defendant, holding that SOX does not prohibit termination for disclosures to the media. The Plaintiffs had conceded that SOX's list of protected activity was the most specific of all of the whistleblower statutes, but asked the court to read it expansively, drawing parallels to other whistleblower protection statutes. The court, however, found that Congress had been clear in SOX about the types of whistleblowing that would be protected, and that leaking documents to the media was not one of them.

The Plaintiffs also argued that the Defendant's reliance on the media disclosures as the reason for their termination was pretext because dissemination of information outside the company was permitted by corporate policy on confidentiality. The court, however, found that the corporate policies did not, in fact, protect the disclosures made by the Plaintiffs. Because the disclosures violated corporate policy, and the grounds for the dismissals were not vague or unsupported by the facts, the court found that the Defendant had shown by clear and convincing evidence that the Plaintiffs would have been dismissed independently of any protected activity under SOX.

PROTECTED ACTIVITY; COMMUNICATIONS MUST RAISE SOX FRAUD OR SECURITIES VIOLATION "DEFINITIVELY AND SPECIFICALLY;" USE OF WORDS "FRAUD" OR "FRAUD ON SHAREHOLDERS," HOWEVER, IS NOT REQUIRED

In Van Asdale v. International Game Technology , No. 07-16597 (9th Cir. Aug. 13, 2009), the 9th Circuit joined three other circuit courts in agreeing with the ARB's holding that to constitute protected activity under SOX, an employee's communications must "definitively and specifically" relate to one of the categories of fraud or securities violations listed under section 1514A(a)(1).

Reviewing the facts in the light most favorable to the Plaintiffs-Appellants (the case being in summary judgment posture) the court found that the Plaintiffs-Appellants' conversations with company's General Counsel and its Vice President of Product Development satisfied the "definitively and specifically" standard, even though the words "fraud" or "fraud on shareholders" may not have been used.

PROTECTED ACTIVITY; OBJECTIVELY REASONABLE BELIEF THAT THERE HAS BEEN SHAREHOLDER FRAUD MUST AT LEAST APPROXIMATE ELEMENTS OF SECURITIES FRAUD

In Van Asdale v. International Game Technology , No. 07-16597 (9th Cir. Aug. 13, 2009), the Plaintiffs-Appellants were in-house intellectual property attorneys who allegedly had raised the issue of shareholder fraud in relation to the failure to disclose, prior to a merger, possible problems with an important patent holding.

The Ninth Circuit concluded that the plain language of the SOX whistleblower provision , as well as the statute's legislative history and case law interpreting it, suggest that to trigger the protections of the Act, an employee must have (1) a subjective belief that the conduct being reported violated a listed law, and (2) this belief must be objectively reasonable. The court stated that it agreed with the First Circuit that "[t]o have an objectively reasonable belief there has been shareholder fraud, the complaining employee's theory of such fraud must at least approximate the basic elements of a claim of securities fraud." Slip op. at 11083, quoting Day v. Staples, Inc. , 555 F.3d 42, 55 (1st Cir. 2009).

In the instant case, the court found that the Plaintiffs' theory of fraud was sufficient (for the purposes of determining a summary judgment motion) to approximate a securities fraud - at least that it was objectively reasonable for the Plaintiffs' to suspect that the non-disclosure prior to the merger was deliberate (the patent being the "crown jewel" of the Defendant's intellectual property portfolio). The court made a point of stating that it was not finding that the nondisclosure actually constituted wrongdoing, but that under the SOX whistleblower provision - to encourage disclosures -- a plaintiff's reasonable, but mistaken belief of a SOX violation is protected.

PROTECTED ACTIVITY; GENERAL INQUIRY REGARDING A BUSINESS DECISION

In Fraser v. Fiduciary Trust Co., Int'l , No. 1:04-cv-06958 (S.D.N.Y. Aug. 25, 2009) (case below 2003-SOX-28), the Plaintiff had sent an e-mail to the Respondent's president attaching a copy of an e-mail he had earlier drafted, but not sent when instructed not to do so, that explained to other of the Respondent's offices the New York office's decision to sell off WorldCom bonds it held in ERISA trust accounts. Thereafter, the Los Angeles office retained its WorldCom bonds, and suffered substantial losses when WorldCom defaulted on its debt and filed for bankruptcy. The Plaintiff argued that the e-mail to the president was protected activity under SOX. The district court rejected this argument because the e-mail did not express any specific concern about any fraud enumerated in SOX § 806, and the Plaintiff had not alleged that the instruction not to send the earlier e-mail amounted to misconduct on the part of his superiors in New York. "On its face, then, the e-mail constituted a general inquiry regarding a business decision rather than a specific complaint of fraud." Slip op. at 9. The Court also observed that the delay between the drafting of the earlier e-mail and the e-mail to the president cast doubt on the Plaintiff's subjective belief that the New York office's decision not to communicate its WorldCom strategy to other offices constituted a violation. The court also noted that the Plaintiff's stated reason for sending the e-mail to the president was to show the president that the New York office was making the right decisions. This was not, the court found, alerting an employer to a suspected fraud.

The Plaintiff also argued that he engaged in protected activity when he told his supervisor that an internal document showing the United Nations as one of the Respondent's top ten relationships by revenue should not be shown to clients because the UN pension fund accounts were not managed accounts, and the document therefore overstated the Respondent's assets under management. Again, the court rejected the argument because the discussion with the supervisor was merely a general inquiry; the Plaintiff never expressed a specific concern that the information contained in the document was illegal. Moreover, the document was never disseminated to clients.

PROTECTED ACTIVITY; REASONABLENESS OF PLAINTIFF'S BELIEF SCRUTINIZED FROM BOTH SUBJECTIVE AND OBJECTIVE STANDARD

In Harp v. Charter Communications, Inc. , No. 07-1445 (7th Cir. Mar. 16, 2009), the Seventh Circuit, observing that the whistleblower provision of SOX requires that the employee "reasonably" believe in the unlawfulness of the employer's actions, stated that it agreed with "the courts that have held that the reasonableness must be scrutinized under both a subjective and objective standard. "Objective reasonableness 'is evaluated based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee.'" Slip op. at 3 (citations omitted).

In Harp , the court found that the Plaintiff, the supervisor of a technical fraud unit, had failed to establish an objectively reasonable belief that her supervisor had fraudulently authorized full payment to a contractor for work that was not performed. The court found that the Plaintiff's allegation of fraud rested on a conversation with another employee in which she attempted to divine the supervisor's intent in paying the invoices, and that the statements made by the supervisor were far too ambiguous to support an objectively reasonable belief that a fraudulent payment had been ordered. Moreover, the supervisor's conduct up to the time of the allegedly fraudulent order had been to support the Plaintiff, and the ethics complaint filed by the Plaintiff with HR spoke only in terms of the supervisor trying to reach a negotiated settlement. The court also looked to subsequent actions of the supervisor, indicating that he still supported the Plaintiff, but wanted her to better document the claims of improper billing, and had not instructed her to stop her investigation. One member of the court disagreed with the majority's interpretation of the facts, and found that the discrepancies were reconcilable, and that the case should go forward to a jury.

PROTECTED ACTIVITY; REASONABLE BELIEF STANDARD

Reasonable belief element

In Day v. Staples, Inc. , No. 08-1689 (1st Cir. Feb. 9, 2009) (case below 2006-SOX-34), the First Circuit addressed the "reasonable belief" element of protected activity under the SOX whistleblower provision. The court indicated that the DOL regulations and caselaw had established a common understanding, with which it agreed, that the term that the term "reasonable belief" has both a subjective and objective component.

Subjective component; relevance of plaintiff's particular background

The court stated that, "[a]s to the subjective component, the law is not meant to protect those whose complaints are not undertaken in subjective good faith." In this regard, the court agreed with the district court that a "plaintiff's particular educational background and sophistication [is] relevant to the subjective component. Subjective reasonableness requires that the employee 'actually believed the conduct complained of constituted a violation of pertinent law.' Welch , 536 F.3d at 277 n.4." In the instant case, there was no evidence that the Complainant did not make his complaints in subjective good faith. The court, therefore, focused on the objective component.

Objective component

    a. Three categories of conduct; fraud as a common denominator

In regard to the objective component, the court began its analysis by noting that the SOX only protects the employee's provision of information about three broad categories of conduct: (1) a violation of specified federal criminal fraud statutes, 2) a violation of any rule or regulation of the SEC; and/or (3) a violation of any provision of federal law relating to fraud against shareholders. The court stated that the first and third categories involve "fraud," and that many of the second category claims will also involve fraud.

    b. Employee's communication must relate specifically to one of these categories, but does not need to cite precise code violation nor show an actual violation

The court stated that "[t]he employee must show that his communications to the employer specifically related to one of the laws listed in § 1514A. The employee is not required to provide the employer with the citation to the precise code provision in question. The employee is not required to show that there was an actual violation of the provision involved." Slip op. at 25-26 (footnote and citations omitted).

    c. Meaning of fraud in context of SOX; employee's communication must at least approximate claim of securities fraud

The court stated that "[t]he reasonableness of [a plaintiff's] belief for purposes of § 1514A must be measured against the basic elements of the laws specified in the statute. 'Fraud' itself has defined legal meanings and is not, in the context of SOX, a colloquial term. 'The hallmarks of fraud are misrepresentation or deceit.'" Wire or mail fraud is 'broader than the common law definition [of fraud]' but also emphasizes the deceit requirement." Slip op. at 27 (citations omitted).

The court continued: "To have an objectively reasonable belief there has been shareholder fraud, the complaining employee's theory of such fraud must at least approximate the basic elements of a claim of securities fraud. 'Securities fraud' itself has additional relevant elements. The elements of a cause of action for securities fraud 'resembl[e] . . . common-law tort actions for deceit and misrepresentation.' Those elements typically include a material misrepresentation or omission, scienter, loss, and a causal connection between the misrepresentation or omission and the loss. Securities fraud under section 10(b) and Rule 10b-5 requires: '(1) a material misrepresentation or omission; (2) scienter; (3) connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.' The employee need not reference a specific statute, or prove actual harm, but he must have an objectively reasonable belief that the company intentionally misrepresented or omitted certain facts to investors, which were material and which risked loss." Slip op. at 27-28 (citations omitted).

    d. Application of principles to facts of case sub judice

The court then applied these principles to the case before it. The Plaintiff had alleged that he reasonably believed that the Defendant had violated § 1514A through its manipulation of accounting data. The court, however, found that the complaint failed to meet the basic components of fraud or of securities fraud.

       -- mere disagreement about corporate efficiency is not actionable

The court stated that "[a] disagreement with management about internal tracking systems which are not reported to shareholders is not actionable." In regard to complaints amounting to allegations that the company's practices did not maximize shareholder profits, the court found that the Plaintiff did not hold an objectively reasonable belief that shareholders have been or are likely to be defrauded. "A company may legitimately decide for a number of reasons that maximizing short-term profits through certain practices is not its goal, particularly if the practices lead to consumer unhappiness. Further, a company's management may legitimately decide that certain practices are more efficient than others. A complaint about corporate efficiency is also not within the intended protection of SOX." Slip op. at 28.

       -- mere allegation of needless loss of revenue is not actionable

The Plaintiff had stated a belief that the Defendant's returns procedure constituted fraud on shareholders because it permitted overbilling. The court found this belief not to be objectively reasonable, noting that what the Plaintiff described as data manipulation was unrelated to the financial condition of the company and had not been reported to shareholders. Although the Plaintiff alleged that the procedure resulted in a needless loss of revenue to the detriment of shareholders, the court held that "[a] claim of 'needless loss of revenue' is not a claim of fraud." The mere possibility of overbilling by a delivery company was a far cry from fraud.

       -- mere allegation of billing discrepancy is not actionable

Similarly, the Plaintiff had alleged that the Defendant knowingly refused to provide customers with monetary credits to which they were entitled. The court found that this allegation was "not even plausibly a situation of shareholder fraud." Slip op. at 29. The court wrote: "'[A] billing discrepancy, without more, does not equal fraud.' Platone v. U.S. Dep't of Labor, 548 F.3d 322, 327 (4th Cir. 2008). [The Plaintiff] may have made a complaint related to consumer protection, but he does not have an objectively reasonable belief there was shareholder fraud under § 1514A." Slip op. at 29-30.

       -- mere allegation of violation of general accounting provisions is not actionable

The court took note that the Plaintiff had attempted to connect his allegations to violations of general accounting principles, and then to connect violations of accounting principles to shareholder fraud. But the court found that this theory was inadequate, the Plaintiff having failed to allege that the numbers he alleged were inaccurate (1) were reported to shareholders, (2) were inconsistent with generally accepted accounting principles ("GAAP"), or (3) constituted fraud.

The court stated that "[a] generalized allegation of inaccuracy in accounting is insufficient to establish a reasonable belief in a violation of GAAP, much less a reasonable belief in shareholder fraud" and that "' merely stating in conclusory fashion that a company's books are out of compliance with GAAP would not in itself demonstrate liability under section 10(b) or Rule 10b-5.'" Slip op. at 30-31 (citations omitted).

The court continued: "Even when a company's accounting method is in violation of GAAP, 'some techniques . . . might prove to be entirely legitimate, depending on the specific facts.' Claims that there has been accounting fraud thus require evidence beyond a belief in a mere accounting irregularity." Slip op.at 31 (citations omitted).

    e. Materiality of alleged inaccuracies to shareholders

The court also found that the Plaintiff's belief was objectively unreasonable because he had not shown that any inaccuracy was material to shareholders. The court wrote that the "materiality requirement means the complainant must believe there is a 'likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.' Thus complaints about purely internal practices that are not financial in nature and are not reported to shareholders do not meet the materiality requirement for an objectively reasonable belief in shareholder fraud." Slip op. at 32 (citations omitted).

    f. Company's explanations

Finally, the court stated that a "company's explanations given to the employee for the challenged practices are also relevant to the objective reasonableness of an employee's belief in shareholder fraud." Slip op. at 32. In the instant case, while the Plaintiff's complaints arguably may have initially reflected a reasonable concern, it ceased to be reasonable once the Defendant reiterated rationales for the procedure questioned by the Plaintiffs and assured the Plaintiff that no fraud was being committed.

WAIVER OF ARGUMENT OF VIOLATION OF SEC REGULATIONS WHERE BRIEF FAILS TO SPECIFY WHICH REGULATIONS WERE VIOLATED

Where the Plaintiff's brief made unspecified reference to SEC regulations in regard to the Plaintiff's claim of violations of accounting principles relevant to shareholder fraud, the court found that the argument had been waived. Day v. Staples, Inc. , No. 08-1689 (1st Cir. Feb. 9, 2009) (case below 2006-SOX-34).

PROTECTED ACTIVITY; MERELY ALERTING MANAGEMENT THAT NEAR-TERM PROFITS WERE AFFECTED BY BILLING DISCREPANCIES IS NOT SUFFICIENT TO MEET "DEFINITIVELY AND SPECIFICALLY" STANDARD

In Platone v. USDOL , No. 07-1635 (4th Cir. Dec. 3, 2008) (case below ARB No. 04-154, ALJ No. 2003-SOX-27), the court held that "a complainant must alert management to more than the fact that the company's near-term profits were affected by billing discrepancies in order to meet the standard of definitively and specifically alleging mail or wire fraud [under the whistleblower provision of SOX]."

ALTHOUGH MANY OF THE LAW ENUMERATED IN SECTION 1514A CONTAIN MATERIALITY REQUIREMENTS, THE SOX WHISTLEBLOWER PROVISION DOES NOT CONTAIN AN INDEPENDENT MATERIALITY REQUIREMENT

In Welch v. Chao , No. 07-1684 (4th Cir. Aug. 5, 2008), the Fourth Circuit stated that although many of the laws listed in § 1514A of SOX contain materiality requirements, nothing in § 1514A indicates that § 1514A contains an independent materiality requirement. A statement or omission must concern a material fact to violate § 10(b) of the Securities Exchange Act and SEC Rule 10b-5. See Livingston v. Wyeth, Inc. , 520 F.3d 344, 355 (4th Cir. 2008).

PROTECTED ACTIVITY; ARB RULING THAT A COMMUNICATION MUST DEFINITIELY AND SPECIFICALLY RELATE TO A LAW LISTED UNDER § 1515A DOES NOT REQUIRE THAT A COMPLAINANT COMPLAIN OF AN ACTUAL VIOLATION

The ARB's ruling in Platone v. FLYi, Inc. , ARB Case No. 04-154, slip op. at 17 (ARB Sept. 29, 2006), that a communication must "definitively and specifically relate" to a law listed under § 1514A in order to be protected activity, does not require that an employee complain of an actual violation. Rather,§ 1514A protects an employee's communications based on a reasonable, but mistaken, belief that conduct constitutes a securities violation. Welch v. Chao , No. 07-1684 (4th Cir. Aug. 5, 2008).

PROTECTED ACTIVITY; MISCLASSIFICATION OF ITEMS IN FINANCIAL STATEMENT THAT DOES NOT AFFECT THE BOTTOM LINE

In Welch v. Chao , No. 07-1684 (4th Cir. Aug. 5, 2008), the Complainant alleged that the Respondent had misrepresented its net worth to investors because a loan recovery in the amount of $195,000 had been erroneously reported as income rather than placed in the loan reserve account in violation of GAAP. The ARB held, as a matter of law, that the Complainant could not have had an objectively reasonable belief that the reporting violated relevant law, reasoning that even if the Respondent erroneously reported the cash recovery as income, the erroneous entries still showed that "Cardinal had in fact recovered $195,000 that it previously did not have," and that therefore the Complainant could not have had an objectively reasonable belief that the loan entries might mislead investors. The ARB suggested that the misclassification of items in a financial statement can never "present[ ] potential investors with a misleading picture of [a company's] financial condition," so long as the misclassification does not affect the "bottom line." On appeal, the Fourth Circuit disagreed:

As the SEC has explained in its amicus brief, "'[t]he individual items, subtotals, or other parts of a financial statement may often be more useful than the aggregate to those who make investment, credit, and similar decisions.'" Statement of the SEC, Amicus Curiae, in Support of Neither Side at 3 (quoting the Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 5, Recognition and Measurement of Financial Statements of Business Enterprises 15-16, ¶ 22 (Dec. 1984)) (emphasis omitted). Thus, as the Department of Labor now concedes, communications about misclassifications in financial statements may , in some circumstances, form the basis for a Sarbanes-Oxley whistleblower action, and the ARB erred to the extent that it held to the contrary.

Slip op. at 13.

PROTECTED ACTIVITY; COMPLAINANT MUST SHOW HOW THE ALLEGED CONDUCT OF THE RESPONDENT COULD REASONABLY BE REGARDED AS VIOLATING ANY OF THE LAW LISTED IN § 1514A; EXPLANATION PROVIDED BEFORE THE COURT OF APPEALS IS UNTIMELY

In Welch v. Chao , No. 07-1684 (4th Cir. Aug. 5, 2008), the Complainant had complained to his Employer about a number of accounting irregularities, such as the asserted misreporting of cash received in a loan recovery as income rather than being placed in the loan reserve account, the practrice of allowing persons without accounting experience to make ledger entries, and failure to correct a quarterly 10-QSB report. The ARB ruled that such complaints had not been shown to be protected activity under SOX where the Complainant failed to show how the alleged conduct could reasonably be regarded as violating any of the laws listed in § 1514A. Although the Complainant advanced several arguments before the ARB, he supported these arguments only with irrelevant and inapposite authority or conclusory, general statements. The Fourth Circuit Court of Appeals found no error with the ARB's ruling, and stated:

    To the extent that Welch now explains his position and cites to relevant authority in his filings before this court, he attempts to raise new arguments relying on newly identified authorities. Welch has forfeited these new arguments by failing to raise them before the ARB. ...

    Of course, we do not suggest that a whistleblower must identify specific statutory provisions or regulations when complaining of conduct to an employer, nor do we address the burden upon the parties in the proceedings before the ALJ . See 29 C.F.R. §§ 1980.103-109 (2007). We simply hold that Welch completely failed to raise any relevant arguments before the ARB and may not now raise new arguments before this court.

Slip op. at 15 (citation omitted).

PROTECTED ACTIVITY; ALLEGATION THAT DEFENDANT MADE MISREPRESENTATIONS TO PURCHASERS IS NOT, STANDING ALONE, SUFFICIENT TO STATE A CAUSE OF ACTION UNDER SOX

In Heaney v. Prudential Real Estate Affiliates, Inc. , No. 05-820 (E.D.La. July 3, 2008) (case below ARB No. 05-039, ALJ No. 2004-SOX-72), the court granted summary summary against the Plaintiff on his SOX whisteblower claim where the Plaintiff failed to sufficiently assert facts to show that he reasonably believed that there had been a violation any of the six enumerated categories covered by section 1514A. Rather, the Plaintiff had only claimed that the Defendant allegedly made misrepresentations to purchasers in the course of selling real estate. The court found that this allegation did not present an action cognizable under SOX.

PROTECTED ACTIVITY; ACCOUNTING DISPUTE; MUST IMPLICATE FRAUD TO BE PROTECTED ACTIVITY

In Skidmore v. ACI Worldwide, Inc. , No. 08:08CV1 (D.Neb. June 18, 2008) (case below ALJ No. 2007-SOX-77), the Plaintiff had been instructed by his supervisor to book an estimated tax rate for the forecasted budget for the end of the first quarter of the fiscal year, which the Plaintiff refused to do without supporting information because he believed the actual numbers did not justify the estimated tax rate. When the Plaintiff attempted to submit a written report of the incident to the Defendant's General Counsel and Chief Compliance Officer, the report was refused. The Plaintiff was terminated shortly thereafter, and the Plaintiff filed a SOX whistleblower complaint. The Defendant moved for summary judgment.

The court found that "[i]n order for a SOX claim to survive a Rule 12(b)(6) motion to dismiss, a complaint must state a cause of action where an employee reasonably believed that the reported conduct was violating the provisions of §§ 1514A relating to shareholder fraud." The court found that the Plaintiff had not alleged any facts supporting his contention that booking an estimated tax rate, not backed by supporting information, related to fraud against shareholders. The court also found that when the Plaintiff informed the General Counsel of his concerns, he did not tell the General Counsel that he believed that the Defendant was engaging in any type of fraud. The court found that the Plaintiff's complaint alleged was an accounting dispute. The court noted that the Plaintiff had referenced 15 U.S.C. § 7218 (applicable accounting standards) and 15 U.S.C. § 7264 (code of ethics for senior financial officers) in his complaint as part of how the Defendant's actions were a violation of a rule or regulation of the SEC. The court, however, found that "[t]hese statutory provisions can only be implicated under a SOX whistleblower claim if plaintiff's disclosure of ACI's activity revealed anything that relates to fraud against the shareholders."

PROTECTED ACTIVITY; PLAINTIFF FAILED TO ESTABLISH THAT HE ENGAGED IN PROTECTED ACTIVITY UNDER SOX WHERE TO SO FIND REQUIRED A SPECULATIVE, MULTI-STEPPED REASONING PROCESS

In Livingston v. Wyeth, Inc. , No. 06-1939 (4th Cir. Mar. 24, 2008) (case below M.D.N.C. No. 1:03-cv-00919, ALJ No. 2003-SOX-25), the Fourth Circuit affirmed the district court's order granting summary judgment against the Plaintiff on his SOX complaint where he failed to produce evidence that he provided information or made a complaint to the Defendant about conduct which a reasonable employee in his position could have believed at the time constituted a violation of securities laws. The Plaintiff had alleged that the Defendant had retaliated against him because he had complained to management that the Defendant was in danger of failing to adequately implement a training program on "good manufacturing production" at a facility in compliance with an earlier consent agreement reached with the FDA and that such deficiencies might be misrepresented or covered up by local employees to internal compliance auditors and the FDA. The court found that to find that the Plaintiff engaged in protected activity under SOX would require speculative, multi-step reasoning that failed at several suppositional levels: he had not shown that the Defendant misrepresented or concealed anything; he had not shown that the consent decree had been violated; he had not shown in his complaint to management that the Defendant had, or even intended to, mislead shareholders; he had not shown any material misstatement had been made in violation of SEC Rule 10b-5. One Circuit Judge dissented principally on the ground that the majority had failed to state the facts in the light most favorable to the Plaintiff, as it was required to do when ruling on a motion for summary judgment.

PROTECTED ACTIVITY; SOX WHISTLELOWER PROVISION REGARDING VIOLATION OF SEC RULE INCLUDES ELEMENT OF FRAUD

In Livingston v. Wyeth, Inc. , No. 06-1939 (4th Cir. Mar. 24, 2008) (case below M.D.N.C. No. 1:03-cv-00919, ALJ No. 2003-SOX-25), the Fourth Circuit held that the reference in section 1514A to "any rule or regulation of the Securities and Exchange Commission" refers to regulations prohibiting fraud. The court concluded that "[t]o conclude otherwise would absurdly allow a retaliation suit for an employee's complaints about administrative missteps or inadvertent omissions from filing statements. Moreover, the ambiguity is fully clarified by the context of the whistleblower provision in the Sarbanes-Oxley Act and by the legislative history that indicates that whistleblowing is protected by § 1514A when it relates to fraud.'" Slip op. at n.1 (citations omitted).

PROTECTED ACTIVITY; REASONABLE BELIEF INCLUDES BOTH SUBJECTIVE BELIEF IN VIOLATION AND REASONABLY OBJECTIVE BELIEF; BELIEF MUST BE OF AN EXISTING VIOLATION, NOT SOMETHING THAT IS ABOUT TO HAPPEN UPON SOME FUTURE CONTINGENCY

In Livingston v. Wyeth, Inc. , No. 06-1939 (4th Cir. Mar. 24, 2008) (case below M.D.N.C. No. 1:03-cv-00919, ALJ No. 2003-SOX-25), the Fourth Circuit held:

To "reasonably believe" that company conduct "constitutes a violation" of law, as those terms are used in § 1514A(a)(1), Livingston must show not only that he believed that the conduct constituted a violation, but also that a reasonable person in his position would have believed that the conduct constituted a violation. It would make no sense to allow Livingston to proceed if he himself did not hold the belief required by the statute, and the language of the statute itself requires that the belief be a "reasonable" one. 18 U.S.C. § 1514A(a)(1). Thus, §1514A requires both a subjective belief and an objectively reasonable belief that the company's conduct constitutes a violation of the relevant law.

Moreover, the statute requires Livingston to have held a reasonable belief about an existing violation, inasmuch as the violation requirement is stated in the present tense: a plaintiff's complaint must be "regarding any conduct which [he] reasonably believes constitutes a violation of [the relevant laws]." 18 U.S.C. § 1514A(a)(1) (emphasis added). In an analogous context, we have construed the reasonable belief of a violation to allow for a reasonable belief that the violation not only (1) "has happened" but also (2) "is in progress." Jordan v. Alternative Resources Corp. , 458 F.3d 332, 340-41 (4th Cir. 2006) (construing the retaliation provision in Title VII, 42 U.S.C. § 2000e-3(a)), cert. denied , 127 S. Ct. 2036 (2007). As we amplified in Jordan , "the employee must have an objectively reasonable belief that a violation is actually occurring based on circumstances that the employee observes and reasonably believes." Id . at 341. We rejected the claim, however, that a reasonable belief that a violation has occurred or is in progress can include a belief that a violation is about to happen upon some future contingency. See id. at 340-41.

Slip op. at 13 (footnote omitted). One Circuit Judge sought to clarify in a dissent that the existing violation rule is based on the notion that an employee's belief is unreasonable and unprotected if based entirely on unsupported conjecture about hypothetical future events; a reasonable belief must relate to activity that a reasonable person could conclude is or is about to become a violation. The dissent also clarified that an actual violation by the Defendant is not required, but only the employee's reasonable belief of such.

PROTECTED ACTIVITY; MATERIAL MISREPRESENTATION OR OMISSION

In Livingston v. Wyeth, Inc. , No. 06-1939 (4th Cir. Mar. 24, 2008) (case below M.D.N.C. No. 1:03-cv-00919, ALJ No. 2003-SOX-25), the Fourth Circuit held that in order for the SOX Plaintiff to justify his belief that the Defendant committed securities fraud, he would have had to reasonably believed that the Defendant "(1) made a material misrepresentation (or omission) (2) with scienter (3) in connection with the purchase or sale of a security (4) on which the seller or purchaser reasonably relied, (5) causing economic loss." Slip op. at 16 (citations omitted). Moreover, the Plaintiff would have needed to establish -- to show a violation of SEC Rule 10b-5 -- that the matter concerned a material fact. The court wrote: "The Supreme Court has noted that to fulfill the materiality requirement, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.' Basic, Inc. v. Levinson , 485 U.S. 224, 231-32 (1988) (internal quotation marks omitted)." Slip op. at 17.

PROTECTED ACTIVITY; A STOCK ANALYST'S STATEMENT AT A REVIEW MEETING THAT SHE WOULD REFUSE TO CHANGE A STOCK RATING WAS NOT PROTECTED ACTIVITY WHERE SHE DID NOT VOICE A BELIEF THAT A CHANGE WOULD VIOLATE A SECURITIES LAW AND SHE WAS NOT DIRECTED TO CHANGE THE RATING

In Getman v. Administrative Review Board, USDOL , No. 07-60509 (5th Cir. Feb. 13, 2008) (unpublished), the court affirmed the ARB's holding that the Complainant, a research analyst for a securities company, had not engaged in protected activity under SOX when she refused to recommend a high rating for a stock she reported on. A review committee had questioned her rating and asked for her reasoning. At the end of the meeting, the Complainant told the committee that they could change the rating but that she would not sign on to the change. She did not, however, inform the committee that she believed that changing the rating would violate any securities law. Moreover, none of the committee members told her to change the rating.

PROTECTED ACTIVITY; SOX PROTECTS AGAINST RETALIATION BASED UPON THE WHISTLEBLOWER'S REPORTING OF FRAUD UNDER ANY OF THE ENUMERATED STATUTES REGARDLESS OF WHETHER THE MISCONDUCT RELATES TO "SHAREHOLDER" FRAUD

In O'Mahony v. Accenture Ltd. , No. 1:07-CV-07916 (S.D.N.Y. Feb. 5, 2008), the court agreed with authority ruling that protected activity must implicate the substantive law protected in Sarbanes-Oxley definitively and specifically. However, the court did not agree with authority ruling that § 1514A limits the activity to be protected only to reporting conduct that involves "fraud against shareholders." The court wrote:

    The Court finds that the plain language of § 1514A is unambiguous. Section 1514A states, in pertinent part, that a publicly traded company may not retaliate against an employee who provides information that the employee "reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders." 18 U.S.C. § 1514A(a)(1). Section 1514A contains six provisions that enumerate six specific forms of misconduct which, if reported by an employee, protect the whistleblower from employer retaliation: (1) § 1341 (mail fraud); (2) § 1343 (wire fraud); (3) 18 U.S.C. § 1344 (bank fraud); (4) 18 U.S.C. § 1348 (securities fraud); (5) any rule or regulation of the SEC; or (6) any provision of federal law relating to fraud against shareholders. The first four provisions are statutes that, as written by Congress, are not limited to types of fraud related to SOX. By listing certain specific fraud statutes to which § 1514A applies, and then separately, as indicated by the disjunctive "or", extending the reach of the whistleblower protection to violations of any provision of federal law relating to fraud against securities shareholders, § 1514A clearly protects an employee against retaliation based upon the whistleblower's reporting of fraud under any of the enumerated statutes regardless of whether the misconduct relates to "shareholder" fraud.

Slip op. at 26-27.

PROTECTED ACTIVITY; COMPLAINANT'S ASSISTANCE IN INVESTIGATION OF WHETHER DOCUMENTS SUBJECT TO A GRAND JURY SUBPOENA WERE BEING PROPERLY PRESERVED

In Miles v. Wal-Mart Stores, Inc. , No. 5:06-CV-05162, slip op. at n.4 and surrounding text (W.D.Ark. Jan. 25, 2008), the court found that the Plaintiff had created a geniune issue of material fact as to whether she engaged in protected activity under the SOX where she had provided assistance to the FBI and an Assistant U.S. Attorney in connection with Defendant's response to a grand jury subpoena calling for production of documents concerning union-related labor relations and the investigation of a former executive for suspected fraud. The Complainant had objected to an instruction to shred certain documents being digitized in her labor relations department which might have been subject to the subpoena. The Defendant argued that the Plaintiff had only aided an "investigation" as opposed to a "proceeding." The court found that under the circumstances, a geniune issue of material fact existed as to whether the Complainant engaged in protected activity.

PROTECTED ACTIVITY; SOX COMPLAINT MUST DEFINITIVELY AND SPECIFICALLY RELATE TO ONE OF THE SIX ENUMERATED CATEGORIES FOUND IN SECTION 1514A

In Allen v. Administrative Review Bd., USDOL , No. 06-60849, ___ F.3d ___, 2008 WL 171588 (5th Cir. Jan. 22, 2008) (case below ARB No. ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62), the Fifth Circuit Court of Appeals affirmed

... the ARB's legal conclusion that an employee's complaint must "definitively and specifically relate" to one of the six enumerated categories found in § 1514A: (1) 18 U.S.C. § 1341 (mail fraud); (2) 18 U.S.C. § 1343 (wire fraud); (3) 18 U.S.C. § 1344 (bank fraud); (4) 18 U.S.C. § 1348 (securities fraud); (5) any rule or regulation of the SEC; or (6) any provision of federal law relating to fraud against shareholders. See Platone v. FLYI, Inc. , ARB Case No. 04-154, 2006 WL 3246910, at *8 (ARB Sept. 29, 2006) ("[A]n employee's protected communications must relate definitively and specifically to the subject matter of the particular statute under which protection is afforded.") (internal quotation marks omitted); see also Harvey v. Home Depot USA, Inc. , ARB Case No. 04-114, 2006 WL 3246905, at *11 (ARB June 2, 2006) ("[A]n employee's complaint must be directly related to the listed categories . . . .").

Slip op. at 11-12.

PROTECTED ACTIVITY; AN EMPLOYEE'S REASONABLE BELIEF MUST BE SCRUTINIZED UNDER BOTH A SUBJECTIVE AND OBJECTIVE STANDARD

WHERE THE COMPLAINANT IS AN EXPERIENCED ACCOUNTANT, OBJECTIVE REASONABLENESS IS EVALUATED FROM THE PERSPECTIVE OF AN ACCOUNTING EXPERT

In Allen v. Administrative Review Bd., USDOL , No. 06-60849, ___ F.3d ___, 2008 WL 171588 (5th Cir. Jan. 22, 2008) (case below ARB No. ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62), the Fifth Circuit Court of Appeals observed that SOX prohibits a publicly-traded company from retaliating against an employee who reports information to a supervisor "regarding any conduct which the employee reasonably believes constitutes a violation" of one of the six enumerated categories, 18 U.S.C. § 1514A(a)(1), and specifically agreed with the ARB's legal conclusion that "an employee's reasonable belief must be scrutinized under both a subjective and objective standard." Slip op. at 12. The court wrote:

The objective reasonableness of a belief is evaluated based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee. ... Importantly, an employee's reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six enumerated categories is protected. ...

    The "objective reasonableness" standard applicable to SOX whistleblower claims is similar to the "objective reasonableness" standard applicable to Title VII retaliation. ... In Title VII retaliation cases, the objective reasonableness of an employee's belief can be decided as a matter of law in some cases. ... However, the objective reasonableness of an employee's belief cannot be decided as a matter of law if there is a genuine issue of material fact. ... If "[r]easonable minds could disagree on this issue," the objective reasonableness of an employee's belief should not be decided as a matter of law, and the fact-finder's resolution of the issue is entitled to deference on appeal. ...

Slip op. at 12-13 (citations and footnotes omitted). In Allen , one of the Complainants had alleged that she reasonably believed that the Respondent was violating an SEC rule or regulation when she expressed concerns to her supervisors that the Respondent was not complying with SEC Staff Accounting Bulletin 101 ("SAB-101"), which instructed that publicly-traded companies should not recognize sales revenue before they deliver merchandise to the customer. The court found that a SAB (which is only guidance and not a rule with the force of law) could fall within the fifth enumerated category found in section 1514A to the extent that it assists a company in complying with existing SEC financial accounting rules. However, the Complainant's concerns related only to internal financial documents not submitted to the SEC, and the Complainant - as an accountant - knew that these internal documents did not need to be SAB-101 compliant. Thus, the court affirmed the ARB's and ALJ's conclusion that the Complainant did not have an objectively reasonable basis for her complaint. The court declined to express an opinion as to whether this complaint would have been protected activity if made by a layperson without extensive accounting knowledge.

PROTECTED ACTIVITY; SIXTH ENUMERATED CATEGORY OF PROTECTED ACTIVITY UNDER SOX INCLUDES ELEMENT OF SCIENTER

In Allen v. Administrative Review Bd., USDOL , No. 06-60849, ___ F.3d ___, 2008 WL 171588 (5th Cir. Jan. 22, 2008) (case below ARB No. ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62), the Fifth Circuit Court of Appeals held that the sixth enumerated category of protected activity found in § 1514A, "any provision of federal law relating to fraud against shareholders" --

... indicates that some form of scienter related to fraud against shareholders is required. See Ernst & Ernst v. Hochfelder , 425 U.S. 185, 193 n.12 (1976) (defining scienter in the securities fraud context as "a mental state embracing intent to deceive, manipulate, or defraud"). Mere negligence on the part of the employer does not constitute a violation of federal law relating to fraud against shareholders. See id. at 199; see Tellabs, Inc. v. Makor Issues&Rights, Ltd., 127 S. Ct. 2499, 2504 (2007). In cases involving the sixth "catch-all" category, we conclude that the employee must reasonably believe that his or her employer acted with a mental state embracing intent to deceive, manipulate, or defraud its shareholders. However, as stated previously, an employee's reasonable but mistaken belief that the employer violated some "provision of Federal law relating to fraud against the shareholders" is protected. See Halloum , 2006 WL 3246900, at *5.

Slip op. at 16-17 (footnote omitted). In a footnote, the court noted that it was not expressing an opinion on whether the first five enumerated categories of protected activity found in § 1514A require some form of scienter related to fraud against shareholders. The court indicated, however, that there was a spilt in authority, and also noted that several ALJs had "held that fraud is an essential element of all whistleblower claims arising under § 1514A, which necessarily includes an element of intentional deceit. " Slip op. at n.8 (citations omitted).

In Allen , the court found that substantial evidence supported the ARB's and ALJ's conclusions that the Respondent had not acted with the requisite scienter when it made unsuccessful attempts to remedy a computer application problem with calculating interest, was slow in issuing refunds, and did not address a concern raised by some of the Complainants concerning whether the way bills were presented might make it difficult to collect unpaid balances. In each instance, the court found that a reasonable person could conclude that the Respondent had caused the problems, did not conceal their existence, and attempted to remedy them. The court found that, at most, the Respondent "inadequately responded to three unintended problems that arose in the regular course of business, and substantial evidence supports the ALJ's and ARB's factual finding that [the Respondent] did not intend to defraud its shareholders in failing to disclose these problems."

PROTECTED ACTIVITY; WHETHER ELEMENTS OF RULE 10b-5 CLAIM ARE NECESSARILY PART OF EVALUATION OF OBJECTIVE REASONABLENESS

In Allen v. Administrative Review Bd., USDOL , No. 06-60849, ___ F.3d ___, 2008 WL 171588 (5th Cir. Jan. 22, 2008) (case below ARB No. ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62), the Fifth Circuit Court of Appeals concluded that the Complainants had tried to shoe-horn their complaint that the Respondent had intentionally failed to disclose accounting and billing into the sixth enumerated category of protected activity found in § 1514A ("any provision of federal law relating to fraud against shareholders"). The court wrote:

It appears that this generic fraudulent omission claim is essentially a watered-down Rule 10b-5 claim. In cases involving an alleged fraudulent omission in violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, the objective reasonableness of the employee's belief is evaluated in part through reference to the elements of a Rule 10b-5 claim . ... Although an employee who makes a complaint concerning an alleged fraudulent omission does not need to prove that an actual violation of federal law occurred, the employee does need to prove that his or her belief was objectively reasonable under the circumstances.

Slip op. at n.9 (citations omitted). Because it affirmed the ARB and ALJ on other grounds, however, the court did not reach the question of whether the objective reasonableness of all generic fraudulent omission complaints must be evaluated in part through reference to the elements of a Rule 10b-5 claim.

PROTECTED ACTIVITY; CHEMIST'S DISCLOSURE OF PURPORTED VIOLATION OF FDA CONSENT DECREE, FDA AND EU REGULATIONS, AND OTHER DRUG ANUFACTURING GUIDELINES WAS NOT PROTECTED ACTIVITY UNDER SOX WHERE THE PLAINTIFF NEVER EXPLICITLY REFERENCED VIOLATION OF A FEDERAL LAW RELATED TO FRAUD AGAINST SHAREHOLDERS

In Portes v. Wyeth Pharmaceuticals, Inc. , No. 06-CV-2689 (S.D.N.Y. Aug. 20, 2007) (case below 2005-SOX-98), the court assumed as true for purposes of deciding a summary judgment motion that the Complainant was a chemist, and the principle project manager for a "Sustainable Compliance Initiative" that was established as the result of a consent decree entered into with the FDA after the Defendant had failed to comply with certain FDA regulations, including good manufacturing practices for the production of pharmaceutical and biological products. The Plaintiff uncovered problems with his direct supervisor's work, leading him to believe that the Defendant was in violation of the consent decree, and certain federal and EU regulations. He communicated his findings to a higher level supervisor, who allegedly retaliated against him. After being placed on a PIP, the Complainant filed additional complaints through various channels at the Defendant alleging violations of regulations relating to the manufacture of pharmaceuticals and complaining of "whistleblower" retaliation. The Plaintiff was eventually terminated as a result of those disclosures and complaints. The Defendant moved for summary judgment based on a contention that the Plaintiff did not engage in protected activity under the SOX because none of his reports were sufficiently related to securities fraud or any violation enumerated in section 1514A(a)(1). The court agreed.

The court closely followed the analysis from Fraser v. Fiduciary Trust Co. Int'l , 417 F.Supp.2d 310 (S.D.N.Y.2006), which protects disclosures under SOX only when they "implicate the substantive law protected in Sarbanes-Oxley 'definitively and specifically.'" Slip op. at 7 (citations omitted). The Plaintiff argued that if the Defendant had violated regulations, it faced fines and other penalties that might have significantly affected share prices. He also asserted that, in light of prior references to the consent decree in financial reports, he had a reasonable belief that the company was obligated to report the violations to the FDA, SEC, and shareholders. He did not, however, allege that he explicitly referred to fraud, shareholders, securities, statements to the SEC, or SOX in his disclosures to his superiors at the Defendant. The court stated that the purported violations involved the consent decree, FDA and EU regulations, and other drug manufacturing guidelines, and not federal law related to fraud against shareholders. Thus, the court found that the disclosures were not sufficiently related to shareholder fraud to constitute protected activity. The circumstances did not suggest a concern that the Defendant was being unfair to its investors, that its lack of compliance with FDA regulations might have implications for its reports to investors and the SEC, or that it was otherwise engaged in conduct that would have alerted it that the Plaintiff believed that the Defendant was violating a federal rule or law related to fraud against shareholders.

The court observed that the Plaintiff was employed as a chemist and project manager implementing standards for drug manufacturing, and not as an investment analyst. Thus, the court would not infer that the Plaintiff was concerned with shareholder fraud based on the nature of his job responsibilities or his work.

PROTECTED ACTIVITY; ALLEGED WHISTLEBLOWING ACTIVITY MUST INCRIMINATE OR ACCUSE, AND NOT MERELY IMPLY VIOLATION OF THE SUBSTANTIVE LAW PROTECTED BY SOX

In Van Asdale v. International Game, Technology , No. 3:04-CV-00703-RAM (D.Nev. June 13, 2007), the Magistrate Judge looked to Bozeman v. Per-Se Tech., Inc. , 456 F. Supp. 2d 1282, 1359 (N.D. Ga. 2006) and similar authority to conclude that under SOX, an employee's act must implicate securities fraud definitively and specifically. The court found that "implicate" in this context does not mean merely to "imply," but "'to bring into intimate or incriminating connection' See Webster's Third New International Dictionary, Unabridged, 1135 (entry for 'implicate')." Slip op. at 10. The Magistrate Judge stated that a better synonym for "implicate" in this context would be "incriminate" or "accuse."

In Van Asdale , the Plaintiffs, who were in-house intellectual property attorneys for the Respondent, alleged that they met with the Defendant's General Counsel to express their views on the invalidity of a patent held by a company which the Defendant was considering acquiring by merger, and to express concern that fraud had occurred. The Magistrate Judge granted summary judgment against the Plaintiffs on this alleged act of protected activity because the deposition testimony of one of the Plaintiffs indicated that the potential for "fraud" related to fraud against the patent office rather than fraud against shareholders. Citing the "sham" affidavit rule, the Magistrate refused to permit the Plaintiffs to create a genuine issue of material fact by submitting a declaration stating that the Plaintiff whose deposition testimony had been cited had referenced a need to investigate for fraud on the shareholders. The Magistrate Judge also was not willing to infer that the Plaintiff implied that shareholder fraud had occurred and the General Counsel understood the implication.

In Van Asdale v. International Game, Technology , No. 3:04-CV-00703-RAM (D.Nev. Aug. 10, 2007) (Order [denying reconsideration]), the Plaintiffs argued on motion for reconsideration that the Defendant's General Counsel was an extremely sophisticated recipient of the information, and must have understood that they were alleging shareholder fraud. The Magistrate Judge stated that although an inference could be drawn that he so understood, the law requires that a whistleblower do more than imply that a SOX violation occurred.

PROTECTED ACTIVITY; COMPLAINT MADE TO SAME SUPERVISOR WHO WAS ALLEGED TO HAVE CONDONED ILLEGAL ACTIVITY

In Van Asdale v. International Game, Technology , No. 3:04-CV-00703-RAM (D.Nev. June 13, 2007), the Magistrate Judge rejected the Defendant's argument that a wrongful termination suit fails where the alleged retaliation is based on a report to the same supervisor alleged to have been condoning and enforcing illegal activity. The Magistrate Judge found that the Defendant's argument was based on a California law that was not applicable to SOX whistleblower claims.

PROTECTED ACTIVITY; REASONABLE PERSON STANDARD; SOX DOES NOT REQUIRE - IN ORDER FOR A PLAINTIFF'S ACTIONS TO BE PROTECTED - AN INVESTIGATION TO RULE OUT NON-FRAUDULENT EXPLANATIONS PRIOR TO RAISING THE ISSUE OF POSSIBLE FRAUD

In Van Asdale v. International Game, Technology , No. 3:04-CV-00703-RAM (D.Nev. June 13, 2007), the Magistrate Judge followed authority from other courts, the legislative history of SOX, and several ALJ decisions in finding that SOX provides that

 

• the whistleblower must "reasonably believe" that there has been a SOX violation,

   

• the reasonableness threshold is intended to include all good faith and reasonable reporting of fraud, and there should be no presumption that reporting is otherwise, absent specific evidence,"

   

• the "reasonable person" standard should be applied,

   

• in order for an employee to reasonably believe that a violation occurred, he or she must have a subjective and objectively reasonable belief that fraud occurred,

   

• under the subjective portion of the reasonableness requirement the employee must actually believe that the employer was in violation of the relevant law or regulations,

   

• under the objective portion of the reasonableness requirement the employee's belief must be objectively reasonable,

   

• reasonableness is "determined on the basis of the knowledge available to a reasonable person in the circumstances with the employee's training and experience."

Slip op. at 14-15. In Van Asdale, the Plaintiffs, who were in-house intellectual property attorneys for the Respondent, alleged that they met with the Defendant's General Counsel to express their views on the invalidity of a patent held by a company which the Defendant was considering acquiring by merger, and to express concern that fraud had occurred. In regard to the objectively-reasonable belief element, the Magistrate rejected the Defendant's argument that fraud would have only occurred if the target company had intentionally failed to disclose documents bearing on the invalidity of the patent, and that the Plaintiffs therefore could have only had an objectively reasonable belief if they ruled out other non-fraudulent explanations for the non-disclosure. The Magistrate found that SOX does not require an attorney whistleblower "to investigate and rule out other possible explanations for what appears to be fraud before ever reporting the apparent fraud to any one at the company." Slip. at 16.

PROTECTED ACTIVITY; REASONABLENESS OF PLAINTIFF'S BELIEF IN ACCOUNTING VIOLATION; DEFENDANT'S INTERNAL INVESTIGATION AS A RESULT

In Johnson v. Stein Mart, Inc. , No. 3:06-cv-00341 (M.D.Fla. June 20, 2007) (case below 2006-SOX-52), the Plaintiff had been hired as a Buyer at the Defendant's corporate headquarters, and was later promoted to be a Planner, in which capacity she complained to management about (1) the collection of markdown allowances from vendors, (2) the changing of season codes on older inventory, and (3) the accounting for the value of inventory. The Defendant argued that the Plaintiff failed to establish a prima facie case on the element of protected activity because she did not have a reasonable belief that these practices were illegal because she had no accounting background and had no knowledge of the Defendant's accounting practices. The Defendant argued that its vendor markdown allowances and season code changes were in line with general industry practices. The district court rejected this argument because the Defendant had treated the Plaintiff's complaints reasonable enough to have warranted an internal investigation.

PROTECTED ACTIVITY; REPORTS OF MAIL OR WIRE FRAUD NEED NOT BE LINKED TO FRAUD AGAINST SHAREHOLDERS TO BE PROTECTED UNDER THE SOX

In Reyna v. Conagra Foods, Inc. , No. 3:04-CV-00039 (M.D.Ga. June 11, 2007), the Plaintiffs (who were employees in the Defendant's HR Department) contended that the Defendant violated the whistleblower provision of the Sarbanes-Oxley Act when they were terminated for reporting two incidents of fraud: (1) a fraudulent insurance scheme in which a supervisor falsely requested that individuals he identified as his wife and son (who were in fact his sister and nephew) be added to his company-provided health insurance as dependents, and (2) an instance in which a HR supervisor and a benefits coordinator provided a fake social security card for an employee in order to satisfy the I-9 requirements of the immigration law. The Plaintiffs contended that these fraudulent activities necessarily involved the use of mail or the internet, and thus the reporting of the activities was protected under the SOX. The Defendant filed a motion for summary judgment arguing that the reporting was not protected activity because the reports of mail fraud and wire fraud did not relate to "fraud against shareholders." Employing principles of statutory interpretation, the court denied summary judgment, holding:

The statute clearly protects an employee against retaliation based upon that employee's reporting of mail fraud or wire fraud regardless of whether that fraud involves a shareholder of the company. The Court rejects Defendants' interpretation that the last phrase of the provision, "relating to fraud against shareholders," modifies each of the preceding phrases in the provision. Defendants seek to redraft the statute to read that the employee is protected only if he reasonably believes that the conduct constitutes a "violation of section 1341 [mail fraud] 'relating to fraud against shareholders,' section 1343 [wire fraud] 'relating to fraud against shareholders,'" etc.

Slip op. at 39.

PROTECTED ACTIVITY; MERELY EXPRESSING CONCERN OR SUPPORT FOR A WHISTLEBLOWER IS NOT PROTECTED ACTIVITY

In Mahony v. Keyspan Corp. , No. 06CV00554 (E.D.N.Y. Mar. 12, 2007) (case below 2004-SOX-24), the Plaintiff alleged that he engaged in protected activity when, inter alia, he had conversations with the Defendant's in-house counsel regarding the Director of Accounting Research's claims of accounting irregularities and the detrimental effect they could have on the company, and when he had a conversation with the Defendant's outside counsel in which he informed outside counsel that he was concerned about the Director of Accounting Research's health and that the Director was a "good man." The court held that these claims failed as a matter of law: "Merely expressing concern or support for a whistleblower cannot be considered to be protected activity under SOX. Plaintiff's conversations with [the attorneys] did nothing to advance the investigation. Indeed, [the attorneys] already knew about [the Director's] allegations when they spoke to Plaintiff. Whether a whistleblower provides information to or assists in an investigation, a plaintiff must point to affirmative acts that advance the investigation. Accordingly, there is no interpretation of SOX under which Plaintiff's conversations with [the attorneys] constitute providing information, causing information to be provided, or otherwise assisting in an investigation." Id. , Slip op. at 9-10.

PROTECTED ACTIVITY; ASSISTING A WHISTLEBLOWER IN OPENING A CHANNEL OF COMMUNICATION WITH UPPER MANAGEMENT IS PROTECTED ACTIVITY

In Mahony v. Keyspan Corp. , No. 06CV00554 (E.D.N.Y. Mar. 12, 2007) (case below 2004-SOX-24), the Defendant filed a motion for summary judgment arguing that the Plaintiff could not show that he engaged in protected activity under SOX. The Plaintiff alleged that he engaged in protected activity when, inter alia, he urged the CEO to attend a meeting with the Director of Accounting Research, in-house counsel, and the Defendant's outside counsel, to ensure that the Director's concerns about accounting irregularities were heard by the Defendant's highest corporate officer. The court found this contention persuasive. The court observed that if the Director experienced difficulties having his concerns addressed or heard by officers, then the Plaintiff's assistance by opening a channel of communication with the company's CEO would constitute assistance to the investigation. In fact, the Director had sought out the Plaintiff's assistance because of his close relationship with the CEO. The court wrote:

    In order to reach the conclusion that Defendant wishes this Court to reach, this Court would have to hold that SOX applies only to those who blow the whistle but not to those who make the whistle audible. This interpretation not only flies in the face of the plain language of the statute, which clearly includes those who assist in an investigation, but also leads logically to a point that isolates the whistleblower in a way that Congress could not have intended. See Hendrix v. American Airlines, Inc. , 2004-AIR-10, 2004-SOX-23 (Dec. 9, 2004). Given that SOX is a statute designed to promote corporate ethics by protecting whistleblowers from retaliation, it is reasonable to construe the statute broadly. See 149 Cong. Rec. S1725-01, S1725, 2003 WL 193278 (Jan. 29, 2003)("The law was intentionally written to sweep broadly, protecting any employee of a publicly traded company who took such reasonable action to try to protect investors and the market"). Therefore, although Plaintiff's actions clearly did not rise to the level of Enron whistleblower Sherron Watkins, the "mere fact that the severity or specificity of [his] complaints does not rise to the level of action that would spur Congress to draft legislation does not mean that the legislation it did draft was not meant to protect [him]." Collins v. Beazer Home USA, Inc. , 334 F.Supp.2d 1365, 1375-76 (N.D.Ga.2004). As a result, Defendant cannot establish that, as a matter of law, Plaintiff did not assist in an investigation.

Id. , Slip op. at 11-12.

PROTECTED ACTIVITY; REASONABLE BELIEF; NO REQUIREMENT THAT WHISTLEBLOWER HAVE ACCOUNTING EXPERTISE

In Mahony v. Keyspan Corp. , No. 06CV00554 (E.D.N.Y. Mar. 12, 2007) (case below 2004-SOX-24), the Defendant filed a motion for summary judgment arguing that the Plaintiff did not engage in protected activity because he could not have reasonably believed that the Defendant was engaging in fraud. The court denied the motion. Although the Plaintiff had admitted that "he had neither personal knowledge of the fraud nor the educational background to discover the fraud on his own, there is no requirement that a whistleblower have any particular expertise. Plaintiff understood the basic accounting principles that [the Director of Accounting Research] believed were violated while compiling a fraudulent financial statement. Plaintiff's lack of expertise was supplemented by the credibility [the Director of Accounting Research] derived from his position as director of financial accounting. Further, Plaintiff was shown emails which confirmed [the Director of Accounting Research]s allegations. In short, a fair and reasonable juror could find that Plaintiff reasonably believed that the company was engaging in accounting practices that needed to be corrected before its financial statements misled shareholders." Slip op. at 12.

PROTECTED ACTIVITY; ALLEGATION THAT COMPLAINANT NEVER SPECIFICALLY ALLEGED SECURITIES OR ACCOUNTING FRAUD AND THAT THE COMPLAINTS WERE TOO VAGUE; REASONABLE BELIEF TEST

In Collins v. Beazer Homes USA, Inc. , __ F.Supp.2d __, 2004 WL 2023716 (N.D.Ga. Sept. 2, 2004), the Defendants moved for summary judgment alleging that the Plaintiff did not engage in protected activity within the meaning of the SOX whistleblower provision where the Plaintiff never specifically alleged securities or accounting fraud and where the complaints were allegedly too vague. The Defendants cited in contrast the type of disclosures made by Sherron Watkins regarding Enron's accounting practices. In response, the Plaintiff pointed to four specific disclosures which were allegedly exposed "attempts to circumvent the company's system of internal accounting controls and therefore state a violation of Section 13 of the [Securities] Exchange Act." The allegations were that the Respondent knowingly overpaid invoices to an advertising agency, that the ad agency was being used because of a personal relationship between management and the agency, that sales agents who were friends of the Director of Sales were being overpaid, and that kickbacks were being paid to lumber suppliers.

The court, although acknowledging that it was a close case, found that a genuine issue of material fact existed as to whether the Plaintiff had engaged in protected activity (especially given the lack of caselaw guidance and the broad remedial purpose of the SOX). The mere fact that they did not rise to level of the complaints raised by Ms. Watkins regarding Enron was not determinative. Rather, the test was a "reasonable belief" test. The court rejected the Defendant's assertion that the complaints were too vague to constitute protected activity, noting that the Defendants had taken the allegations seriously and investigated the claims, citing in that respect legislative history to the effect that "any type of corporate or agency action taken based on the information would be strong indicators of a reasonable belief." The court found that since reasonable jurors could find by a preponderance of the evidence that the Plaintiff engaged in protected activity, the Defendants were not entitled to summary judgment as a matter of law.

PROTECTED ACTIVITY; REVEALING OR REITERATING INVOLVEMENT IN AN INVESTIGATION MONTHS AFTER THE INVESTIGATION WAS CONCLUDED FOUND NOT TO BE PROTECTED ACTIVITY UNDER SOX

In Sussberg v. K-Mart Holding Corp. , No. 05-70378 (E.D.Mich. Nov. 15, 2006), the court did not reach the issue of whether the Plaintiff's reporting of allegations that the Defendant's Vice-President for Ladies' Wears was accepting kickbacks from vendors was protected activity under SOX because it granted summary judgment based on failure to establish that such activity was a contributing factor in his termination. The court did, however, hold that the Complainant's revealing or reiterating to managers that he had a part in the investigation of the Vice-President, five months after the Vice-President had been fired, could not "be said to be related to protecting shareholders from fraud." Slip op. at 17.

PROTECTED ACTIVITY; ANTICIPATED TESTIMONY BEFORE THE SEC IS POSSIBLY PROTECTED ACTIVITY UNDER SECTION 1514A(a)(2)

In Romaneck v. Deutsche Asset Management , No. C-5-2473 (N.D.Cal. Aug. 17, 2006), the Defendant sought summary judgment on the ground that the Plaintiff could not establish that he engaged in protected activity based on his anticipated testimony before the SEC, relying on the ARB's decision in Henrich v. Ecolab, Inc. , ARB No. 05-030, ALJ No. 2004-SOX-51 (ARB June 29, 2006), in which the ARB held that "[W]here a complainant refuses to act but does not relate such refusal to a concern about potential fraud or another possible SOX violation, such refusal does not necessarily 'provide information' about a SOX violation." The court denied the motion, finding that the ARB's holding only went to the "provide information" prong of the SOX whistleblower provision at 18 U.S.C. § 1514A(a)(1), and that the SOX also protects employees who "file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of" securities laws, 18 U.S.C. § 1514A(a)(2).

PROTECTED ACTIVITY; ACTUAL VIOLATION NEED NOT BE SHOWN, BUT GENERAL INQUIRIES ARE INSUFFICIENT; MUST IMPLICATE SUBSTANTIVE LAW PROTECTED IN SOX "DEFINITELY AND SPECIFICALLY"

Although decided on other grounds, the court in Bozeman v. Per-Se Technologies, Inc. , 1:03-CV-3970 (N.D.Ga. Sept. 12, 2006), described the nature of protected activity under SOX:

    SOX protects employees who provide information, which the employee "reasonably believes constitutes a violation" of any SEC rule or regulation. 18 U.S.C. § 1514A(a)(1); Collins , 334 F.Supp.2d at 1376. While a plaintiff need not show an actual violation of law by his employer, or cite a code section he believes was violated, "general inquiries . . . do not constitute protected activity." Id .; Bechtel Constr. Co. v. Sec'y of Labor , 50 F.3d 926, 931 (11th Cir. 1995); see also Lerbs v. Buca Di Beppo, Inc. , 2004-SOX-8, 2004 DOLSOX LEXIS 65, at *33-34 (Dep't Labor June 15, 2004) ("[I]n order for the whistleblower to be protected by [SOX], the reported information must have a certain degree of specificity [and] must state particular concerns, which, at the very least, reasonably identify a respondent's conduct that the complainant believes to be illegal.") (citing Bechtel , 50 F.3d at 931); Bishop , 2006 WL 1460032, at *5 ("An employee can engage in § 1514A protected activity even if the reported conduct did not actually constitute a violation of one of the laws or regulations enumerated in § 1514A(a)(1)."). Protected activity must implicate the substantive law protected in Sarbanes-Oxley "definitively and specifically." American Nuclear Res., Inc. v. United State Dep't of Labor , 134 F.3d 1292, 1295-96 (6th Cir. 1998). It is sufficient that "the individuals to whom [the complaints] were addressed understood the serious nature of [the employee's] allegations." Collins , 334 F.Supp.2d at 1377-78.

Slip op. at 166-167.

PROTECTED ACTIVITY; FRAUD IS AN INTEGRAL ELEMENT OF SOX WHISTLEBLOWER CAUSE OF ACTION; REQUIREMENT OF REASONABLE, OBJECTIVE BASIS FOR SUSPECTING SUCH FRAUD; MATERIALITY

In Livingston v. Wyeth , No. 1:03-CV-00919 (M.D.N.C. July 28, 2006), the court found that protected activity under the SOX whistleblower provisions necessarily includes an element of fraud against shareholders. The court wrote:

Sarbanes-Oxley was enacted to address corporate fraud on shareholders. One way it does so is by protecting employees who report violations of laws that relate to shareholder fraud. It is clear from the plain language of the statute and its legislative history that fraud is an integral element of a whistleblower cause of action. To be protected, the whistleblower must not only subjectively believe that the reported conduct may constitute fraud on shareholders, there must also be a reasonable, objective basis for suspecting such fraud. See, e.g. , S. Rep. No. 107-146, 2002 WL 863249, at *18- 19 (May 6, 2002). The "reasonableness" test used under Sarbanes-Oxley is the same test as that generally used in a variety of legal contexts. See Cong. Rec. S7418, S7420 (daily ed. July 26, 2002), reprinted at 2002 WL 32054527.

 

* * *

To be protected under Sarbanes-Oxley, an employee's disclosures must be related to illegal activity that, at its core, involves shareholder fraud. It may be that the employee need not know precisely what securities law is about to be violated, but there must be some basis for an objectively reasonable belief, considering the employee's experience and knowledge, that the corporation is about to commit wrongdoing.

 

* * *

Information must be sufficiently material to a company's financial picture before it will form the basis for securities fraud. Under Supreme Court authority, for information to be material, there must be "a substantial likelihood that a reasonable shareholder would consider [the matter] important to his decision to invest." TSC Indus., Inc. v. Northway, Inc. , 426 U.S. 438, 449 (1976); see also Basic, Inc. v. Levinson , 485 U.S. 224, 231-32 (1988). Given the importance of "materiality" under the securities laws, Administrative Law Judges have rejected whistleblower retaliation claims where the information disclosed would not be sufficiently material to shareholders.

Slip op. at 19, 21, 22-23. In regard to the materiality requirement, the court took notice of the ALJ decisions in Minkina v. Affiliated Physician's Group , 2005-SOX-19 (ALJ Feb. 22, 2005) (complaint about poor air quality); Nixon v. Stewart & Stevenson Servs., Inc. , 2005-SOX-1 (ALJ Feb. 16, 2005) (failure to disclose potential violations of environmental regulations); and Harvey v. Safeway, Inc. , 2004-SOX-21 (ALJ Feb. 11, 2005) (complaint of wage irregularities under the FLSA). In Livingston , the Complainant had complained to company officials that the Defendant's certification of training programs to the FDA required under a consent decree concealed training deficiencies. The court found that the Plaintiff's concerns were not reasonable for an employee in his position, who knew that the deficiencies could be adequately addressed if a legacy plan were adopted for closing any compliance gaps. In addition, the court found that the Plaintiff's contention that the potential financial impact of the training deficiencies should have been reported to shareholders were not sufficiently material to the Defendant's financial picture to form the basis for securities fraud. Finally, the court found that even assuming that the Plaintiff had a subjective belief that training gaps might increase the chances of adulterated product being released to the public, that belief was not objectively reasonable based on the evidence adduced.

PROTECTED ACTIVITY; MUST IMPLICATE THE SUBSTANTIVE LAW PROTECTED IN SOX DEFINITIVELY AND SPECIFICALLY; MERE ALLEGATION OF FAILURE TO FOLLOW PLAINTIFF'S INVESTMENT ADVICE DOES NOT MEET SINE QUA NON OF AN ALLEGATION OF WRONGDOING

In Fraser v. Fiduciary Trust Co. , 417 F.Supp.2d 310 (S.D.N.Y. 2006), the court described protected activity under SOX as follows:

SOX protects employees who provide information, which the employee "'reasonably believes constitutes a violation'" of any SEC rule or regulation or "'Federal law relating to fraud against shareholders'." Id . (citing 18 U.S.C. § 1514A(a)(1)). While a plaintiff need not show an actual violation of law, id , or cite a code section he believes was violated (June 23, 2005 Decision and Order, at 16), "'general inquiries . . . do not constitute protected activity'." Id . (citing cases); see also Lerbs v. Buca Di Beppo, Inc. , 2004-SOX-8, 2004 DOLSOX LEXIS 65, at **33-34 (Dep't Labor June 15, 2004) ("[I]n order for the whistleblower to be protected by [SOX], the reported information must have a certain degree of specificity [and] must state particular concerns which, at the very least, reasonably identify a respondent's conduct that the complainant believes to be illegal." (citation omitted). Thus, "[p]rotected activity must implicate the substantive law protected in Sarbanes-Oxley 'definitively and specifically'" (June 23, 2005 Decision and Order, at 16 (citation omitted)).

Slip op. at 17. In Fraser , the Plaintiff contended that he engaged in protected activity when he prepared and sent a confidential memo to the H.R. Department when he sent e-mails to other company officials suggesting that large losses across accounts could have been avoided if a portfolio manager for an ERISA account had heeded the Plaintiff's advice for investment strategy and not taken a cavalier attitude toward the Plaintiff's credit research. The confidential memo also accused the portfolio manager of wanting to conceal and falsify year end performance results. Similarly, the Plaintiff contended that he engaged in protected activity when he sent an e-mail to company officials contending that investment performance had suffered because of a failure to implement the Plaintiff's recommendation to establish a long/short high-yield investment fund for clients. The court found that such conduct did not alert the Defendants that the Plaintiff believed the company was violating any federal rule or law related to fraud on shareholders. Slip op. at 18-19. The court found that these activities did not rise to the level of whistleblowing, and were "more reflective of Fraser's complaints that Defendants did not follow his investment advice. They cannot be read as allegations of wrong-doing, the sine qua non of whistleblowing." Slip op. at 23.

The court, however, did permit the Plaintiff to proceed on the portion of his complaint alleging that he had complained to the company President that an e-mail he had sent recommending reduction of holdings of WorldCom stock be distributed firm wide had been ignored. The court found that the Defendants could not establish as a matter of law that this conduct was not protected activity in view of the fact that only clients of the New York office received the prudent advice to timely sell WorldCom stock, whereas Los Angeles clients suffered losses relating to that holding. The court considered it a close call, but held that this e-mail was sufficient to satisfy the pleading requirements for a SOX whistleblowing claim. The court noted that the Plaintiff had contended that this instance related to a provision of the Investment Advisers Act of 1940 which prohibits fraudulent conduct against shareholders.

PROTECTED ACTIVITY; COMPLAINT MUST PLEAD FACTS THAT WOULD OBJECTIVELY SUPPORT A BELIEF THAT FRAUD HAD OCCURRED TO SURVIVE A 12(b)(6) MOTION

In Bishop v. PCS Administration (USA), Inc. , No. 1:05-CV-05683 (N.D.Ill. May 23, 2006), the Defendants filed a motion to dismiss under FRCP 12(b)(6). Accepting the facts as alleged in the complaint as true for purposes of ruling on the motion, the court considered whether the Plaintiff, an in-house attorney who had been informed that she would be made the Compliance Officer for the Defendant, engaged in protected activity under the SOX whistleblower provision when she advocated for a compliance program that would directly involve upper management based on her interpretation of the Federal Sentencing Guidelines. The Plaintiff contended that creating a sham compliance program would perpetrate a fraud on shareholders. The court, however, found that the Plaintiff had not pleaded facts that would objectively support a belief that fraud had occurred - thus she had not engaged in protected activity and the cause of action must be dismissed.

The court described protected activity under SOX:

An employee can engage in § 1514A protected activity even if the reported conduct did not actually constitute a violation of one of the laws or regulations enumerated in § 1514A(a)(1). It is sufficient that the employee "reasonably believes" the conduct constituted such a violation. This reasonableness test "is intended to impose the normal reasonable person standard used and interpreted in a wide variety of legal contexts. The threshold is intended to include all good faith and reasonable reporting of fraud, and there should be no presumption that reporting is otherwise, absent specific evidence." The reasonable belief must be both subjectively believed and objectively reasonable. The employee's access to information, experience, and background are considerations in determining whether he or she had a reasonable belief.

Slip op. at 14-15 (citations omitted). The court distinguished several ALJ decisions cited by the Plaintiffs: (1) Morefield v. Exelon Services, Inc. , 2004-SOX-2 (ALJ Jan. 28, 2004) (ALJ's ruling was that actions did not loose protection because the whistleblower was successful in stopping the fraud before it was perpetrated on shareholders, whereas here the Plaintiff's activity only involved legal disagreements over how to establish procedures for preventing and discovering fraudulent conduct); (2) Getman v. Southwest Securities, Inc. , 2003-SOX-8 (ALJ Feb. 2, 2004) (ALJ's decision was overturned on appeal by the ARB; dictum in ARB decision indicated that an actual violation was not necessary as long as the employee reasonably believed that the corporation was about to commit fraud against shareholders or some other securities violation). The court noted that the ALJ decision in Marshall v. Northrup Gruman Synoptics , 2005-SOX-8 (ALJ June 23, 2005), supported requiring that there be a relationship to an actual violation of one of the laws or regulations enumerated in the SOX whistleblower statute. The court concluded:

    The plain language of § 1514A(a)(1) refers to providing information that is reasonably believed to "constitute[ ] a violation" of one of the enumerated statutes or regulations. The word "constitute" should be understood to mean an actual violation has occurred, which could include an attempt (in the criminal sense). To the extent there is a reasonable (but incorrect) belief, it must be a reasonable belief that an actual violation has occurred or is being attempted. A reasonable belief that implementing certain procedures will be insufficient to prevent violations is not, by itself, a reasonable belief that a violation has occurred or been attempted. Plaintiff must rely on something more than just complaints that the compliance program itself was legally deficient so that the potential and risk of violations or penalties was present.

Slip op. at 21 (footnote omitted). The court stated in regard to the case sub judice that "[i]f the law itself does not establish that a deficient compliance program is a violation of the pertinent statutes or regulations concerning fraud, then the subjective belief of plaintiff (an attorney practicing before the SEC) was not objectively reasonable." Slip op. at 22. The court found nothing in the SOX or the Sentencing Guidelines that mandated ex ante any particular form of corporate compliance program, and concluded that failure to adopt the provisions of the Federal Sentencing Guidelines compliance program could not objectively be regarded as fraudulent within the meaning of Section 1514A. The court summarized by focusing on the need for the pleading of fraud against shareholders:

    All the statutes and regulations referenced in § 1514A(a)(1) are ones setting forth fraud. The phrase "relating to fraud against shareholders" in this provision must be read as modifying each item in the series, including "rule or regulation of the Securities and Exchange Commission." Although other aspects of the retaliation claim need not be pleaded with particularity, Rule 9(b) does require that the fraud violation itself be pleaded with particularity.

Slip op. at 23 (citations omitted).

 

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ADMINISTRATIVE REVIEW BOARD DECISIONS

PROTECTED ACTIVITY; RESPONDENT IS NOT SHIELDED FROM LIABILITY UNDER THE SOX WHISTLEBLOWER PROVISION MERELY BECAUSE IT WAS ALREADY AWARE OF PROBLEMS REPORTED BY THE COMPLAINANT

POSSIBILITY THAT ERRONEOUS FINDING BY ALJ AS TO WHETHER CERTAIN ACTIVITY WAS PROTECTED UNDER SOX MAY HAVE LED TO OTHER ERRONEOUS FINDINGS BY THE ALJ WAS NOT CONSIDERED BY THE ARB ON APPEAL WHERE RELIEF AWARDED TO COMPLAINANT ALREADY SUFFICIENT TO MAKE HER WHOLE

In Gunther v. Deltek, Inc. , ARB Nos. 13-068, -069, ALJ No. 2010-SOX-49 (ARB Nov. 26, 2014), the ARB noted that the ALJ had erred in finding that concerns raised by the Complainant with management could not be protected activity because management was aware of the problems. See Inman v. Fannie Mae , ARB No. 08-060, ALJ No. 2007-SOX-47, slip op. at 7 (ARB June 28, 2011). The Complainant contended on appeal that this error may have led to other errors concerning adverse action and dismissal of certain named individuals. The ARB, however, found it unnecessary to address these matters as the relief awarded to the Complainant made her whole.

COLLATERAL ESTOPPEL DOES NOT PREVENT ADJUDICATION OF ISSUE OF PROTECTED ACTIVITY WHERE, ALTHOUGH THAT ISSUE HAD BEEN LITIGATED REGARGING PRE-DISCHARGE ACTIVITY, THE INSTANT COMPLAINT WAS BASED ON POST-DISCHARGE COMPLAINTS FILED WITH OSHA

In Levi v. Anheuser Busch Inbev , ARB No. 13-047, ALJ No. 2012-SOX-39 (ARB July 24, 2014), the Complainant filed a SOX complaint alleging that a pension plan determination that set the termination date for calculation of his pension on the final day he was actually paid, rather than the later effective date of his termination, constituted retaliation for his earlier whistleblowing activity against the Respondent. The ALJ dismissed the complaint for two reasons: (1) that collateral estoppel barred the Complainant from re-litigating whether he engaged in protected activity, and (2) the Complainant failed to offer evidence that he suffered an adverse personnel action when receiving his pension determination. The ARB found that the ALJ correctly determined that the complaint was precluded under collateral estoppel to the extent that the complaint was based on protected activity that occurred prior to the Complainant's discharge, an issue that had previously been litigated between the parties. The ARB, however, found that the Complainant had also asserted that his post-discharge filing with OSHA of whistleblower complaints constituted protected activity. The ARB found that this allegation of protected activity was not barred by collateral estoppel.

The ARB, however, found that the uncontroverted evidence of record showed that the effective date of the Complainant's discharge did not control the amount of the pension benefits; rather, the pension plan calculated benefits based on days actually paid as an employee. The ARB affirmed the ALJ's finding that the Complainant had not established an adverse action.

One member of the Board concurred. She concluded that the substantive protected activity alleged by the Complainant in his complaint and his amended complaint stemmed from pre-discharge activity, and therefore collateral estoppel and res judicata clearly applied to bar the instant complaint. This member of the Board would not have reached the adverse action issue.

PROTECTED ACTIVITY; SUBSTANTIAL EVIDENCE SUPPORTED ALJ'S FINDING THAT COMPLAINANT DID NOT HAVE A REASONABLE BELIEF THAT THE ACTION SHE REFUSED TO TAKE WAS A SOX VIOLATION; COMPLAINANT'S ACTUAL CONCERN WAS VIOLATION OF COMPANY POLICY

In Dampeer v. Jacobs Technology - Engineering and Science Group , ARB No. 12-006, ALJ No. 2011-SOX-33 (ARB May 31, 2013), the ARB affirmed the ALJ's determination that the Complainant failed to demonstrate that she engaged in protected activity under the SOX. In June 2010, the Complainant refused to verify a job title or coding change on an employee's personnel profile because she believed it would be against company policy. Later, in August 2010, the Complainant's supervisor informed her that the employee's personnel file was part of an internal company "Sarbanes-Oxley" audit and asked the Complainant to verify the employee's job title or coding change, after assuring the Complainant that it was not against company policy to do so. The Complainant again refused, testifying that she did so because she still believed it would be against company policy and also because she believed to alter a file subject to a "Sarbanes-Oxley" audit would be illegal. Subsequently, the Complainant lost her job as part of a company reduction in force. The ALJ found that the Complainant failed to establish that her refusal to verify the job profile was based on an actual subjective or objective reasonable and genuine belief that the verification would constitute a violation of any conduct prohibited by SOX Section 806. The ALJ noted that the Complainant's initial concern in June 2010 was only over potentially violating an internal company policy, and that it was not until two months later that she alleged any concern that the verification would constitute a SOX violation. Given this background, the ALJ was not convinced of the reasonableness of the Complainant's alleged concern that to do so would constitute a SOX violation. The ARB found that this was a close case, but that substantial evidence supported the ALJ's finding that the Complainant's actual concern about verifying the job title or coding change pertained to an internal company policy issue, not to a SOX violation concern.

PROTECTED ACTIVITY UNDER SOX; REPORT OF MISSTATEMENTS IN DRAFT FORM 10-K; REPORTING AN ACTUAL VIOLATION AT TIME OF REPORTING IS NOT REQUIRED; SOX PROTECTION INCLUDES BELIEF THAT A VIOLATION IS ABOUT TO OCCUR OR IS IN THE STAGES OF OCCURRING

In Barrett v. e-Smart Technologies, Inc. , ARB Nos. 11-088, 12-013, ALJ No. 2010-SOX-31 (ARB Apr. 25, 2013), the ALJ held that the Complainant engaged in protected activity because he reported misstatements and omissions in an SEC Form 10-K draft that he reasonably believed would mislead investors by distorting the company's current capabilities. The Respondent claimed on appeal that the Complainant's complaints about the 10-K were not protected because they raised concerns about future SOX violations. The Respondent argued that a SOX complainant's beliefs must involve an actual violation occurring at the time the employee raises the concern. The ARB rejected this contention, stating that "reporting an actual violation is not required. A complainant can engage in protected activity when he reports a belief of a violation that is about to occur or is in the stages of occurring." USDOL/OALJ Reporter at 6 (citation omitted).

SUFFICIENCY OF COMPLAINT; ELEMENT OF PROTECTED ACTIVITY; BLANKET ASSERTION THAT COMPLAINANT ENGAGED IN PROTECTED ACTIVITY INSUFFICIENT TO PLEAD CAUSE OF ACTION UNDER SOX

In Pik v. Credit Suisse AG , ARB No. 11-034, ALJ No. 2011-SOX-6 (ARB May 31, 2012), the Complainant was the resident of a foreign country employed by a foreign company operating in that country, but who alleged that he was managed by staff from New York City. The Complainant's original complaint filed with OSHA contained no factual allegations addressing whether he had engaged in SOX protected activity. The ALJ issued an Order to Show Cause why the complaint should not be dismissed based on a failure to allege protected activity. In response, the Complainant merely provided a general, conclusory statement that the Respondent retaliated against him for "reporting fraud" to "management" regarding false market data. The ARB agreed with the ALJ that neither the complaint nor the response to the Order to Show Cause sufficiently indicated what information the Complainant might have provided to management that constituted SOX protected activity. The ARB noted that the Complainant appeared pro se and was entitled to some leeway, but that "a complainant must at least point to facts that fairly identify the activity protected by the SOX statute, particularly where the issue of extraterritoriality must be resolved." USDOL/OALJ Reporter at 5. The ARB found that the allegation was nothing more than a blanket assertion that the Complainant engaged in SOX protected activity.

PROTECTED ACTIVITY; COMPLAINANT IS NOT REQUIRED TO ESTABLISH FRAUD OR ACTUAL VIOLATION TO MEET REASONABLE BELIEF ELEMENT OF SOX SECTION 806 COMPLAINT

In Zinn v. American Commercial Lines Inc. , ARB No. 10-029, ALJ No. 2009-SOX-25 (ARB Mar. 28, 2012), the Respondent's business included transportation of various industrial products by barges on waterways using its own or hired tugboats. The Complainant, hired as a corporate attorney, alleged protected activity under SOX Section 806 based on (1) her raising a concern that the Respondent's report in its 10-K Form that it had been upholding safety might be a misrepresentation in view of incident reports indicating that one of its vendors used unlicensed tugboat personnel, and (2) her raising a concern that the Respondent should have filed a Form 8-K announcing the company's appointment of a new general counsel and senior vice president. The ALJ found that this was not protected activity under SOX. The ARB found that the ALJ's conclusions were legal error. The ALJ had determined that the Complainant failed to show that she had a reasonable belief that her employer engaged in violations that related to shareholder fraud, securities fraud, or an actual violation of a specific law. But his decision had been rendered prior to the Board's decision in Sylvester v. Paraxel Int'l LLC , ARB No. 07_123, ALJ Nos. 2007_SOX_39 and 42 (ARB May 25, 2011), in which the ARB held that an allegation of shareholder fraud is not a necessary component of protected activity under Section 806 of the SOX; that a SOX complainant need not establish the various elements of securities fraud to prevail on a Section 806 retaliation complaint; and that an employee's whistleblower communication is protected where based on a reasonable, but mistaken, belief that the employer's conduct constitutes a violation of one of the six enumerated categories of law under Section 806.

PROTECTED ACTIVITY; PROTECTED ACTIVITY CONCERNS WHETHER A COMPLAINANT HAS A REASONABLE BELIEF THAT THERE IS A VIOLATION WHEN HE MAKES THE COMMUNICATION, NOT WHETHER HE COMMUNICATES THAT BELIEF TO THE RESPONDENT OR WHETHER HE PUTS THE RESPONDENT ON NOTICE OF PROTECTED ACTIVITY; SUCH NOTICE, HOWEVER, MAY BE RELEVANT TO THE ISSUE OF CAUSATION

In Prioleau v. Sikorsky Aircraft Corp. , ARB No. 10-060, ALJ Nos. 2010-SOX-3 (ARB Nov. 9, 2011), the Complainant was a systems engineer who had numerous job duties, including duties relating to computers and security. The Complainant submitted an internal report to management pointing out that there was a conflict between the Respondent's legal hold policy and its records retention policy of deleting emails after a given number of days. The Complainant pointed out technical issues about complying with legal holds and suggested that subcontractors should also receive legal hold notices. Shortly after returning from scheduled leave, the Complainant was fired. The Complainant filed a SOX whistleblower complaint. Both OSHA and the ALJ summarily dismissed the complaint on the ground that the Complainant had not engaged in protected activity because his internal complaint did not mention fraud, illegal activity, or anything that could reasonably be perceived to be a violation of 18 U.S.C.A. §§ 1341, 1343, 1344 or 1348; any rule or regulation of the Securities and Exchange Commission; or any provision of federal law relating to fraud against shareholders.

On appeal, the ARB found that the ALJ should not have granted summary decision. The ARB indicated that although the Complainant did not mention fraud or violations of the SEC in his internal report, in his OSHA complaint he stated that the combination of the legal hold policy and the conflicting electronic deletion policy "made it clear that the company and its employees may commit fraud." Moreover, the Complainant's training and experience with information technology audits made it clear to him that he was dealing with a SOX internal controls issue that fell under SOX and faulty fraudulent reporting. Moreover, the Complainant stated in his complaint that after making his report to all levels of management, he believed that it would be forwarded to the Respondent's legal and IT departments, and the company that developed the Respondent's computer infrastructure.

Thus, the ARB disagreed with the ALJ's conclusion that, as a matter of law the Complainant did not engage in protected activity because he did not alert the Respondent in his report of any suspected fraud against shareholders. The ARB wrote:

    First, the ALJ erred in finding that that Prioleau's case must be dismissed because protected activity must relate to shareholder fraud. As indicated above, § 1514A prohibits an employer from retaliating against an employee who complains about "any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire, radio, TV fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders." 18 U.S.C.A. § 1514A. As we observed in Sylvester v. Paraxel Int'l LLC , ARB No. 07-123, ALJ Nos. 2007-SOX-039, -42 (May 25, 2011), of the "six categories" set out in SOX § 1514A, "only the last one refers to fraud against shareholders." Sylvester , ARB No. 07-123, slip op. at 19. "In examining the SOX's language, it is clear that a complainant may be afforded protection for complaining about infractions that do not relate to shareholder fraud." Id. at 20.

    Second, the ALJ did not properly undertake the analysis of whether Prioleau reasonably believed that he reported a violation of the Securities and Exchange Act to Sikorsky. The issue whether activity is protected concerns whether a complainant has a reasonable belief that there is a violation when he makes the communication, not whether he communicates that belief to the respondent or whether he puts the respondent on notice of protected activity. The reasonable belief must be both subjective and objective. The Fourth Circuit has stated that the question of "objective reasonableness" is a mixed question of law and fact. Welch v. Chao, 536 F.3d 269, 278 n.4 (4th Cir. 2008). Further, "[o]ften the issue of 'objective reasonableness' involves factual issues and cannot be decided in the absence of an adjudicatory hearing." (citations omitted). Sylvester, ARB No. 07-123, slip op. at 15.

    Objective reasonableness is evaluated based upon the knowledge available to a reasonable person with the same training and experience. Id. at 14. Prioleau argued that someone in his position would know that what he reported constituted a violation that the SOX protected, thus demonstrating the objective reasonableness of his belief. Prioleau submitted evidence demonstrating that he received SOX training in July 2008 (Comp. Br. at 7) and was familiar with SOX provisions requiring certification of a company's financial reporting system. Comp. Br. at 7-8. He alleged that earlier in his career he had participated in an internal audit in preparation for SOX compliance. Complaint at 4. He alleged that as a former IT specialist he had helped design UTC's computer infrastructure and became knowledgeable regarding the impact of automatic scripts on SOX sections 302 and 404, relating to internal controls. Complaint at 5 n.11. These factual allegations are sufficient to create a genuine issue of material fact regarding whether Prioleau had a reasonable belief that his report constituted protected activity.

USDOL/OALJ Reporter at 7-8 (footnotes omitted). In a footnote, the ARB observed that "[a]lthough the complainant does not have to put the employer on notice of protected activity to have engaged in protected activity, whether the employer was put on notice may be relevant to whether it retaliated because the employee engaged in protected activity." Id. at n.4. One member of the ARB dissented on the ground that the Complainant's assertions did not "objectively connect the perceived problem to a 'reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.'" Id. at 15 (quoting Complainant's OSHA complaint).

PROTECTED ACTIVITY; REMOVAL AND TRANSFER OF CONFIDENTIAL AND SENSITIVE INFORMATION IN VIOLATION OF COMPANY POLICY; TENSION BETWEEN SUCH A POLICY AND WHISTLEBLOWER BOUNTY PROGRAMS; WHETHER CONDUCT IS PROTECTED DEPENDS ON WHETHER IT IS THE KIND OF "ORIGINAL INFORMATION" THAT CONGRESS INTENDED TO PROTECT UNDER SUCH PROGRAMS

In Vannoy v. Celanese Corp. , ARB No. 09-118, ALJ No. 2008-SOX-64 (ARB Sept. 28, 2011), the ARB held that the ALJ erred in finding, in a decision granting summary decision in favor of the Respondent, that the Complainant "did not suffer an unfavorable personnel action due to protected activity" because he was terminated due to undisputed evidence that he misappropriated employee personnel information in violation of company policy. The Complainant admitted that he had taken, without permission, business documents related to company operations that contained sensitive personal identifying information of former and current company employees. The information included employee credit card information and personal identifying information such as employee home addresses and social security numbers. The Complainant argued that the purpose of transferring this information to his home computer was to further his IRS Whistleblower program complaint.

The ARB noted legislative history related to Section 806 of the SOX indicating that the provision specifically protected lawful conduct to disclose misconduct, and that although the Complainant's conduct may have violated company policy, local police had investigated the matter but had brought no charges. The ARB then discussed what the ALJ must address in determining whether the taking of information in violation of company policy was protected under the SOX:

    There is a clear tension between a company's legitimate business policies protecting confidential information and the whistleblower bounty programs created by Congress to encourage whistleblowers to disclose confidential company information in furtherance of enforcement of tax and securities laws. Passage of these bounty provisions demonstrate that Congress intended to encourage federal agencies to seek out and investigate independently procured, non-public information from whistleblowers such as Vannoy to eliminate abuses in the tax realm under the IRS Whistleblower program and now in the securities realm with the SEC Whistleblower program recently enacted in 2010. In 2010, the Dodd-Frank Act established the SEC Investor Protection fund, which is to be used to pay whistleblower claims and is funded with monetary sanctions that the SEC collects in a judicial or administrative action, or through certain disgorgements under the Sarbanes-Oxley Act of 2002. Similar to the IRS Whistleblower bounty program that Vannoy pursued, Section 21F(b) of the Dodd-Frank Act provides that the SEC "shall pay" a whistleblower who voluntarily provides original information to the SEC that leads to the successful enforcement of a covered judicial or administrative action and results in certain monetary sanctions.

    Under the SEC bounty program, the whistleblower is entitled to an award of between 10 percent and 30 percent of what the SEC collects in monetary sanctions. However, the whistleblower must provide " original information to the SEC relating to a violation of the securities law." 15 U.S.C. 78u-6 (b)(1) (emphasis added). The Act defines original information as information that: (i) "is derived from the independent knowledge or analysis of the whistleblower ;" (ii) "is not known to the SEC from any other source, unless the whistleblower is the original source of the information;" and (iii) the information "is not derived exclusively from an another allegation contained in a judicial or administrative hearing, in a governmental report, hearig, audit or investigation, or from the news media, unless the whistleblower is a source of the information." 15 U.S.C. 78u-6(a)(3).

    Under the terms of the SEC whistleblower bounty program, Congress anticipated that the whistleblower would provide independently garnered, insider information that would be valuable to the SEC in its investigation. Indeed, the recently issued final rule implementing the SEC bounty program contains a provision prohibiting employers from enforcing or threatening to enforce confidentiality agreements to prevent whistleblower employees from cooperating with the SEC. 17 C.F.R. § 240.21F-17(a).

    The IRS whistleblower bounty program Vannoy used, like the SEC program recently established, reflects Congressional recognition of the notable contributions to law enforcement provided by whistleblowers with non public, inside information. Vannoy's allegations must be viewed in light of these significant enforcement interests. Evidence of record supports Vannoy's allegations that he procured employee data in 2005 and in 2007 as part of his efforts to facilitate his complaint with the IRS as to Celanese's accounting practices. In doing so he sent confidential information by e-mail and created compact discs containing confidential information concerning Celanese employees without the company's permission. Indeed the record shows that some of this information was transferred to a personal computer at Vannoy's home. See supra at 4. Thus the crucial question for the ALJ to resolve with a hearing on remand is whether the information that Vannoy procured from the company is the kind of " original information " that Congress intended be protected under either the IRS or SEC whistleblower programs, and whether the manner of the transfer of information was protected activity within the scope of SOX. These are mixed questions of law and fact for the ALJ to determine in the first instance.

USDOL/OALJ Reporter at 16-17.

PROTECTED ACTIVITY; REPORTED MISCONDUCT DOES NOT NEED TO RELATE TO SHAREHOLDER FRAUD; REPORTING ABOUT A POTENTIAL VIOLATION IS PROTECTED AS LONG AS IT IS REASONABLE TO BELIEVE THAT A VIOLATION IS LIKELY TO HAPPEN

In Vannoy v. Celanese Corp. , ARB No. 09-118, ALJ No. 2008-SOX-64 (ARB Sept. 28, 2011), the ARB held that the ALJ erred in granting summary decision to the Respondent on the ground that the Complainant had not engaged protected activity under the SOX. The ALJ had determined that the Complainant's filing of a "Business Conduct Policy" complaint and a disclosure under the "IRS Whistleblower Rewards Program," and voicing several complaints to his managers about the company's record-keeping of employee credit card processes, were not protected activity because the Complainant "failed to allege a violation that definitively and specifically relates to one of the six enumerated categories considered under 1514A." The ALJ also determined that the Complainant did not have a reasonable belief that the conduct he was reporting violated one of the enumerated categories. The ALJ also found that "reporting to the IRS does not constitute a complaint to a 'federal regulatory or law enforcement agency' as contemplated by 1514(A)." The ALJ found that there was no evidence that the Complainant believed that the Respondent had committed fraud when he made his complaints and that that "the belief and presence of fraud is essential for SOX violations." The ALJ determined that the Complainant failed to allege any violation that would have a "material, adverse outcome to shareholders."

The ARB held that the ALJ erred in ruling that the reported misconduct must relate to shareholder fraud, citing its decision in Sylvester v. Paraxel Int ' l LLC , ARB No. 07-123, ALJ Nos. 2007-SOX-39, -42 (May 25, 2011). The ARB wrote:

    While Vannoy may not have asserted a claim of shareholder fraud specifically, under SOX he need not do so to sustain his claim of a SOX violation. Vannoy's complaints concerning Celanese's business practices, assertions as to misstated financial records, and shortcomings in the company's "accounting controls" support the reasonableness of his belief that the company was engaging in accounting misconduct in violation of SOX. We find that Vannoy alleged facts sufficient to sustain his claim that he engaged in protected activity under Section 806.

USDOL/OALJ Reporter at 11 (footnotes omitted). The ARB noted that the "definitively and specifically" standard had been rejected in Sylvester . The ARB further noted that the ALJ's erred when he based his decision on a finding that the Complainant failed to demonstrate that his belief that the Respondent had committed actual fraud at the time of his protected disclosures.. The ARB quoted its decision in Funke v. Federal Express , ARB No. 09-004, ALJ No. 2007-SOX-43, slip op. 11 (ARB July 8, 2011), where it stated that it had explained in Sylvester that "disclosures concerning violations about to be committed (or underway) are covered as long as it is reasonable to believe that a violation is likely to happen."

PROTECTED ACTIVITY; COMPLAINT FILED WITH THE INTERNAL REVENUE SERVICE THAT INCLUDES COMPLAINTS ABOUT ACCOUNTING IRREGULARITIES IMPLICATING SEC REPORTING RULES

In Vannoy v. Celanese Corp. , ARB No. 09-118, ALJ No. 2008-SOX-64 (ARB Sept. 28, 2011), the Complainant had filed a disclosure under the "IRS Whistleblower Rewards Program." The ALJ found that "reporting to the IRS does not constitute a complaint to a 'federal regulatory or law enforcement agency' as contemplated by 1514(A)." The ARB held that this was error because the SOX does not limit the agencies to which a complainant may report information in furtherance of enforcement of laws that fall within the SOX's coverage. The ARB held that it would be contrary to Congressional intent to construe the SOX whistleblower provision so narrowly that only reports to the SEC would warrant protection. The ARB found that the IRS complaint included complaints about accounting irregularities that affected the company's reporting requirements under SEC rules. The ARB held "Because there is no limiting language in Section 1514A that precludes complaints to agencies other than the SEC and Department of Labor, we find that in these unique circumstances, Vannoy's complaint to the IRS would fall within SOX's coverage."

PROTECTED ACTIVITY; OBJECTIVE REASONABLENESS STANDARD; ACCOUNTING ISSUES ON WHICH REASONABLE MINDS MAY DIFFER

PROTECTED ACTIVITY; MATERIALITY ELEMENT OF FRAUD NEED NOT BE ALLEGED FOR A SOX SECTION 806 COMPLAINT; EVEN IF MATERIALITY IS A THRESHOLD, OPENING OF EXTERNAL AND INTERNAL INVESTIGATIONS IS EVIDENCE OF MATERIALITY

PROTECTED ACTIVITY; REASONABLENESS OF COMPLAINANT'S POSITION ON ACCOUNTING PRACTICE IS NOT NECESSARILY UNDERMINED BY SEC FINDING APPROVING THAT PRACTICE

In Menendez v. Halliburton, Inc. , ARB Nos. 09-002, -003, ALJ No. 2007-SOX-5 (ARB Sept. 13, 2011), the ARB affirmed the ALJ's finding that the Complainant engaged in protected activity when he alleged violations of SEC rules concerning revenue recognition and joint venture accounting practices to his supervisors, the SEC, and the Board of Directors' Audit Committee. On appeal, the Respondent contended that the ALJ had erred by failing to properly evaluate the objective reasonableness of the Complainant's belief that the Respondent had violated SEC rules. The ARB found that the ALJ had employed the correct standard: an employee's reasonable belief must be both subjectively and objectively reasonable, and the determination of whether a whistleblower's belief is objectively reasonable is based on the knowledge available to a reasonable person in the circumstances with the employee's training and experience. The ARB found that the ALJ had considered the testimony of numerous witnesses in finding that the Complainant had raised issues on which reasonable minds may differ, and deferred under the substantial evidence standard of review to the ALJ's finding that the Complainant's belief was objectively reasonable.

The Respondent also contended that the ALJ should have considered the materiality of the issues raised by the Complainant. The ARB, however, noted that it had recently explained in Sylvester v. Parexel International LLC , ARB No. 07-123, ALJ Nos. 2007-SOX-39 and 42 (ARB May 25, 2011), that "a complainant need not allege the substantive elements of fraud, including materiality, to warrant Section 806 protection; the complainant need only have a reasonable belief that the activity alleged constitutes fraud." USDOL/OALJ Reporter at 13. The ARB further held that even if a materiality threshold existed, "[h]ad Menendez's complaints been immaterial or unreasonable, they would not have warranted one external and two internal investigations." Id. (footnote omitted).

Finally, the ARB ruled that the reasonableness of the Complainant's position was "not necessarily undermined by the fact that the SEC ultimately approved Halliburton's accounting methods."

PROTECTED ACTIVITY; REPORT OF MAIL FRAUD BY THIRD PARTY

In Funke v. Federal Express Corp. , ARB No. 09-004, ALJ No. 2007-SOX-43 (ARB July 8, 2011), the ARB considered whether the Complainant, a FedEx courier, engaged in protected activity under SOX, 18 U.S.C.A. § 1514A, when she alerted dispatchers, customer service representatives, her manager and local law enforcement that a third party was using FedEx as a conduit for suspected mail fraud. The ARB found that the statute on its face does not limit its application to reported misconduct of the employer or any other particular perpetrator. The ARB also found that DOL caselaw and regulatory precedent has recognized coverage beyond discrimination against a current employee by a current employer, such as in refusal to hire cases. The ARB found that in drafting § 1514A, Congress expanded traditional employer-employee definitions by subjecting additional entities to liability for retaliation -- not only publicly traded companies -- but "any officer, employee, contractor, subcontractor, or agent of such company." The ARB thus held that reports of third-party conduct, which an employee reasonably believes constitutes a violation of the laws listed under § 1514A, constitutes SOX-protected activity.

PROTECTED ACTIVITY; REPORT TO NON-MANAGEMENT OFFICIALS
PROTECTED ACTIVITY; REPORT TO LOCAL RATHER THAN FEDERAL OFFICIALS

In Funke v. Federal Express Corp. , ARB No. 09-004, ALJ No. 2007-SOX-43 (ARB July 8, 2011), the ARB considered whether the Complainant, a FedEx courier, engaged in protected activity under SOX, 18 U.S.C.A. § 1514A, when she alerted dispatchers, customer service representatives, her manager and local law enforcement that a third party was using FedEx as a conduit for suspected mail fraud. The ARB held that reports of third-party conduct, which an employee reasonably believes constitutes a violation of the laws listed under § 1514A, constitutes SOX-protected activity.

The Respondent argued that the Complainant's disclosures to her dispatchers were not covered by the SOX whistleblower provision because the dispatchers had no supervisory authority over her. The ARB found, however, that the SOX whistleblower provision covers employees who report misconduct not only to supervisors but also to "such other person working for the employer who has the authority to investigate, discover, or terminate misconduct." 18 U.S.C.A. § 1514A(a)(1)(C). The ARB noted that the Complainant had argued that the Respondent's written policies directed a courier who encounters suspicious activity to "notify your manager or Dispatch" and "[y]our manager or Dispatch" will notify security officials.

The Respondent also argued that that the Complainant did not satisfy the notice requirement of § 1514A because she reported the third party's suspicious activity to a county sheriff's department rather than "federal law enforcement" as required by the statute. The ARB first found that the Complainant's prior awareness of an investigation of the third party in which local officials had brought in federal authorities gave her a reasonable belief that federal officials would become involved. The ARB also found that § 1514A protects reports of covered misconduct to local or state law enforcement, as well as federal law enforcement - because the statute was unclear as to whether it covered only federal authorities and because it was common sense that Congress intended to protect disclosures to "law enforcement" given the remedial nature of the statute.

PROTECTED ACTIVITY; COMPLAINANT NEED NOT WAIT UNTIL A LAW HAS ACTUALLY BEEN BROKEN

In Funke v. Federal Express Corp. , ARB No. 09-004, ALJ No. 2007-SOX-43 (ARB July 8, 2011), the ARB found that the ALJ erred in his conclusion that the complainant must believe the reported violation is ongoing. The ARB stated that, as it explained in Sylvester v. Paraxel Int'l , ARB No. 07-123, ALJ Nos. 2007-SOX-039, -042 (ARB May 25, 2011) (en banc), "disclosures concerning violations about to be committed (or underway) are covered as long as it is reasonable to believe that a violation is likely to happen. Such a belief must be grounded in facts known to an employee, but an employee need not wait until a law has actually been broken to register a concern." USDOL/OALJ Reporter at 11 (footnotes omitted).

PROTECTED ACTIVITY; REMAND BASED ON SYLVESTER ; FACT THAT EMPLOYER ALREADY KNEW ABOUT PROBLEMS REPORTED BY COMPLAINANT DOES NOT CAUSE THE REPORT NOT TO BE PROTECTED UNDER SOX SECTION 806

In Inman v. Fannie Mae , ARB No. 08-060, ALJ No. 2007-SOX-47 (ARB June 28, 2011), problems with Fannie Mae's amortization integration modeling system (AIMS) were identified by an oversight agency as the cause of internal control weaknesses. Fannie Mae and the oversight agency agreed to eliminate AIMS and restate certain accounting information on a new accounting system. Fannie Mae announced to the public that its financial statements and auditor's reports from January 2001 through the second quarter of 2004 could not be relied upon. Subsequently the Complainant was hired as a Senior Manager to develop an updated accounting and reporting process. During the Complainant's employment, AIMS was still used to close out Fannie Mae's books. The Complainant reported what he believed to be AIMS errors to management -- including a $52.4 million expense overstatement and a $2.6 billion anomalous income result -- and recommended that a White Paper on the problem be revised. The Complainant was given an unfavorable performance review and was later discharged. His SOX complaint was dismissed on summary decision by the presiding ALJ, who applied the "definitive and specific" standard for protected activity that had been articulated in ARB decisions. The ALJ also dismissed the complaint because it had not specified that the events reported by the Complainant constituted evidence of fraud. The ARB found that the ALJ's grant of summary decision was error based on its recent decision in Sylvester v. Paraxel Int'l , ARB No. 07-123, ALJ Nos. 2007-SOX-39, -42 (ARB May 25, 2011) (en banc). In Sylvester , the ARB rejected the "definitive and specific" standard, finding that it was in potential conflict with the express statutory authority of section 1514A. The ARB also explained in Sylvester that an allegation of fraud is not a necessary component of protected activity under Section 806 of the SOX. The ARB found that the ALJ erred in concluding that the complaint was deficient because the Complainant had not informed the Respondent that its actions could adversely affect the investing public. The ALJ also erred, the ARB stated, when he appeared to indicate that the Complainant could not prevail because the Respondent was already aware of the concerns he was raising. The ARB stated that "neither the SOX nor its implementing regulations indicate that an employee does not engage in protected activity when he informs his employer about violations of which the employer is already aware." The ARB remanded the case to the ALJ for further proceedings.

PROTECTED ACTIVITY; ALJ FINDING THAT MERELY RAISING ACCOUNTING IRREGULARITIES IS NOT PROTECTED ACTIVITY BASED ON "DEFINITIVELY AND SPECIFICALLY" STANDARD LEADS TO REMAND BASED ON SYLVESTER

In Mara v. Sempra Energy Trading, LLC , ARB No. 10-051, ALJ No. 2009-SOX-18 (ARB June 28, 2011), the ALJ employed the standard that, for an employee's activity to be protected, it "must relate 'definitively and specifically' to the subject matter of the particular statute under which protection is afforded." The ALJ found that the Complainant's raising of accounting irregularities was not sufficient in itself to establish protected activity under SOX. The ARB remanded based on its recent decision in Sylvester v. Paraxel Int'l , ARB No. 07-123, ALJ Nos. 2007-SOX-039, -042, slip op. at 17 (ARB May 25, 2011) (en banc), in which the ARB rejected the "definitive and specific" standard.

PROTECTED ACTIVITY; CONVEYENCE OF REASONABLENESS OF BELIEF NOT REQUIRED TO SUPPORT CLAIM; ACTUAL VIOLATION NEED NOT HAVE ALREADY TAKEN PLACE; "DEFINITIVE AND SPECIFIC" STANDARD HAS BEEN MISAPPLIED; FRAUD AGAINST SHAREHOLDERS VERSUS GENERAL CORPORATE FRAUD; SOX COMPLAINT NEED NOT ESTABLISH ELEMENTS OF CRIMINAL FRAUD OR QUANTUM OF MATERIALITY

In Sylvester v. Parexel International LLC , ARB No. 07-123, ALJ Nos. 2007-SOX-39 and 42 (ARB May 25, 2011), the Respondent was a publicly traded company that tests drugs for drug manufacturers and other clients. The Respondent consistently reported to shareholders that it strictly adheres to the FDA's "Good Clinical Practice" (GCP) standards. One Complainant worked as a Case Report Forms Department Manager, and one Complainant worked as a Clinical Research Nurse. Both alleged that they were discharged in retaliation for reporting clinical research fraud (failure to adhere to GCP standards). The ALJ granted dismissal of the complaints on the ground that the Complainants' OSHA complaints failed to establish subject matter jurisdiction under the SOX because those complaints failed to allege protected activity under SOX Section 806. The ARB decided the appeal en banc to clarify several areas of SOX adjudication.

Subject matter jurisdiction

Initially, the ARB found that the ALJ erred in characterizing the issue of whether the Complainants engaged in protected activity as an issue involving subject matter jurisdiction under FRCP 12(b)(1). The ARB noted that subject matter jurisdiction - which is not particularly onerous to establish - concerns a tribunal's power to hear a case - a separate issue from the issue of whether a complainant's actions are covered as protected activity. The ARB found that subject matter jurisdiction clearly existed because the Complainants had filed complaints alleging that the Respondent violated the SOX by discharging them from employment. The ARB suggested that the ALJ's 12(b)(1) analysis, however, was essentially a 12(b)(6) analysis under a different label.

Heightened pleading standards for federal pleadings do not apply; ALJs should freely grant amendments

In regard to the ALJ's consideration of the matter, in effect, under FRCP 12(b)(6) (failure to state a claim upon which relief can be granted), the ARB found that the ALJ erred in applying the pleading standard for complaints initiating a federal court action. Rather, the ARB observed that SOX complaints are initiated before OSHA, and if the federal court pleading standard was applied, a SOX complainant would have to be mindful of those pleading requirements when first filing the complaint with OSHA. The ARB held that "SOX claims are rarely suited for Rule 12 dismissals," given that they inherently involve issues of fact. The ARB held that "ALJs should freely grant parties the opportunity to amend their initial filings to provide more information about their complaint before the complaint is dismissed, and dismissals should be a last resort. Dismissal is even less appropriate when the parties submit additional documents that justify an amendment or further evidentiary analysis under the ALJ rules governing motions for summary decision." USDOL/OALJ Reporter at 13. The ARB limited its ruling to SOX whistleblower cases, and did not voice an opinion on the application of federal pleading standards on other whistleblower statutes within the ARB's scope of authority.

Reasonable belief standard does not include a requirement that a complainant actually convey the reasonableness of the belief to management or the authorities

In his decision, the ALJ wrote:

    Complainants' many explanations and conclusory assertions in their complaints which attempt to expand or elaborate the scope of their actual reports of clinical fraud, which they allege comprise protected activity, to establish a connection with shareholder fraud are immaterial as a matter of law. The relevant inquiry is not what Complainants have alleged or argued in their complaints, but what Complainants actually communicated to Respondent prior to their respective terminations as alleged in their pleadings. Until the allegedly protected a activities are shown to have a sufficiently definitive and specific relationship to any of the listed categories of fraud or securities violations under 18 U.S.C. § 1514A(a)(1), what Complainants might have believed or been told by Respondent regarding any relationship of such false reporting to SOX is irrelevant and immaterial to the legal sufficiency of their complaints under SOX. Complainants' beliefs in such regard would also not be objectively reasonable.

Sylvester v. Parexel International LLC , ALJ Nos. 2007-SOX-39 and 42 (ALJ Aug. 31, 2007) (footnote and citations omitted) (excerpt is from the ALJ's decision, which was not quoted in full in the ARB decision). The ARB found that the ALJ had failed to acknowledge the basic requirements for establishing protected activity described in the statute. The ARB noted that the plain language of the statute provides that where the complainant's asserted protected conduct involves providing information to one's employer, the complainant need only show that he or she "reasonably believes" that the conduct complained of constitutes a violation of the laws listed at Section 1514. 18 U.S.C.A. § 1514A(a)(1). The ARB reiterated it has interpreted the reasonable belief standard to include both a subjective and objective component. The ARB stated that "[t]he reasonable belief standard requires an examination of the reasonableness of a complainant's beliefs, but not whether the complainant actually communicated the reasonableness of those beliefs to management or the authorities." USDOL/OALJ Reporter at 15 (citation omitted). Moreover, the ARB stated that the issue of objective reasonableness often involves issues of fact that cannot be decided in the absence of an adjudicatory hearing.

Thus, the ALJ's discounting as "irrelevant and immaterial" of "what the Complainants 'might have believed or been told by Respondent regarding any relationship of such false [FDA] reporting to SOX' improperly "precluded the Complainants from presenting evidence regarding the reasonableness of their alleged protected activities." Id. at 15-16.

Protected activity need not describe an actual violation that has already taken place

The ALJ had held "until enforcement action is taken," the Complainants' allegations that the Respondent had engaged in fraud were speculative and insufficiently material to the Respondent's financial picture to form a basis for securities fraud or to affect shareholders investment decisions. The ARB found that this was error both because it required a specific reference to fraud and to an illegal act that had already taken place. The ARB stated that "[a] whistleblower complaint concerning a violation about to be committed is protected as long as the employee reasonably believes that the violation is likely to happen. Such a belief must be grounded in facts known to the employee, but the employee need not wait until a law has actually been broken to safely register his or her concern." USDOL/OALJ Reporter at 16 (citations omitted).

"Definitive and specific" evidentiary standard; retreat from Platone ruling

The ARB also found that the ALJ erred in applying caseslaw using the words "definitive and specific" or "definitively and specifically" in determining whether a complainant engaged in SOX-protected activity. The ARB found that use of the words "definitively and specifically" in whistleblower retaliation cases is traced to cases arising under the Energy Reorganization Act, to flesh out a statutory catch-all provision protecting employees who assist or participate in a proceeding or any other action designed to carry out the purposes of that chapter of the ERA or the Atomic Energy Act of 1954. The caselaw construed the phrase to require the employee's actions to relate "definitively and specifically" to nuclear safety. The SOX statute, however, contained no similar language but "instead expressly identifies the several laws to which it applies." The ARB noted that Section 1514A refers to "any provision of Federal law relating to fraud against shareholders" but found that this proviso was far more specific and significantly different from the ERA's catch-all provision. The ARB found importation of the ERA "definitively and specifically" standard to SOX was inapposite and potentially conflicts with the express language of the SOX. The ARB noted that the ARB had introduced the standard in Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), and followed it in several subsequent decisions. The ARB also noted that several circuit courts had deferred to the Platone ruling. But the ARB found that the standard had been imposed in the later cases without reflection and without further analysis of the term's origin or correct application. The ARB held that "the standard announced in Platone has evolved into an inappropriate test and is often applied too strictly." USDOL/OALJ Reporter at 18. Rather, the ARB found that the "critical focus is on whether the employee reported conduct that he or she reasonably believes constituted a violation of federal law." Id. at 19 (emphasis as in original). Thus, in the instant case, the ARB framed the issue before the ALJ as whether the Complainants provided information to the Respondent "that they reasonably believed related to one of the violations listed in Section 806, and not whether that information 'definitively and specifically' described one or more of those violations." Id . The ARB concluded that "[i]t was therefore error for the ALJ to dismiss the complaints in this case for failure to meet a heightened evidentiary standard espoused in case law but absent from the SOX itself." Id.

SOX protected activity does not necessarily have to relate to fraud against shareholders

The ARB also found that the ALJ erred in dismissing the complaints on the ground that the Complainant's had not alleged that they had referred to shareholder fraud when reporting false reporting of clinical data. The ARB stated that "[t]his constitutes error because a complaint of shareholder or investor fraud is not required to establish SOX-protected activity. " Id . The ARB looked to the SOX legislative history to find that it "was implemented to address not only securities fraud (in the aftermath of financial scandals involving Enron, Worldcom, and Arthur Anderson), but also corporate fraud generally." Id . (citation omitted). Applying the statutory interpretation "rule of the last antecedent" the ARB noted that the last of the six categories of laws about which a complaint is protected under SOX Section 806, "any provision of Federal law relating to fraud against shareholders," was the only category that referred to fraud against shareholders. The ARB held that "[i]n examining the SOX's language, it is clear that a complainant may be afforded protection for complaining about infractions that do not relate to shareholder fraud. On their face, mail fraud, fraud by wire, radio, or television, and bank fraud are not limited to frauds against shareholders." Id. at 20. Thus:

    When an entity engages in mail fraud, wire fraud, or any of the six enumerated categories of violations set forth in Section 806, it does not necessarily engage in immediate shareholder fraud. Instead, the violation may be one which, standing alone, is prohibited by law, and the violation may be merely one step in a process leading to shareholder fraud. Additionally, a reasonable belief about a violation of "any rule or regulation of the Securities and Exchange Commission" could encompass a situation in which the violation, if committed, is completely devoid of any type of fraud. In sum, we conclude that an allegation of shareholder fraud is not a necessary component of protected activity under SOX Section 806.

Id . at 21.

Elements of criminal fraud; retreat from Platone "materiality"standard

The ARB also held that some courts had misinterpreted the analysis in Platone as a requirement that SOX complainants must allege the elements of a securities law fraud claim to qualify for SOX Section 806 protection. Thus, caselaw had "merged the elements required to prove a violation of a fraud statute, e.g., materiality and scienter, with the requirements a whistleblower must allege or prove to engage in protected activity." The ARB stated:

    But requiring a complainant to prove or approximate the specific elements of a securities law violation contradicts the statute's requirement that an employee have a reasonable belief of a violation of the enumerated statutes. We agree that a complainant who blows the whistle on activity that approximates the elements of a fraud will be protected under Section 806. But because a complainant need not prove a violation of the substantive laws, we feel a complainant can have an objectively reasonable belief of a violation of the laws in Section 806, i.e., engage in protected activity under Section 806, even if the complainant fails to allege, prove, or approximate specific elements of fraud, which would be required under a fraud claim against the defrauder directly. In other words, a complainant can engage in protected activity under Section 806 even if he or she fails to allege or prove materiality, scienter, reliance, economic loss, or loss causation.

    The purpose of Section 806, and the SOX in general, is to protect and encourage greater disclosure. Section 806 exists not only to expose existing fraud, i.e., conduct satisfying the elements of a fraud claim, but also to prevent potential fraud in its earliest stages. We feel the purposes of the whistleblower protection provision will be thwarted if a complainant must, to engage in protected activity, allege, prove, or approximate that the reported irregularity or misstatement satisfies securities law "materiality" standards, was done intentionally, was relied upon by shareholders, and that shareholders suffered a loss because of the irregularity.

    Section 806's plain language contains no requirement that a complainant quantify the effect of the wrongdoing the respondent committed. We acknowledge that the Board has, in prior rulings, held that to be protected, an employee's communication must relate to a "material" violation of any of the laws listed under SOX. But the Fourth Circuit rejected this notion in Welch . The court stated that, "[a]lthough many of the laws listed in § 1514A of [SOX] contain materiality requirements, nothing in § 1514A (nor in Livingston ) indicates that § 1514A contains an independent materiality requirement" Welch , 536 F.3d at 276 (emphasis added). Accordingly, we do not impose a materiality requirement on the communication that the complainants contend is protected activity.

Id . at 22. The ARB acknowledged that a complainant's complaint might implicate such a trivial matter that it would not be considered protected activity under SOX Section 806, but noted that "[a] wide range of conduct may be important to regulatory bodies or a reasonable investor that falls short of satisfying the rigorous requirements for securities violations."

Separate opinions

Two ARB members wrote separately in a concurring opinion that they believed that the lead opinion left unresolved whether the Platone "definitive and specific" standard was still viable. The concurring opinion described why, in the view of the concurring members, the plain language of the SOX whistleblower statute does not permit dismissals of SOX whistleblower claims pursuant to a "definitive and specific" standard.

One member concurred in part and dissented in part. This member dissented from the majority's ruling sustaining the applicability of FRCP 12(b)(6) to SOX complaints. This member concluded that an ALJ's authority to summarily dismiss a meritless claim that is lacking in either legal or factual support is found in the OALJ Rule of Practice and Procedure at 29 C.F.R. §§ 18.40 and 18.41, and recourse to the pleading requirements of FRCP 8(a)(2) or the provisions of FRCP 12(b)(6) are inapposite because a SOX complaint is not equivalent to a complaint that initiates a federal court proceeding.

PROTECTED ACTIVITY; REASONABLY BELIEVED REPORT OF MAIL OR WIRE FRAUD DOES NOT REQUIRE A SHOWING OF FRAUD AGAINST SHAREHOLDERS TO BE PROTECTED UNDER SOX

In Brown v. Lockheed Martin Corp. , ARB No. 10-050, ALJ No. 2008-SOX-49 (ARB Feb. 28, 2011), the ARB affirmed the ALJ's finding that that the Respondent violated the SOX's employee protection provision when it constructively discharged the Complainant for protected activity. The Complainant was a Communications Director. After working for the Respondent for several years, the Complainant learned of allegations that her supervisor, then Vice President of Communications, had engaged in fraudulent and illegal activities, largely related to the supervisor having developed sexual relationships with several soldiers, with respect to a "Pen Pal" program the Respondent had established for communications between Lockheed employees and U.S. soldiers in Iraq. The Complainant came to believe the allegations, and after relating the concerns to the president of Technical Operations. The Complainant later contacted the Vice President of Human Resources, who filed an anonymous complaint on the Complainant's behalf, assuring the Complainant that no one would learn of her identity and that there would be no retaliation. Within a few days, the Pen Pal program was discontinued and the supervisor's position was changed (although she remained a vice-president). The supervisor then attempted to find out who had reported on her. Although she initially blamed another employee, the Complainant eventually admitted upon being confronted by her former supervisor that she had told the HR Vice President "several things" although she wasn't sure that her comments resulted in the complaint. From that point, the Complainant's position in the company deteriorated, eventually resulting in the Complainant providing the Respondent with a "notice of forced termination."

The ALJ found that the Complainant's actions were protected because she had definitively and specifically communicated to the president of Technical Operations her reasonable belief that her supervisor had engaged in fraudulent conduct, and that the actions satisfied the reasonable belief prong under mail and wire fraud theories because the supervisor mailed letters to solicit prospective paramours and sent gifts to paramours, which were presumed to have been billed to the U.S. government as part of the Pen Pal program.

The ARB agreed, explaining that "SOX protects employees who report conduct that the employee reasonably believes constitutes a violation of the specified federal securities laws. . . . The "reasonable belief"standard requires [the Complainant] to prove both that she actually believed that [her supervisor] committed wire and/or mail fraud and that a person with her expertise and knowledge would have reasonably believed that as well. ... Under Section 806(a)(1), once an employee proves that she reported conduct that she reasonably believed constituted mail or wire fraud, then she proved she was engaged in protected activity. Furthermore, Section 806(a)(1) does not require that the mail fraud or wire fraud pertain to a fraud against the shareholders." USDOL/OALJ Reporter at 9 (citations omitted). The ARB agreed with the ALJ's conclusion that the Complainant reasonably believed that her supervisor engaged in mail and wire fraud. The ARB noted that the ALJ had applied a high standard in determining whether the Complainant engaged in protected activity. Specifically, the ALJ relied on Platone v. United States Dept. of Labor , 548 F.3d 322 (4th Cir. 2008), to examine whether the Complainant's disclosures "definitively and specifically" related to fraudulent conduct under SOX. The ARB, however, found that it was unnecessary to determine whether this was the appropriate standard because the Complainant met the high standard in this case.

The ARB also affirmed the ALJ's findings on constructive discharge that a reasonable person in the Complainant's shoes would have found continued employment intolerable and would have been compelled to resign. The ARB affirmed the ALJ's finding that protected activity motivated the Employer's adverse actions.

PROTECTED ACTIVITY; COMPLAINT THAT DISLCOSURE FORM GAVE FALSE AND MISLEADING INFORMATION ABOUT THE COST OF FRONT END LOAD CHARGES IS PROTECTED; COMPLAINT THAT SUPERVISOR THE COMPLAINANT TO CONSULT WITH HIM BEFORE OFFERING NON-PROPRIETARY PRODUCT FOUND NOT TO BE PROTECTED

In Ryerson v. American Express Financial Services, Inc. , ARB No. 08-064, ALJ No. 2006-SOX-74 (ARB July 30, 2010), the Respondent did not challenge on appeal the ALJ's finding that the Complainant engaged in protected activity when he complained that a disclosure form that the Respondent's financial advisors were required to provide clients who invested in mutual funds gave a false and misleading impression that for certain investments, investing in "A" shares having initial front end load charges were less costly than investing in "B" shares having no front end load charges. In affirming the ALJ's finding, the ARB noted that the ALJ had found that the Respondent had revised the form in response to the Alien's concern, and that this action supported a finding that the Complainant had a reasonable belief that the form violated securities lawas dealing with fraud against shareholders.

The Complainant also alleged that that a complaint he made about his supervisor preventing him from recommending non-proprietary investment products to clients over the Respondent's proprietary products constituted SOX protected activity. The ARB agreed with the ALJ's finding that this complaint was not protected activity because the supervisor had only required that the Complainant consult with him prior to offering a non-proprietary product to a client - a policy which itself was not illegal.

Despite the finding of protected activity in regard to the disclosure form, the ARB affirmed the ALJ's finding that the Complainant failed to prove that his protected activity played any role in his subsequent termination.

The Respondent had not challenged the ALJ's finding that the Complainant was required to rewrite his previously approved financial plans because the protected activity and the ALJ's order to expunge the Complainant's personnel file and any record referencing the directive. Neither had the Respondent challenged the ALJ's order allowing the Complainant to submit an itemized application for litigation costs and expenses. Because these aspects of the ALJ's order were not challenged, the ARB affirmed them.

PROTECTED ACTIVITY; COMPLAINANT'S SINGLE REFUSAL TO ACT IN A MANNER HE BELIEVED TO BE FRAUDULENT MUST DIRECTLY IMPLICATE CATEGORIES OF FRAUD LISTED IN SOX; REQUIREMENT THAT COMPLAINANT'S REASONABLE BELIEF THAT TO DO OTHERWISE WOULD CONSTITUTE A MATERIAL MISSTATEMENT OR OMISSION CONCERNING RESPONDENT'S FINANCIAL CONDITION

In Fredrickson v. The Home Depot U.S.A., Inc. , ARB No. 07-100, ALJ No. 2007-SOX-13 (ARB May 27, 2010) , it was undisputed that the Complainant refused to mark down store-used items as "damaged goods" because he believed it was "illegal" and fraudulent. The ARB held, however, that "refusing to mark down a single package of hooks at one Home Depot store as 'damaged goods' does not constitute SOX-protected activity because it did not directly implicate the categories of fraud listed in the statute or securities violations, but at most constitutes an expenditure with which Fredrickson disagreed. Moreover, one instance of refusing to mark down a single package of hooks as 'damaged goods' is not sufficient to support a finding that Fredrickson had a reasonable belief that to do otherwise would constitute a material misstatement of fact or omission concerning Home Depot's financial condition, on which an investor would reasonably rely." USDOL/OALJ Reporter at 7 (footnotes omitted).

PROTECTED ACTIVITY; LACK OF REPORT TO SUPERVISORY OFFICIAL OR OFFICIAL WITH AUTHORITY TO INVESTIGATE, DISCOVER OR TERMINATE MISCONDUCT

In Fredrickson v. The Home Depot U.S.A., Inc. , ARB No. 07-100, ALJ No. 2007-SOX-13 (ARB May 27, 2010) , it was undisputed that the Complainant refused to mark down store-used items as "damaged goods" because he believed it was "illegal" and fraudulent. The ARB held, however, that the undisputed facts showed that the only employees of the Respondent aware of the Complainant's refusal did not have supervisory authority over the Complainant, or authority to investigate, discover or terminate misconduct. Merely stating in an affidavit that the Respondent knew or had reason to know that he engaged in protected activity was insufficient to create a genuine issue of material fact in response to a motion for summary decision. Moreover, the affidavit contradicted the Complainant's admission in a deposition that he did not discuss the refusal with anyone with supervisory authority over him.

PROTECTED ACTIVITY; COMPLAINTS ABOUT EXECUTIVE DECISIONS AND CORPORATE EXPENDITURES THAT ONLY RAISE THE POSSIBILITY OF INVESTOR FRAUD

PROTECTED ACTIVITY; REASONABLE BELIEF THAT ACCOUNTING PRACTICE VIOLATED BANKING LAWS AND COULD MISSTATE RESPONDENT'S FINANCIAL CONDITION

PROTECTED ACTIVITY; COMPLAINT RAISED BY AUDITOR AS PART OF HER DUTIES AS AN AUDITOR

In Robinson v. Morgan Stanley , ARB No. 07-070, ALJ No. 2005-SOX-44 (ARB Jan. 10, 2010), the Complainant argued that she engaged in SOX-protected activity when she raised concerns about employee cell phone usage, the untimely reporting of audit results, computer security, qualifications of employees, use of contractors, technology expenditures, and the use of the improper date to record bankruptcy charge offs. The ARB found that only the bankruptcy charge off complaint implicated protected activity under SOX. The ARB stated that "[c]omplaints to management about executive decisions and corporate expenditures with which a complainant disagrees are not protected activity under the SOX unless they directly implicate the categories of fraud listed in the statute or securities violations." Slip op. at 12 (footnote omitted). It is not enough that the challenged practice possibly could affect the company's financial condition, and that such effect possibly would be intentionally withheld from investors.

The bankruptcy charge off matter, however, raised a potential impact of $8 million, and raised such concern that an investigation was initiated by the Respondent. The ARB found that the Complainant had a reasonable belief that improper handling of bankruptcy charge offs was a violation of federal banking regulations, and that those violations had the potential to misstate the Respondent's financial condition. Thus, the complaint was protected under SOX. The ARB rejected the ALJ's conclusion that, to the extent that the Complainant lodged the bankruptcy charge off concern while discharging her duties as an auditor, she was not engaged in protected activity pursuant to the Fourth Circuit's decision in Sasse v. USDOL , 409 F.3d 773 (6th Cir. 2005) (involving an Assistant U.S. Attorney). The ARB distinguished Sasse on the ground that the SOX statute "does not indicate that an employee's report or complaint about a potential violation must involve actions outside the complainant's assigned duties." Slip op. at 13.

PROTECTED ACTIVITY; COMPLAINT MUST DEFINITIVELY AND SPECIFICALLY RELATE TO THE SOX SUBJECT MATTER

In Lewandowski v. Viacom Inc. , ARB No. 08-026, ALJ No. 2007-SOX-88 (ARB Oct. 30, 2009), the Complainant alleged that the Respondent violated the whistleblower protection provision of the SOX when it fired her after she complained that her supervisor was allegedly providing confidential information to competitors. The Complainant was a Story Editor responsible for reading books and attending theatre productions and then advising Paramount executives through memoranda on the book or production's potential for development into motion pictures. The Complainant reported to the executives that her supervisor was leaking the memos to competitors and the media. The ARB affirmed the ALJ's finding that the Complainant's complaint was not an allegation of wire or securities fraud and was not protected activity under the SOX. In describing the nature of SOX protected activity, the ARB wrote:

Not all employee complaints to management are covered by the SOX. The ARB has said that complaints to management of racial and employment discrimination, personnel actions, and executive decisions and corporate expenditures with which the complainant disagrees are not protected activity under the SOX because they do not directly implicate the categories of fraud listed in the statute or securities violations. "A mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld from investors, is not enough."

    Thus, to come under the protection of the SOX, the whistleblower must ordinarily complain about a material, misstatement of fact (or omission) about a corporation's financial condition on which an investor would reasonably rely. The protected complaint must "definitively and specifically" relate to the SOX subject matter, be specific enough to permit compliance, and support a complainant's reasonable belief that there is a violation.

USDOL/OALJ Reporter at 7-8 (footnotes omitted). The ARB found that the Complainant's e-mail to Paramount executives and a meeting with an in-house attorney raising a breach of corporate standards and alleging disloyalty did not "definitively and specifically" relate to the use of electronic means to defraud shareholders or others, and thus was not protected activity under the wire fraud provision of SOX. In regard to whether the Complainant's activity constituted a complaint of fraud against shareholders, the ARB wrote:

    Similarly, for a protected complaint based on fraud against shareholders, [the Complainant] must have had a reasonable belief that [her supervisor] was engaged in shareholder fraud and [the Complainant] must have conveyed that complaint "definitively and specifically" to her employer. The elements of a cause of action for securities fraud are rooted in common law tort actions for deceit and misrepresentation. The basic elements include a material misrepresentation (or omission); scienter; a connection with the purchase or sale of a security; reliance; economic loss; and causation -- a causal connection between the material misrepresentation and the loss. A fact is material if the reasonable investor would consider it significant to his trading decision. With respect to omissions of fact, "there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available.

    [The Complainant]'s complaints raising a breach of corporate standards and alleging disloyalty do not "definitively and specifically" relate to defrauding Viacom shareholders or others. Moreover, a mere possibility that [her supervisor]'s alleged disclosure of confidential information to competitors could affect the value of Viacom stock to investors is too attenuated to state a claim for relief under the SOX whistleblower protection provision.

USDOL/OALJ Reporter at 9 (footnotes omitted).

PROTECTED ACTIVITY; INFORMATION ABOUT ACTUAL AND POSSIBLE VIOLATIONS OF U.S. EXPORT LAWS FOUND NOT TO BE PROTECTED ACTIVITY

In Joy v. Robbins & Myers, Inc. , ARB No. 08-049, ALJ No. 2007-SOX-74 (ARB Oct. 29, 2009), the Complainant was the Respondent's Director of Internal Audit; he informed senior management that the company had not implemented an export compliance management program, and warned that the Respondent had engaged in "possible violations" of U.S. export laws. The ARB affirmed the ALJ's grant of summary decision on the element of protected activity, writing:

    [I]nformation about actual and "possible violations" of U.S. export laws and what might happen as a result does not definitively and specifically relate to violations of the fraud statutes, SEC rules, or laws concerning fraud against shareholders. Similarly, [the Complainant] 's worries about someone else complaining to the SEC about export compliance does not definitively and specifically implicate those statutes, rules, and laws or convey his own reasonable belief of a violation of those laws or regulations.

USDOL/OALJ Reporter at 6.

PROTECTED ACTIVITY; CONCERNS ABOUT PERFORMANCE OF COWORKERS

LIMITATION ON DISCOVERY WHERE COMPLAINT DOES NOT ALLEGE PROTECTED ACTIVITY SUFFICIENT TO SURVIVE 12(b)(6) MOTION

In Neuer v. Bessellieu , ARB No. 07-036, ALJ No. 2006-SOX-132 (ARB Aug. 31, 2009), the Complainant filed a SOX complaint alleging that he had been fired for disclosing concerns about the performance of two managers. The ALJ granted dismissal under FRCP 12(b)(6) on the ground that the complaint did not allege protected activity under SOX. The ARB affirmed, writing:

    A SOX complaint "should include a full statement of the acts and omissions, with pertinent dates, which are believed to constitute the violations." A failure to comply with the indicated level of specificity could subject the complainant to dismissal. As we have already noted, according to his OSHA complaint, Neuer disclosed to Dvash that one manager was overworked, and the other was incompetent and redundant. Neuer did not allege that he believed, at the time he made disclosures of his concerns to Dvash, that the two managers, or anyone else, engaged in mail fraud, wire fraud, bank fraud, or securities fraud. Likewise, he did not allege that the managers violated any SEC rules and regulations, which regulate the issuance of, and transactions involving, the securities of publicly traded corporations. A mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld from investors, is not enough. For example, although a company that tolerates incompetence or poor management may not be acting in the best interests of its shareholders, a SOX-protected activity must involve an alleged violation of a federal law directly related to fraud or securities violations. "SOX protects shareholders from inaccurate reporting of a publicly held corporation's financial condition . . . . Providing information to management about questionable personnel actions, racially discriminatory practices, executive decisions or corporate expenditures with which the employee disagrees, or even possible violations of other laws . . . standing alone, is not protected conduct under the SOX."

USDOL/OALJ Reporter at 5-6 (footnotes omitted). On appeal, the Complainant argued that he could have had a better chance of proving protected activity if OSHA had done a full investigation and the ALJ had allowed follow-up discovery and an evidentiary hearing. The ARB dismissed this argument:

But he was not entitled to an investigation and a full bearing [sic] because his OSHA complaint does not allege any facts that, if true, would establish that he engaged in SOX-protected activity. OSHA will not conduct an investigation of a complaint unless the complainant "makes a prima facie showing" that protected activity was a contributing factor in the adverse action that the complainant suffered. Therefore, OSHA did not err in declining to investigate his complaint, and the ALJ did not err in denying him discovery and an evidentiary hearing.

USDOL/OALJ Reporter at 6 (footnote omitted).

PROTECTED ACTIVITY; MUST RAISE SOX VIOLATION DEFINITIVELY AND SPECIFICALLY

In Godfrey v. Union Pacific Railroad Co. , ARB No. 08-088, ALJ No. 2008-SOX-5 (ARB July 30, 2009), the ARB affirmed the ALJ's order granting summary decision in favor of the Respondent based on the Complainant's failure to establish a genuine issue of material fact that he engaged in SOX-protected activity prior to his discharge. On appeal, the ARB identified from the Complainant's filings three potential instances of protected activity. First, the ARB found that hotline calls made by the Complainant's wife alleging discrimination and sexual harassment did not definitively and specifically relate to the matters protected under SOX (and the Complainant admitted as much). Second, the ARB found that the Complainant's claim that he had raised an issue about credit card abuse (parceling of purchases to avoid a company rule on a written contract for purchases of more than $5,000 with a particular vendor) failed to establish protected activity because of lack of evidence that the Complainant had linked his complaint at the time to defrauding of shareholders, and because "speculation or a mere possibility that shareholders would be defrauded because Union Pacific employees parceled purchases does not satisfy the reasonable belief requirement" of SOX protected activity. Finally, the ARB found that the Complainant's claim on appeal that he had reported financial "kickbacks" was not supported by the record, and was waived on appeal because it had not been argued before the ALJ.

PROTECTED ACTIVITY; MEMO TO SUPERVISOR; SUBMISSION OF FORMAL COMPLAINT; INSISTENCE THAT SUPERVISOR SIGN DOCUMENTS JUSTIFYING INCREASE IN LINE PRESSURE; CONVERSATION WITH FEDERAL OFFICIAL

In Leak v. Dominion Resources Services, Inc. , ARB Nos. 07-043 and 07-051, ALJ No. 2006-SOX-12 (ARB May 29, 2009), the Complainant was a Technical Specialist who had been given the task of resolving deficiencies cited in a state public utilities commission notice. While performing this task, the Complainant became convinced that four gas lines needed to be operated at no higher pressure than the lowest maximum allowable operating pressure of one of the systems. The Complainant's supervisor disagreed with the Complainant's conclusion, and directed him to consider alternative operational models. The Complainant continued to express his concerns about line pressure. After being given a below expectations rating for his performance on the project, the Complainant filed two "Problem Resolution" complaints - one about the rating, and one about his concerns regarding the project. He also made an anonymous hotline call. At a meeting to discuss the Problem Resolutions, it was determined that company policy did not permit the Complainant to tape record the meeting. Subsequently, the Complainant asked his supervisor to sign documents used to justify increases in system pressure. The supervisor declined to do so. After speaking with a USDOT official, the Complainant repeated the request for the supervisor to sign the documents, which he again declined to do. The Complainant's supervisors and other managers then decided to hold a meeting to determine whether the Complainant had any legal or safety reasons for insisting that the supervisor sign the justification records. Depending on what the Complainant told them, they would then determine whether to give the Complainant an "Employment Decision Day."

At the start of the meeting, the Complainant asked if he could record the meeting, and he was told "no." The Complainant refused to participate without a recording, asked to be excused, and got up to walk out. The supervisor stated that if the Complainant left, he would be terminated. The Complainant responded "Then terminate me," and the supervisor then said "You're terminated." The Complainant was escorted out of the building. That same day, the supervisor issued a discharge letter based on the Complainant's insubordinate refusal to attend the meeting. Following a hearing, the ALJ found that the Complainant had engaged in protected activity, but that he failed to establish that such activity was a contributing cause in his termination.

On appeal, the ARB agreed with the ALJ that the Complainant engaged in protected activity when he (1) sent a memo to management about the gas line pressure; (2) submitted a Problem Resolution complaint with a copy to the Respondent's vice president; (3) insisted that his supervisor sign the justification records; (4) and engaged in a phone conversation with the USDOT official. The ARB noted the Respondent's argument that the phone conversation was about a regulatory rather than a safety issue, but found that the although the purpose of the call was different, the discussion included the Complainant's concerns about potential violation of pipeline safety rules and regulations.

The ARB also found, however, that substantial evidence supported the ALJ's finding that the Complainant failed to prove that his protected activity was a contributory factor in his discharge. Essentially, the Complainant's argument on appeal was that the meeting about the Complainant's reasons for demanding his supervisor's signature had been concocted to either force the Complainant to abandon his protected activity, or to provoke him into insubordination. The ARB found that substantial evidence supported the ALJ's finding, however, that the meeting had been called to discuss the legal and safety reasons for the Complainant's insistence that his supervisor sign the justification records, and to issue an Employment Day Decision. The ALJ also found that the supervisors did not provoke the Complainant - and that the Complainant's own behavior precipitated his termination. The ARB found that the ALJ therefore found that neither the purpose of the meeting nor the reaction to the Complainant's insubordination were pretextual. The ARB found that the ALJ had very thoroughly analyzed the evidence, and the the Complainant's argument on appeal essentially reduced to an argument that the ALJ erred by not accepting his version of the evidence. The ARB found that the substantial evidence standard required it to uphold the ALJ's findings of fact supported by substantial evidence, even if there is also substantial evidence in support of the other party, or even if the ARB would justifiably made a different choice if the matter had been before it de novo.

PROTECTED ACTIVITY; INQUIRY INTO STATUS OF INVESTIGATION OF ALLEGED IMPROPRIETIES

In Kalkunte v. DVI Financial Services, Inc. , ARB Nos. 05-139, 05-140, ALJ No. 2004-SOX-56 (ARB Feb. 27, 2009), the Complainant's inquiry into the status of an outside law firm's investigation into his employer's alleged financial improprieties, which had been initiated based on information supplied by the Complainant, was found to be protected activity under the SOX. Although there was some dispute about the Complainant's conclusion that a turnaround specialist serving as the employer's CEO after the employer's bankruptcy filing was delaying the outside law firm's investigation, the ARB found that the Complainant's belief was reasonable because she had not been made aware of the role of the bankruptcy court in the delay.

PROTECTED ACTIVITY; PROTECTED COMPLAINT MUST "DEFINITIVELY AND SPECIFICALLY" RELATE TO THE SOX SUBJECT MATTER

In Giurovici v. Equinix, Inc. , ARB No. 07-027, ALJ No. 2006-SOX-107 (ARB Sept. 30, 2008), the Respondent supplied Internet exchange services and a guaranteed power supply for its customers' computer systems. The Complainant was a site engineer. In June 2005, a fire at an electrical substation which provided electricity to the Respondent's facility caused a power failure. The Respondent's automatic control system failed, causing generator interruptions as the engineers, including the Complainant, attempted to operate the system manually and keep power flowing to customers. The Complainant discussed disagreements with an incident follow-up report with the company vice-president who had headed the investigation. At the ALJ hearing, the Complainant testified that the incident report was a "bunch of marketing strategy mumbo jumbo" designed "to save face for the company," and that he kept his mouth shut about the "untrue facts" in the report because he did not want to hurt the company's reputation and its share prices. In April 2006, the Complainant received a counseling memorandum from the Respondent specifying several work deficiencies. That same day, the Complainant called the Respondent's headquarters in California asking for a face-to-face meeting to discuss documents concerning the 2005 power outage. The Complainant was asked to send the documents by facsimile or mail, but he did not do so on the belief that he wouldn't get anywhere by doing so. A personnel manager later spoke with the Complainant about his allegation that he was being harassed with "piddly stuff" in retaliation for disagreeing with the 2005 investigation report. She asked the Complainant to mail or fax copies of the documents "he needed to show somebody" so that they could set up a call and discuss them, but he refused. She testified that she had no sense of the topic in the documents and that the Complainant would not give her any information. The Complainant was later fired after he failed to follow instructions relating to a training program he was assigned to conduct. The Complainant then filed a SOX complaint with OSHA.

The ARB found that the Complainant had not engaged in protected activity under SOX in his communications with the vice president in charge of the incident investigation about the 2005 power outage report; those communications did not reference financial matters, but rather concerns about changes in the programming of generators and that the VP did not have an accurate picture of the power interruptions. The Complainant never conveyed that his disagreements with the report meant that the Respondent was engaged in securities fraud or had violated a SEC rule or regulation or any federal law relating to fraud against shareholders. The Complainant had not directly or specifically implicated in these communications the listed categories of fraud or securities violations under the SOX.

The ARB also found that the Complainant had not engaged in protected activity under SOX when he contacted the corporate headquarters offering to reveal documents about the report. The Complainant refused to mail or fax the documents and would not divulge their contents. Moreover, none of the documents the Complainant submitted to the ALJ as evidence contained any reference to financial matters.

It was only after he was fired that the Complainant alleged that inaccurate information was included in the report to avoid harm to the Respondent's reputation and to ensure that the value of stock options owned by managers would not suffer. The ARB stated that "[s]uch speculative allegations after Giurovici's discharge are insufficient to constitute protected activity under the SOX."

PROTECTED ACTIVITY; COMPLAINT ALLEGING THAT COMPANY POLICY CAUSED DISCRIMINATION AGAINST HANDICAPPED EMPLOYEES; REASONABLE BELIEF STANDARD

The Complainant's letter to the Respondent's outside counsel complaining that the Respondent was violating its code of conduct and the Americans With Disabilities Act by requiring persons who needed service animals to work from home was not protected activity under SOX because it did not allege any of the enumerated fraud or securities violations prohibited under the SOX. Brookman v. Levi Strauss & Co. , ARB No. 07-074, ALJ No. 2006-SOX-36 (ALJ July 23, 2008). In Brookman , the ARB rejected the Complainant's argument that he was only required to demonstrate that he reasonably believed that an actual SOX violation had occurred. The ARB held that the Complainant had failed "to explain why an objectively reasonable employee in his situation would view a complaint regarding a company's discrimination against disabled employees as a violation of the fraud or securities violation provisions of SOX."

PROTECTED ACTIVITY; RAISING GENERAL CONCERNS

In Gale v. World Financial Group , ARB No. 06-083, ALJ No. 2006-SOX-43 (ARB May 29, 2008), the ARB found that the ALJ properly granted summary decision against the Complainant where the Complainant had only expressed "concerns" about a parent company's business operations, and certain of the Respondent's practices and policies, but indicated in deposition testimony that he did not believe that the Respondent had engaged in any illegal or fraudulent activity. Because protected activity is a material element of a SOX whistleblower claim, to avoid summary decision the Complainant was required to produce some evidence that he reasonably believed that there had been a violation of the fraud statutes, SEC rules or regulations, or a Federal law concerning fraud against shareholders.

PROTECTED ACTIVITY; GENERAL ALLEGATIONS OF QUESTIONABLE CORPORATE ACTIONS, PRACTICES, DECISIONS, OR EXPENDITURES IS NOT, STANDING ALONE, PROTECTED ACTIVITY

In Levi v. Anheuser Busch Companies, Inc. , ARB Nos. 06-102, 07-020, 08-006, ALJ Nos., 2006-SOX-27 and 108, 2007-SOX-55 (ARB Apr. 30, 2008), the Complainant had written letters making general claims of poor business decision making by the Respondent and tolerance of racial discrimination, and raising concerns over workplace safety, but not specifically any of the categories of fraud and securities violations covered by the SOX. The ARB wrote:

although a company that tolerates discriminatory practices or unsafe conditions may not be acting in the best interests of its shareholders, a SOX-protected activity must involve an alleged violation of a federal law directly related to fraud or securities violations. As we said in Harvey , "while Title VII protects individuals against discrimination, SOX protects shareholders from inaccurate reporting of a publicly held corporation's financial condition . . . . Providing information to management about questionable personnel actions, racially discriminatory practices, executive decisions or corporate expenditures with which the employee disagrees, or even possible violations of other federal laws . . . standing alone, is not protected conduct under the SOX." Harvey , slip op. at 14. To bring himself under the protection of the act, the information the employee provides must directly relate to the listed categories of fraud or securities violations. 18 U.S.C.A. § 1514A(a); 29 C.F.R. §§ 1980.104(b), 1980.109(a).

USDOL/OALJ Reporter at 10-11.

PROTECTED ACTIVITY; REASONABLE BELIEF REQUIREMENT

In Reed v. MCI, Inc. , ARB No. 06-126, ALJ No. 2006-SOX-71 (ARB Apr. 30, 2008), the Complainant alleged that he was retaliated against in violation of the SOX when he refused to "commit felonies" i.e., refused to use pirated software in his employment as a software engineer. The Complainant theorized that the Respondent's profits were based partly on its use of stolen software and thus the Respondent defrauded shareholders because such practice could expose it to fines and loss of good will. The Respondent filed a motion for summary decision on the ground that the Complainant had not engaged in protected activity. The ARB stated that "To defeat summary decision, Reed must produce evidence that he engaged in SOX-protected activity because he reasonably believed that using the stolen software defrauded shareholders. Speculation or a mere possibility that shareholders would be defrauded because he used the software, however, does not satisfy the reasonable belief requirement." The ARB found that the Complainant had not produced evidence of such a reasonable belief, and granted summary decision.

PROTECTED ACTIVITY; ALLEGATION OF SYSTEMIC RACIAL DISCRIMINATION AND THREAT TO FILE DISCRIMINATION CLAIM

In Smith v. Hewlett Packard , ARB No. 06-064, ALJ Nos. 2005-SOX-88 through 92 (ARB Apr. 29, 2008), the Complainant had complained to a supervisor that the Respondent was engaged in systemic racial discrimination through its employee performance rating system and, because the Respondent's response to the alleged discrimination was inadequate in his view, he would take his concerns to the appropriate federal agency. The ARB held that the complained of conduct did not even remotely relate to the SOX categories of mail fraud, wire, radio, TV fraud, or bank fraud. Moreover, applying the principles enunciated in Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006) and Harvey v. Home Depot U.S.A., Inc. , ARB Nos. 04-114, 115, ALJ Nos. 2004-SOX-20, 36 (ARB June 2, 2006), the ARB held that the Complainant's "allegation of systemic racial discrimination and threat to file a discrimination claim with the federal government do not directly implicate corporate fraud or a securities violation. Smith did not allege, as he must, that Hewlett Packard engaged in securities fraud by misrepresenting (or omitting) any material fact in connection with the purchase or sale of a security, that Hewlett Packard violated a SEC rule or regulation, or that Hewlett Packard violated any Federal law relating to fraud against shareholders. Platone , slip op. at 17, 21, 22; Harvey , slip op. at 14-15, 16. Therefore, Smith did not engage in protected activity in this instance."

The Complainant also alleged that he had been put on administrative leave and eventually fired because he had contacted the EEOC and made an appointment for later in the month. The ARB observed that the SOX does cover a complaint made to an outside agency - but that it must be a complaint about conduct covered under the SOX. The ARB found that the Complainant's complaints to the EEOC did not directly implicate securities fraud, a violation of a SEC rule or regulation, or a violation of any Federal law relating to fraud against shareholders, and were not protected activity under SOX.

[SOX Digest XIII E]
PROTECTED ACTIVITY; COMPLAINT ABOUT MISMANAGEMENT IS NOT PROTECTED ACTIVITY ABSENT SHOWING OF ATTEMPT TO DEFRAUD INVESTORS

In Stojicevic v. Arizona-American Water , ARB No. 05-081, ALJ No. 2004-SOX-73 (ARB Oct. 30, 2007), the Complainant argued that the ALJ erred in his legal conclusion that the Complainant had not engaged in protected activity under the SOX on the theory that the Respondent's failure to inform the stockholders of the Complainant's complaints about mismanagement and violations of SDWA and local regulations constituted misrepresentations. The Board rejected this argument, writing:

However, as we held in Harvey v. Home Depot [ , U.S A., Inc. , ARB Nos. 04-114, 115, ALJ Nos. 2004-SOX-20, 36, slip op. at 14 (ARB June 2, 2006)]:

Providing information to management about questionable personnel actions, racially discriminatory practices, executive decisions or corporate expenditures with which the employee disagrees, or even possible violations of other federal laws such as the Fair Labor Standards Act or Family Medical Leave Act, standing alone, is not protected conduct under the SOX. To bring himself under the protection of the act, an employee's complaint must be directly related to the listed categories of fraud or securities violations. 18 U.S.C.A. § 1514A(a); 29 C.F.R. §§ 1980.104(b), 1980.109(a). See Getman , slip op. at 9-10 (requiring that the employee articulate the nature of her concern). A mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld from investors, is not enough.

At most in this case, Stojicevic demonstrated that AAW's poor management could adversely affect its financial condition. Accordingly, since Stojicevic did not demonstrate that AAW defrauded, or attempted to defraud, its investors, or violated any rule or regulation of the SEC, he has not shown that he engaged in protected activity under the SOX.

Slip op. at 13-14 (footnote omitted).

PROTECTED ACTIVITY; MAIL FRAUD; ISSUE IS NOT WHETHER RESPONDENT ACTUALLY VIOLATED MAIL FRAUD LAW, BUT WHETHER COMPLAINANT REASONABLY BELIEVED THAT THERE WAS A VIOLATION AND CONVEYED THAT BELIEF TO THE RESPONDENT PRIOR TO THE ADVERSE EMPLOYMENT ACTION

In Nixon v. Stewart & Stevenson Services, Inc. , ARB No. 05-066, ALJ No. 2005-SOX-1 (ARB Sept. 28, 2007), the Complainant was the environmental manager for a federal defense contractor. Among other allegations, the Complainant alleged that he engaged in protected activity because the Respondent engaged in mail fraud under 18 U.S.C.A. § 1341 when it sent letters to a state commission falsely asserting that it was immune from environmental penalties. The ALJ had granted summary decision in favor of the Respondent because the Complainant failed to show that the letters were part of a 'scheme or artifice to defraud, or for obtaining money or property,' as required by 18 U.S.C.A. § 1341, and that there was no evidence that the Complainant, prior to his termination, considered the Respondent's conduct to constitute mail fraud. On appeal, the ARB indicated that the ALJ had partly mischaracterized the issue because under the SOX whistleblower provision, an employee is not required to provide information about an actual violation of Section 1341, but only to show that he reasonably believed that there was a violation and conveyed that belief to his employer. The ARB, however, affirmed the ALJ's grant of summary decision because he had correctly found that there was no evidence that the Complainant actually communicated his Section 1341 concerns to the Respondent prior to his termination. Rather, the first mention of the mail fraud statute was in response to a conference call during which the ALJ had asked if there was any other basis for the Complainant's complaint beyond an SEC rule violation alleged in the complaint.

PROTECTED ACTIVITY; REASONABLE BELIEF TEST

In Welch v. Cardinal Bankshares Corp. , ARB No. 05-064, ALJ No. 2003-SOX-15 (ARB May 31, 2007), the Complainant - who was the Respondent's CFO - expressed concerns that the Respondent had overstated income in a quarterly SEC report because it had improperly treated $195,000 in loan recoveries as income when they should have been allocated to the "loan reserve" account. The Complainant argued that error improperly inflated the Respondent's income by 13.7%, and therefore could have materially misled investors. The ARB reversed the ALJ's finding that this was protected activity. The ARB wrote:

The "reasonable belief" standard requires Welch to prove both that he actually believed that the SEC report overstated income and that a person with his expertise and knowledge would have reasonably believed that as well. Furthermore, "[b]ecause the analysis for determining whether an employee reasonably believes a practice is unlawful is an objective one, the issue may be resolved as a matter of law."

USDOL/OALJ Reporter at 10 (footnotes omitted). The ARB found that an experienced CPA/CFO like the Complainant could not have reasonably believed that the quarterly SEC report presented a misleading picture of the Respondent's financial condition because whether reported as income or as a credit to expenses, the fact remained that the Respondent had $195,000 that it previously did not have.

PROTECTED ACTIVITY; VIOLATION OF GAAP AND FFIEC ACCOUNTING STANDARDS IS NOT IPSO FACTO A VIOLATION OF FEDERAL SECURITIES LAW

In Welch v. Cardinal Bankshares Corp. , ARB No. 05-064, ALJ No. 2003-SOX-15 (ARB May 31, 2007), the Complainant - who was the Respondent's CFO - expressed concerns that when the Respondent misclassified loan recoveries as income rather than crediting the loan loss account, it violated GAAP accounting standards and accounting rules that the Federal Financial Institutions Examination Council (FFIEC) developed for banks. The Complainant essentially argued that violation of those accounting standards constituted a violation the clear mandate of Sarbanes-Oxley, and therefore such errors were ipso facto violations of federal securities laws. The ARB found that this argument amounted to wholesale re-writing of SOX's section 1514A, and it would not accept such a contention in the absence of citation of legal authority.

PROTECTED ACTIVITY; CFO'S COMPLAINT OF INSUFFICIENT ACCESS TO AN OUTSIDE AUDITOR

In Welch v. Cardinal Bankshares Corp. , ARB No. 05-064, ALJ No. 2003-SOX-15 (ARB May 31, 2007), the Complainant - who was the Respondent's CFO - complained that he had been denied sufficient access to an outside auditor, who instead chose to communicate with the company's CEO. The ARB found that such complaints were not protected activity under SOX. The ARB wrote: "But Welch did not prove by a preponderance of evidence how his unhappiness about access to [the outside auditor] constituted a reasonable belief that Cardinal was violating or might violate the enumerated fraud statutes, any SEC rule or regulation, or any federal law relating to fraud against shareholders. To be protected, an employee's SOX complaint must definitively and specifically relate to the listed categories of fraud or securities violation." USDOL/OALJ Reporter at 13 (footnote omitted).

PROTECTED ACTIVITY; REJECTION OF CFO'S ADVICE ON ACCOUNTING MATTERS IS NOT INHERENTLY A VIOLATION OF FEDERAL SECURITIES LAW

In Welch v. Cardinal Bankshares Corp. , ARB No. 05-064, ALJ No. 2003-SOX-15 (ARB May 31, 2007), the Complainant - who was the Respondent's CFO - complained that the Respondent had deficient internal accounting controls because persons without accounting expertise had unrestricted access to the general ledger. The Complainant argued that when he briefed Respondent's staff about the problem, and they disregarded his advice, such disregard became fraud because failure to follow the CFO's advice was reflective of an intent to leave things in a deceptive state. The ARB rejected this argument, finding that the Complainant had failed to cite any legal authority to support "the proposition that rejecting the CFO's advice on accounting matters violates or could reasonably be regarded as violating the federal securities laws." USDOL/OALJ Reporter at 14.

PROTECTED ACTIVITY; DICTA SUGGESTING THAT COMPLAINANT NEED NOT BE THE FIRST TO RAISE THE ISSUE, OR BE BASED ON A COMPLAINANT'S BELIEF THAT HE IS REPORTING FRAUD; SOX COVERS NOT JUST FRAUD BUT PROVISION OF INFORMATION REGARDING VIOLATION OF ANY SEC RULE OR REGULATION

In Klopfenstein v. PCC Flow Technologies Holdings, Inc. , ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006), the Board remanded the matter for the ALJ to make findings on whether the Complainant had engaged in protected activity. In this respect, the Board observed that

[C]ontrary to the Respondents' arguments, we do not believe that activity is protected only when the complainant is the first to raise the issue, or when the communications relate to published information, or when the complainant believes he is reporting "fraud." SOX protection applies to the provision of information regarding not just fraud, but also "violation of any rule or regulation of the Securities and Exchange Commission." 18 U.S.C.A. § 1514A(a)(1). ... A complainant need not express a concern in every possible way or at every possible time in order to receive protection, so long as the complainant's actual communications "provide information, cause information to be provided, or otherwise assist in an investigation" regarding a covered violation. 18 U.S.C.A. § 1514A(a)(1).

USDOL/OALJ Reporter at 17. The ARB observed that the Complainant's concerns about in-transit inventory suggested, at a minimum, incompetence in his Employer's internal controls that could affect the accuracy of its financial statements. The Board stated that the Complainant's "communications thus related to a general subject that was not clearly outside the realm covered by the SOX, and it certainly is possible that Klopfenstein could have believed that the problems were a deficiency amounting to a 'violation.' See, e.g., Collins v. Beazer Homes USA Inc. , 334 F. Supp.2d 1365, 1378 (N.D. Ga. 2004) (holding that "allegations - of violations of the company's internal accounting controls - were within the zone of protection afforded by" the SOX)." The ARB did not make a finding on whether the Complainant's concerns about inventory accounting were reasonable, but directed the ALJ to make relevant findings on remand.

[Editor's note: Compare Bishop v. PCS Administration (USA), Inc. , No. 05-C-5683 (N.D. Ill. May 23, 2006), in which the District Court for the Northern District of Illinois indicated that an element of fraud is necessarily pleaded in a SOX complaint. Bishop , slip op. at 23-24 (also available at 2006 WL 1460032 at *9).]

PROTECTED ACTIVITY; CONCERNS THAT ARE NEVER EXPRESSED ARE NOT PROTECTED ACTIVITY

In Henrich v. Ecolab, Inc. , ARB No. 05-030, ALJ No. 2004-SOX-51 (ARB June 29, 2006), the ARB observed that "[a] would-be whistleblower must actually express his concerns in order for his activity to be considered protected." Slip op. at 11 (citation omitted).

PROTECTED ACTIVITY; SOX REQUIRES THAT A COMPLAINANT "PROVIDE INFORMATION" ABOUT A POTENTIAL SOX VIOLATION; MERE REFUSAL TO DO AN ACT WITHOUT AN EXPLANATION WHY IS NOT PROTECTED ACTIVITY

In order to establish protected activity under the SOX, a complainant must prove that he "provided information" about conduct that he reasonably believed constituted one of the six violation types enumerated under SOX (potential fraud or other SOX violation). Thus, in Henrich v. Ecolab, Inc. , ARB No. 05-030, ALJ No. 2004-SOX-51 (ARB June 29, 2006), the ALJ did not err in not making a finding that the Complainant's alleged refusal to approve write offs of certain inventory was protected activity where, other than his own testimony, the record contained no evidence that the Complainant had actually "refused" to write off the inventory as opposed to failing to perform a task. Even if he had refused, there was no showing that the Complainant told his superior why he was refusing. The ARB found, therefore, that even if the refusal occurred, it was not protected activity because the Complainant did not "provide information" to his supervisor about a potential SOX violation.

PROTECTED ACTIVITY; COMPLAINANT MUST HAVE EXPRESSED HIS CONCERN; MERE FACT THAT SUPERVISORS SHARED CONCERN IS INSUFFICIENT PROOF TO SHOW AWARENESS OF PROTECTED ACTIVITY

In Henrich v. Ecolab, Inc. , ARB No. 05-030, ALJ No. 2004-SOX-51 (ARB June 29, 2006), the ARB found that the Complainant's alleged refusal to approve write offs of certain inventory was not protected activity because, even if it occurred, there was no proof that the Complainant informed his superior why he was refusing. The Complainant then appeared to argue that proof that the Respondent's executives were aware of inventory accounting issues proved that they were aware of the Complainant's protected activity. The ARB observed that, for activity to be protected under the SOX whistleblower provision, a complainant must demonstrate that the activity included an expression of concern - that he actually blew the whistle. The ARB therefore held that "[p]roof that Ecolab supervisors shared Henrich's concern does not necessarily prove that any supervisor learned about the concern from Henrich, and thus does not prove that Henrich expressed concern." Slip op. at 15.

PROTECTED ACTIVITY; FAILURE TO ALLEGE ACTIVITY PROTECTED UNDER SOX CONSTITUTES A FAILURE TO STATE OF CLAIM FOR RELIEF UNDER SOX; MERE POSSIBILITY THAT CHALLENGED PRACTICES MIGHT AFFECT THE FINANCIAL CONDITION OF THE COMPANY IS NOT SUFFICIENT

In determining whether the Complainant's letters to the Secretary of Labor, the Assistant Secretary for ESA, and Wage and Hour Administrator constituted a timely complaint under the SOX whistleblower provision, the ARB in Harvey v. Home Depot U.S.A., Inc. , ARB Nos. 04-114 and 115, ALJ Nos. 2004-SOX-20 and 36 (ARB June 2, 2006), looked to whether the letters demonstrated that the Complainant engaged in SOX-protected activity prior to his discharge. In respect to a letter written to the Secretary in which the Complainant had complained about alleged constitutional, civil rights and FMLA violations he had voiced to the Respondent's Board of Director and Executives, the Board wrote:

[The Complainant's] letters to the Board of Directors and Executives must have provided information regarding Home Depot's conduct that [the Complainant] reasonably believed constituted mail, wire, radio, TV, bank, or securities fraud, or violated any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders. Providing information to management about questionable personnel actions, racially discriminatory practices, executive decisions or corporate expenditures with which the employee disagrees, or even possible violations of other federal laws such as the Fair Labor Standards Act or Family Medical Leave Act, standing alone, is not protected conduct under the SOX. To bring himself under the protection of the act, an employee's complaint must be directly related to the listed categories of fraud or securities violations. 18 U.S.C.A. § 1514A(a); 29 C.F.R. §§ 1980.104(b), 1980.109(a). See Getman , slip op. at 9-10 (requiring that the employee articulate the nature of her concern). A mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld from investors, is not enough.

USDOL/OALJ Reporter at 14. Because the Complainant's letter to the Secretary did not express his reasonable belief that Home Depot was defrauding shareholders or violating security regulations, the ARB affirmed the ALJ's determination that the letter was not a timely claim for relief under the SOX. Similarly, the Complainant's letters claiming overtime and FMLA violations by the Respondent were not protected activity under the SOX because they did not involve the listed categories of fraud or securities violations. Even reading all the letters collectively failed to state a SOX whistleblower violation because the Complainant had not alleged that he raised specific concerns about corporate fraud or securities violations with the Respondent or that those concerns were a contributing factor in his termination.

PROTECTED ACTIVITY; LACK OF PROOF THAT COMPLAINANTS REASONABLY BELIEVED THAT COMPUTER PROGRAMMING PROBLEM CONSTITUTED A FRAUD ON SHAREHOLDERS

In Allen v. Stewart Enterprises, Inc. , ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62 (ARB July 27, 2006), the Complainants argued that they engaged in protected activity when they complained to supervisors about the Respondent's failure to correct its computer programming to correctly calculate interest when customers had made a prepayment on principal and requested payoff before the end of the contract term. The ARB observed that "[r]eporting that a company violated its internal accounting controls may constitute SOX-protected activity. Whether a whistleblower's belief is reasonable depends on the knowledge available to a reasonable person in the same circumstances and with the employee's training and experience." Slip op. at 10 (footnotes omitted). The ARB affirmed the ALJ's finding that the Complainants did not reasonably believe that the Respondent's delay in reprogramming constituted a fraud on shareholders. The Complainants knew that the problem was programming related, that the Respondent was actively working on the problem, that manual calculations were used as temporary back ups, and that the Respondent had at one time believed that the problem had been fixed. The ARB also affirmed the ALJ's finding that the Respondent had not been trying to keep the problem a secret.

PROTECTED ACTIVITY; PROVIDING INFORMATION ON VIOLATIONS OF STATE LAW IS NOT, STANDING ALONE, PROTECTED ACTIVITY UNDER SOX

Providing information to management concerning violations of state law, standing alone, is not protected activity under the SOX. Allen v. Stewart Enterprises, Inc. , ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62 (ARB July 27, 2006) ( Complainants had argued that certain refund delays violated the state laws of Texas and Missouri, but did not express any concern about violations of any federal fraud statutes or regulations).

PROTECTED ACTIVITY; REPORTING OF MERE POSSIBILITY THAT ACT OR OMISSION COULD AFFECT FINANCIAL CONDITION OF THE COMPANY IS NOT SUFFICIENT TO ESTABLISH PROTECTED ACTIVITY UNDER SOX

In Allen v. Stewart Enterprises, Inc. , ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62 (ARB July 27, 2006), the Complainants argued they engaged in protected activity when they provided information to management that certain refund delays allegedly violated the laws of two states, and could result in a state's revoking the Respondent's license to operate and thus affect shareholders. The ARB held that "the mere possibility that an act or omission could adversely affect [the Respondent's] financial condition and thus affect shareholders is not enough to bring the Complainants' concerns under the SOX's protection." Slip op. at 12 (citation omitted).

PROTECTED ACTIVITY; FAILURE TO ESTABLISH REASONABLE BELIEF OF VIOLATION OF FEDERAL FRAUD STATEMENT OR SEC RULE OR REGULATION

In Allen v. Stewart Enterprises, Inc. , ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62 (ARB July 27, 2006), the ARB affirmed the ALJ's finding that the Complainants did not engage in protected activity when they reported to management that a problem with the Respondent's computer system that failed to recognize balances on a customer's invoice that third parties owed resulting in the customer receiving an invoice showing an zero balance. The ARB also affirmed the ALJ's finding that one Complainant did not engage in protected activity when she allegedly reported that the Respondent was violating a SEC bulletin prohibiting the recognition of sales revenue before delivery to the customer. In regard to the second concern, the ARB also affirmed the ALJ's finding that one Complainant had not sufficiently complained or raised concerns about the problem to reach the level of protected activity, and that the Complainant herself testified that her concern was based on "internal consolidated financial statements" and that she was not aware of any SEC rule or regulation requiring the filing of such internal documents.

[Editor's note: In Allen , in both instances, the ALJ found that the Complainants beliefs about these problems were not reasonably grounded in a belief that the Respondent was violating a federal fraud statute or "an SEC rule related to fraud against shareholders." Slip op. at 12 and 13. In contrast, in Klopfenstein v. PCC Flow Technologies Holdings, Inc. , ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006), the ARB held that SOX protection applies to the provision of information regarding not just fraud, but also "violation of any rule or regulation of the Securities and Exchange Commission."]

PROTECTED ACTIVITY; FEDERAL MAIL AND WIRE FRAUD STATUTES; ALLEGED FRAUD MUST BE OF TYPE ADVERSE TO INVESTOR'S INTERESTS

In Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), the ARB held that when a SOX whistleblower complaint is grounded in Federal mail and wire fraud statutes, "the alleged fraudulent conduct must at least be of the type that would be adverse to investor's interests." USDOL/OALJ Reporter at 15 (footnote omitted). The ARB cited in support of this holding the fact that the preamble to the SOX states: " To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. Sarbanes-Oxley Act of 2002, Pub L. No. 107-204, 116 Stat. 745 (2002) (emphasis added)."

PROTECTED ACTIVITY; REQUIREMENT THAT COMPLAINANT'S COMMUNICATIONS "DEFINITELY AND SPECIFICALLY" RELATE TO FRAUD OR SECURITIES VIOLATIONS

In Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), the ARB held that

In defining the scope of protected activity under other Federal whistleblower protection provisions, the Board has held that an employee's protected communications must relate "definitively and specifically" to the subject matter of the particular statute under which protection is afforded. The Corporate and Criminal Fraud Accountability Act of 2002 does not provide whistleblower protection for all employee complaints about how a public company spends its money and pays its bills. Rather, under the SOX, the employee's communications must "definitively and specifically" relate to any of the listed categories of fraud or securities violations under 18 U.S.C.A. § 1514A(a)(1). Thus, for example, an employee's disclosure that the company is materially misstating its financial condition to investors is entitled to protection under the Act.

USDOL/OALJ Reporter at 17 (footnote omitted). In Platone , the Complainant's actions in raising a possible issue that might affect the Respondent's ability to collect a debt, working with a senior manager to try to resolve the billing problem, and continued efforts to address the billing issues -- none of which provided specific information regarding fraud against shareholders -- were not protected activity

PROTECTED ACTIVITY; WHAT WAS ACTUALLY COMMUNICATED TO THE RESPONDENT, RATHER THAN WHAT WAS ALLEGED IN THE COMPLAINT, DETERMINES WHETHER THERE WAS PROTECTED ACTIVITY

In Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), the ARB indicated that in determining whether a complainant engaged in protected activity, the relevant inquiry is not what was alleged in the complaint, but what was actually communicated to the respondent prior to the adverse action. In the instant case, the ARB determined that contrary to what the Complainant alleged in her OSHA complaint, she had not informed managers"the company had created, or had acquiesced in, a scheme to funnel improper payments to members of the union's master executive council." Rather, reviewing the evidence of e-mails and conversations contained in the record, it was demonstrated that the Complainant did not provided her employer with specific information regarding "any conduct the employee reasonably believes constitutes a violation of 18 U.S.C.§§ 1341[mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders."

PROTECTED ACTIVITY; ALLEGED SEC RULE 10B-5 VIOLATION MUST IMPLICATE BASIC ELEMENTS OF SECURITIES FRAUD, AND POTENTIAL LOSS MUST BE MATERIAL TO A REASONABLE SHAREHOLDER

In Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), the ARB held that the Complainant's allegation that the Respondent had violated SEC Rule 10b-5 was baseless where her revelations about a potential billing problem did not even approximate any of the basic elements of a claim of securities fraud [ i.e ., a material misrepresentation (or omission), scienter, a connection with the purchase, or sale of a security, reliance, economic loss and loss causation], where she did not identify a fraudulent scheme "in connection with the purchase or sale of any security," and where she testified to less than $1,500 in potential losses (which would be unlikely to be considered "material" by a reasonable shareholder).

PROTECTED ACTIVITY; FAILURE TO SHOW THAT INFORMATION HAD BEEN PROVIDED REGARDING FRAUD OR VIOLATION OF SEC RULE OR REGULATION

The Complainant, a medical transcriptionist, sent three e-mails to a regional manager complaining that local managers had "zapped" the line count of her transcriptions resulting in underpayment to the Complainant. The regional manager cancelled her contract after the third e-mail, the Complainant filed a SOX complaint, OSHA denied the complaint, and after the Complainant requested a hearing, the Respondent filed a motion for summary judgment before the ALJ on the ground that the Complainant had not made a showing of protected activity. The ALJ granted the motion and the ARB affirmed because the Complainant never explained how the e-mails "provided information about conduct she reasonably believed constituted a violation of the federal fraud statutes, or an SEC rule or regulation, or any other federal law relating to shareholder fraud." Reddy v. Medquist, Inc. , ARB No. 04-123, ALJ No. 2004-SOX-35 (ARB Sept. 30, 2005).

PROTECTED ACTIVITY; REFUSAL TO CHANGE STOCK RATING NOT PROTECTED ACTIVITY UNLESS ANALYST COMMUNICATED CONCERN THAT EMPLOYER'S CONDUCT CONSTITUTED A VIOLATION OF LAW

 

In Getman v. Southwest Securities, Inc. , ARB No. 04-059, ALJ No. 2003-SOX-8 (ARB July 29, 2005), the Complainant was a stock analyst appearing before a company stock review committee. The ARB held that the Complainant's refusal to change her stock rating, done in the presence of her managers, was not protected activity. The Board wrote:

    In our view, her unspecified "refusal" [to sign her name to a "strong buy" recommendation] was not sufficient to "provide information" to a person with supervisory authority relating to a violation. In the context of a review committee meeting between an analyst and her supervisor, where disagreement over a rating may be a normal part of the process, the analyst must communicate a concern that the employer's conduct constitutes a violation in order to have whistleblower protection. While there may be times where only refusal is sufficient to provide information, reviewing Getman's evidence in the light most favorable to her, it was not in this case.

    In drafting whistleblower protection laws, Congress, after all, has drawn the distinction between notifying the employer of a violation and refusing to commit a violation. See, e.g., Energy Reorganization Act (ERA), 42 U.S.C.A. § 5851(a)(1)(A), (B) (West 2003) (extending coverage to an employee who "notified" his employer of an alleged violation or "refused" to engage in an unlawful practice if the employee has "identified the alleged illegality to the employer"); Surface Transportation Assistance Act (STAA), 49 U.S.C.A. § 31105(a)(1) (West 1997) (providing protection for an employee who files a "complaint" related to a motor vehicle safety regulation or "refuses to operate" a vehicle because it would violate a safety regulation or the employee reasonably believes the vehicle is unsafe). If Congress had wanted to protect a refusal as distinct from providing information, it could have done so in drafting the SOX. We therefore conclude that Getman's unexplained refusal to change her recommended rating of the Cholestech stock was not protected activity.

USDOL/OALJ Reporter at 9-10.

PROTECTED ACTIVITY; COMPLAINANT'S MISTAKEN, BUT REASONABLE BELIEF THAT THERE HAD BEEN A SECURITIES VIOLATION

In Halloum v. Intel Corp. , ARB No. 04-068, 2003-SOX-7 (ARB Jan. 31, 2006), the ARB affirmed the ALJ's finding that the Complainant's complaints to the SEC and management officials of the Respondent constituted protected activity under the SOX. The Complainant had alleged that he had been instructed to delay payment on invoices to increase cash on the Respondent's balance sheet to meet Wall Street expectations. The SEC and the Respondent took these allegations seriously enough to investigate, but ultimately found the contentions to be unfounded.

The ARB noted that the SOX protects the provision of information that the employee reasonably believes constitutes a violation of any federal law relating to fraud against shareholders. Although the Complainant was mistaken in several ways about his allegations, the ARB found that the record contained sufficient support for a finding that the Complainant reasonably believed that there was a securities violation.

 

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ADMINISTRATIVE LAW JUDGE DECISIONS

REPORTING ALLEGED CRIMINAL ACTIVITY BY CO-WORKERS NOT PROTECTED ACTIVITY UNDER SOX BECAUSE SUCH MISCONDUCT DID NOT PERTAIN TO SHAREHOLDERS; MAIL OR WIRE FRAUD NEED NOT PERTAIN TO FRAUD AGAINST SHAREHOLDERS UNDER SOX; SUMMARY JUDGMENT DENIED ON ISSUE OF CAUSATION

In Murphy v. Symantec Corp. , 2011-SOX-1 (ALJ Mar. 15, 2011), the plaintiff sued his former employer alleging that he was discriminated against in violation of SOX after the plaintiff reported that his coworkers were allegedly using corporate funds to engage in illegal activities, including prostitution and illegal drug use, while on business trips. The employer moved for summary judgment on the grounds that the plaintiff did not engage in protected activity, arguing that the plaintiff could not show that his complaints related to his termination, and that the employer would have terminated the plaintiff's employment, even in the absence of his complaints, because he violated company policy by fraudulently submitting over $5,000 in business expenses. The judge found that the plaintiff's complaints regarding the behavior of his co-workers during the business trip did not constitute protected activity under the employee protection provisions of SOX. The court stated that although misconduct reported by the plaintiff may constitute a violation of criminal statutes pertaining to prostitution and illegal drug use, such misconduct does not constitute shareholder fraud. The judge reasoned that the mere possibility that the alleged inappropriate use of corporate funds by the plaintiff's co-workers could affect the value of the company's stock is too attenuated to state a claim for relief under the SOX whistleblower protection provision.

The plaintiff also argued that summary judgment was not warranted because he alleged that his co-workers purchased illegal drugs with money withdrawn from a company credit card, which would constitute bank fraud, accounting or wire fraud. The employer argued that because employees do not have corporate cards that allowed them to withdraw cash, the plaintiff's allegations were nothing more than mere speculation. The employer further asserted that, as a matter of law, the plaintiff's allegations did not implicate the employee protection provision of SOX because reports of bad behavior that constitutes mail fraud, wire fraud, and bank fraud are protected under SOX only if they relate to fraud against shareholders. The judge acknowledged "a conflict amongst various courts [as to] whether all reports of mail fraud, wire fraud, and bank fraud are protected under SOX or only those relating to fraud against shareholders." Id . Because the Seventh Circuit had not addressed the issue, the judge relied on the most recent Administrative Review Board as controlling. In B rown v. Lockheed Martin Corp. , ARB No. 10-050, ALJ No. 2008-SOX-49 (ARB Feb. 28, 2011), the ARB held that Section 806(a)(1) does not require that mail fraud or wire fraud pertain to a fraud against the shareholder. The judge, therefore, denied summary judgment on the complaints related to bank and wire fraud. The judge further held that there was a genuine issue of material fact regarding the employer's decision to terminate the plaintiff's employment, and denied summary judgment on the issue of causation.

PROTECTED ACTIVITY; COMPLAINT ABOUT CHANGE OF REVENUE FORECASTING FORMULA DURING CORPORATE ACQUISITION; ACTUAL VIOLATION NEED NOT BE PROVED, BUT ONLY REASONABLE BELIEF BY EMPLOYEE IN COMPLAINANT'S POSITION

In Grove v. EMC Corp. , 2006-SOX-99 (ALJ July 2, 20007), the Complainant complained to management that a new formula which increased revenue projections tenfold during a time when the company was being acquired by another company could defraud investors. The ALJ found that, although the record did not establish that the company reckless or fraudulently inflated its revenue forecasts for the purpose of drawing a higher purchase offer from the acquiring company, the Complainant was not required to prove an actual violation of securities law. Because the Complainant was a salesman with no specialized training or expertise in the area of corporate acquisitions, and there was no evidence that the Complainant did not actually believe that the revised revenue forecast overstated expected income, the ALJ found it not unreasonable for a person in the Complainant's position to believe that the new formula presented investors with a materially misleading picture of the company's financial condition. The ALJ found, therefore, that the Complainant engaged in protected activity.

PROTECTED ACTIVITY; EMPLOYEE'S CONTACT WITH THE SEC IN CONNECTION WITH A REASONABLE BELIEF OF A VIOLATION OF SECURITIES LAW FOUND TO BE PROTECTED EVEN IF THE SEC DID NOT INSTITUTE A FORMAL PROCEEDING

In Grove v. EMC Corp. , 2006-SOX-99 (ALJ July 2, 20007), the Complainant, a salesman, testified that he called an SEC attorney to get information after he read about the "arrest" by the SEC of a person who had dealings with his employer relating to his accounts. The Complainant reported to the SEC attorney his concerns about anomalous activity and GAAP violations, and inquired whether other arrangements were legal. The Complainant, however, specifically refused to provide any evidence, opting instead to pursue his concerns internally with the Respondent. The ALJ wrote: "On these facts, one might conclude that Grove's contact with the SEC is not protected because he never initiated or participated in any proceeding before that agency. In my view, however, this would require a narrow and overly technical reading of the Act that would run counter to the legislative history which reflects that 'the law was intentionally written to sweep broadly, protecting any employee of a publicly traded company who took such reasonable action to try to protect investors and the market'" Slip op. at 23-24 (citation omitted). The ALJ noted that the ARB had recognized that whistleblower laws should be interpreted liberally, and had suggested in a ERA case that an employee's contact with a government agency for the purpose of obtaining a legal opinion related to the employee's raising of protected concerns is protected activity. Accordingly, the ALJ held that "when an employee contacts the SEC in connection with a reasonable belief of a securities law violation within the scope of Sarbanes-Oxley ... that action is protected even if no formal SEC proceeding is ever initiated."

PROTECTED ACTIVITY; PLEADING OF ACTUAL FRAUD AGAINST SHAREHOLDERS IS NOT REQUIRED, BUT RATHER ONLY A REASONABLE BELIEF OF VIOLATION OF A LAW RELATING TO FRAUD AGAINST SHAREHOLDERS

In Smith v. Corning, Inc. , No. 06-CV-6516 (W.D.N.Y. July 12, 2007), the court denied the Defendants' motion to dismiss the Plaintiff's SOX suit under FRCP 12(b)(6). The motion was based on a contention that the Plaintiff did not engage in protected activity when he raised concerns that PeopleSoft 8.8, an enterprise resource planning software application, was being implemented in a way that was not correctly reporting financial data with resultant impact on the integrity of quarterly reports.

The court rejected the Defendants' contention that the complaint was deficient because the Plaintiff had not alleged an actual fraud against shareholders. The court found that § 1514A only requires a plaintiff to have reasonably believed that the problem constituted a violation of a provision of Federal law relating to fraud against shareholders. The court found that the Plaintiff's complaint met this standard insofar as it alleged that the Plaintiff reasonably believed that the company was violating 15 U.S.C. § 78m(b)(2)(B)(ii), and that he believed that § 78m(b)(2)(B)(ii) was related to fraud against shareholders. In other words, the Plaintiff alleged that the company was implementing a financial reporting system that was not GAAP compliant in violation of § 78m(b)(2)(B)(ii), and that the company was refusing to correct problems with the program, which would have resulted in the issuance of incorrectly quarterly reports which could have misled investors. Moreover, the court indicated that the submission of quarterly reports that were not prepared in accordance with GAAP would also violate a SEC rule, namely 17 C.F.R. § 210.4-01(a)(1), citing Richards v. Lexmark Int'l, Inc. , 2004-SOX-49 (ALJ June 20, 2006).

The court also rejected the Defendants' contention that the Plaintiff's complaints were not protected in that they involved an internal accounting dispute, and only pertained to a potential for fraud occurring in the future. The court distinguished cases cited by the Defendants because in those cases the plaintiffs had not alleged violation of any law covered by § 1514A, whereas in the instant case, the Plaintiff had alleged that the Defendants repeatedly refused to address a problem that was resulting in incorrect financial information being reported to the company's general ledger - a sufficient allegation to survive a Rule 12(b)(6) motion.

Finally, the court rejected the Defendants' contention that the Plaintiff's complaint was deficient because he only complained about the PeopleSoft application, and therefore could not allege a basis for reasonably believing that the company's entire system of accounting controls was so inadequate as to violate § 78m(b)(2), which speaks to systems rather than portions of accounting systems. The court found that based on facts alleged in the complaint and at this stage in the litigation, it could not say as a matter of law that it was unreasonable for the Plaintiff to believe that the company was violating § 78m(b)(2)(B)(ii) when it refused to address problems with PeopleSoft.

PROTECTED ACTIVITY; ELEMENTS -- SUBJECTIVE AND OBJECTIVE REASONABLE BELIEF; INTENT TO DEFRAUD; MATERIALITY OF INFORMATION DISSEMINATED TO INVESTORS; INTERNAL CONTROLS

In Deremer v. Gulfmark Offshore Inc. , 2006-SOX-2 (ALJ June 29, 2007), the ALJ reviewed the still evolving law on what constitutes protected activity under SOX. The ALJ started by observing that the law includes a "reasonable belief" test, which must be scrutinized under both subjective and objective standards: the complainant must have actually believed that the employer was in violation of the relevant law or regulations, and that belief must be reasonable. Reasonable belief is determined based on the knowledge available to a reasonable person in the circumstances with the employee's training and experience. The ALJ then observed that fraud is an integral element under the SOX whistleblower provision, which in the securities area, may include dissemination of false information in to the market on which a reasonable investor may rely. The intent to deceive is implicit. The ALJ noted a split in authority over whether SOX whistleblower protection is limited to fraud "against shareholders," and after reviewing the nature of that split, found that his conclusion was consistent with that of the ARB - that an allegation of "shareholder fraud" is an essential element of a cause of action under SOX. The ALJ concluded, therefore, that materiality was required for alleged conduct to rise to the level of shareholder fraud. In summation, the ALJ wrote:

    Therefore, under subjective and objective standards, Complainant must actually and reasonably believe, based on the knowledge available to a reasonable person, that Respondent intentionally acted fraudulently, and that such conduct was sufficiently material so as to constitute fraud against the shareholders. In cases where allegations of shareholder fraud are based on potential or actual dissemination of fraudulent information, there must exist a "substantial likelihood" that the disclosure of the omitted or misstated information would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available.

Slip op. at 50. Finally, the ALJ addressed specifically the issue of internal controls, writing,

    In securities fraud cases, it has been observed that inadequacy of internal accounting controls "are probative of scienter [defendant's intent to deceive, manipulate, or defraud] . . . and can add to the strength of a case based on other allegations." Crowell v. Ionics, Inc. , 343 F.Supp.2d 1, 12, 20 (D. Mass. 2004). Therefore, a significant deficiency in internal controls, at least when combined with other significant issues, would constitute a circumstance likely to be "viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." As a company's management is under a statutory duty to disclose significant deficiencies in internal control, a willful attempt to conceal such deficiencies or subvert the published attestation of auditors concerning internal controls, would constitute "shareholder fraud" for purposes of protected activity under the Act.

Slip op. at 51. In the instant case, the ALJ considered whether any of the internal control deficiencies complained of by the Complainant constituted protected activity, either singularly or collectively, and found that they did not. The ALJ found that the only potential financial impact of the alleged fraudulent activity was an additional expense of $200,000 (also observing that varying computations in the record showed a lower amount). The ALJ found this amount arguably not material when compared with the Respondent's overall revenue and losses. The only evidence introduced to suggest that this amount would be material to shareholders was the Complainant's subjective opinion. External auditors chose not to adjust the expense by the final determined amount of $60,000 because they considered it not to be material. An audit committee engaged a law firm to investigate allegations raised by the auditor; this investigation included some of the Complainant's contentions. The ALJ found that this action indicated that auditor and audit committee considered issues raised by the audit to be significant, but did not lead to the conclusion that the concerns acted upon were those raised by the Complainant.

[Editor's note: See also Frederickson v. The Home Depot, U.S.A., Inc. , 2007-SOX-13 (ALJ July 10, 2007) for a similar summary of the element of protected activity in a SOX whistleblower case.].

PROTECTED ACTIVITY; ALLEGED FRAUDULENT POLICY OF SINGLE STORE FOUND NOT TO HAVE BEEN OF SUFFICIENT MAGNITUDE TO MATTER TO A REASONABLE INVESTOR

In Frederickson v. The Home Depot, U.S.A., Inc. , 2007-SOX-13 (ALJ July 10, 2007), the ALJ found that the Complainant failed to establish a prima facie case of a SOX whistleblower complaint where he did not, under the facts presented, show that he had a reasonable belief of actionable fraudulent activity. Specifically, the Complainant maintained that he had a reasonable belief of fraud relating to the recording of items as damaged rather than for "store use," whereby refunds for such merchandise were wrongfully extracted from vendors (the Complainant had used some hooks in his department, and was instructed to record them in the store computer as damaged). The ALJ found, however, that the Complainant had no reasonable basis to believe that this policy extended beyond the store at which he worked, and that such an alleged fraudulent policy, isolated to a single store, even if true, would not have been of sufficient magnitude to believe that a reasonable investor would rely on such information.

PROTECTED ACTIVITY; AUDITOR WHO IS MERELY PERFORMING ASSIGNED DUTIES VERSUS AUDITOR WHO GOES BEYOND ASSIGNED DUTIES TO REPORT REASONABLY PERCEIVED PROBLEMS TO UPPER MANAGEMENT

In Robinson v. Morgan Stanley , 2005-SOX-44 (ALJ Mar. 26, 2007), the Complainant was a senior internal auditor for Morgan Stanley/Discover. Frustrated based on her perception that her concerns about identifiable deficiencies in the company's financial operations were not reaching higher levels of management, the Complainant submitted a detailed memorandum to senior executives at Discover setting out numerous failures in audit controls and examples of management fraud. Based on the circumstances and nature of the memorandum, the Complainant contended that the report was a protected activity under SOX, despite her employment status as an internal auditor.

The ALJ detailed the holding of the ARB in Platone v. FLYi, Inc. , ARB No. 04-154 (Sept. 29, 2006), and the Sixth Circuit in Sasse v. USDOL , No. 04-3245 (6th Cir. May 31, 2005) (cases below ARB No. 02-077 and ALJ No. 1998 CAA 7), and summarized the components that the Complainant would need to establish in order to prove that she engaged in protected activity under SOX:

First, the report or action must relate to a purported violation of a federal law or SEC rule or regulation relating to fraud against shareholders. Second, the complainant's belief about the purported violation must be subjectively and objectively reasonable. Third, the complainant must communicate her concern to either her employer, the federal government, or a member of Congress. Fourth, the report or complaint must involve actions outside the complainant's assigned duties.

Slip op. at 115-116. In regard to the element of relatedness/reasonableness, the ALJ found that most of the items in the Complainant's memorandum failed to fit within the laws enumerated in SOX or other law related to fraud against shareholders. The ALJ found that a few items may have implicated allegations of fraud, but that the Complainant had not presented sufficient evidence to allow the ALJ to identify a specific federal law that may have been violated. The ALJ found that items related to several hundred dollars of unreported misuse of company cell phones and calling cards did not rise to the level of materiality in regard to fraud against shareholders. The ALJ did, however, find that one item in the memorandum - that audit management dropped her finding that Discover was not complying with banking regulations in regards to the prompt charge off of credit card bankruptcies and failed to take corrective action - fit the definition of protected activity under SOX (even though a resultant internal investigation led to no significant findings of impropriety).

The ALJ then turned to the question of whether the Complainant's action in sending the memorandum to upper management was exempt from SOX protection based on the Complainant's role as an auditor. The ALJ found that the Complainant's discovery of the bankruptcy reporting problem and presentation of her findings to audit management was not a SOX protected activity because she was merely discharging her auditor duties ( i.e. , under Sasse , she bore no employment risk in reporting the deficiency as an auditor). However, the ALJ found that the Complainant engaged in protected activity when she went beyond her assigned duties as an auditor by presenting the bankruptcy issue in a memorandum to the Discover President and CFO based on her belief that the issue was not getting to a sufficiently high level of management for necessary corrective action. The ALJ ultimately found, however, that the Complainant failed to prove that this protected activity contributed to her discharge.

PROTECTED ACTIVITY; EMPLOYER'S KNOWLEDGE; REPORTING WITHIN JOB DUTIES; WHETHER COMPLAINANT MUST EXPRESSLY IDENTIFY THE COMPLAINED OF ACTIONS AS ILLEGAL

In Deremer v. Gulfmark Offshore Inc. , 2006-SOX-2 (ALJ June 29, 2007), the Respondent contended that the Complainant's SOX whistleblower complaint was barred because his allegations fell within his job responsibilities and because he failed to communicate to the Respondent that he believed the conduct to be illegal. In support of the first contention, the Respondent cited several decisions in which it was found that finding irregularities as part of one's job duties cannot constitute protected activity - that the employer must be put on notice that the reporting is being done to expose illegal acts rather than merely warning of the consequences of its conduct. The ALJ distinguished the decisions as arising under other laws with different contexts, and returned to the purposes of SOX in interpreting the respondent's knowledge element of protected activity. The ALJ concluded that restricting protected activity to exclude job duties would be contrary to Congressional intent. The ALJ pointed out that the legislative history of SOX explicitly discusses the case of Sherron Watkins, whose job responsibilities at Enron arguably included reporting accounting fraud. The ALJ also pointed out that, to be actionable, a SOX whistleblower complaint requires the respondent's knowledge of protected activity, and an adverse job action to which protected activity is a contributing factor - as the actor, the respondent is necessarily aware of an adverse action and its motivation for such action.

In regard to the Respondent's second contention that a complainant must expressly state that he considers the conduct to be illegal, the ALJ found that an examination must be made of the context in which and to whom the statements were made. In the instant case, the statements were made to the controller, auditors, and an investigating law firm, all of whom should logically have recognized fraudulent behavior if the Complainant described it to them, and that publishing of fraudulent statements with the SEC was illegal. Thus, the ALJ found that the Complainant was not required to specifically state to the Respondent that the activity of which he complained was illegal.

PROTECTED ACTIVITY; COMPLAINANT'S PRESENTATION OF ADVICE THAT WOULD LEAD TO BETTER MANAGEMENT OF INVENTORY WITHOUT EXPRESSING CONCERN ABOUT VIOLATION OF LAWS COVERED BY SOX IS NOT PROTECTED ACTIVITY

In Richards v. Lexmark International, Inc. , 2004-SOX-49 (ALJ June 20, 2006), the Complainant had been assigned to work on a team tasked with managing inventory better; one aspect of the project involved how to reduce write offs in terms of obsolete inventory. Shortly before he was terminated from employment, the Complainant met with his supervisor concerning his preliminary findings on the inventory project, and suggested that metrics being used had the potential to misrepresent and understate the number of days items remained in inventory, resulting in misrepresentations in management reports. The ALJ found that this was not protected activity. Although acknowledging that the testimony indicated that such data had the potential for reaching the public and influencing decisions made by investors or shareholders, the Complainant had not suggested to his supervisor "that there was anything fraudulent about the manner in which the metrics were calculated, nor did he go so far as establish that the methods were contrary to [Generally Accepted Accounting Principles] or SEC filing requirements. Furthermore, he has not established that he believed there were intentional misrepresentations in the financial data reported either internally or externally, or that any laws or SEC regulations were violated." Slip op. at 33. The ALJ found that, although the Complainant believed that his advice would result in better inventory management, the Complainant's testimony as a whole did not establish that he actually believed that any false information had been reported to anyone, or that there was a violation of law.

PROTECTED ACTIVITY; SOX DOES NOT CONTAIN A MATERIALITY STANDARD FOR PROTECTED ACTIVITY

In Richards v. Lexmark International, Inc. , 2004-SOX-49 (ALJ June 20, 2006), in a footnote, the ALJ noted that she rejected the Respondent's argument that the inventory write-off at issue was immaterial because it had only a less than 1% effect on the "days of inventory" calculation for the year in question. The ALJ wrote: "As Complainant has asserted (Brief at 43-46), there is no materiality requirement for recovery under the Act. See generally Morefield v. Excelon Services, Inc. , 2004-SOX-2 (ALJ Levin, Jan. 28, 2004) (the Act "places no minimum dollar value on the protected activity it covers" and "[t]he mere existence of alleged manipulation, if contrary to a regulatory standard, might not be criminal in nature, but it very well might reveal flaws in the internal controls that could implicate whistleblower coverage for seemingly paltry sums.")" Slip op. at n.44.

PROTECTED ACTIVITY; ALLEGATIONS OF ACCOUNTING COVER UP OF A LOAN FROM A CONTRACTOR AND INSURANCE FRAUD

In Rzepiennik v. Archstone Smith, Inc. , 2004-SOX-26 (ALJ Feb. 23, 2007), the Complainant had been employed by the Respondent, an apartment investments and operations company, as a Production Officer whose duties included reviewing and approving payment requisitions from general contractors. The Respondent used a contractor to provide construction services. After his termination, the Complainant brought to the attention of high ranking officials for the Respondent allegations of fraudulent accounting on several projects, one to cover up a loan to the Respondent from the aforementioned general contractor, and one involving alleged insurance fraud. For purposes of deciding a motion for summary judgment, the ALJ found that these activities constituted protected activity under the SOX whistleblower provision, including the provisions on alleged violation of federal mail and wire fraud laws and violation of SEC rules and regulations requiring accurate reporting and adequate internal controls. The ALJ found, viewing the evidence most favorably to the Complainant that he had informed several of the Respondent's officers of what he reasonably believed to be fraudulent activity in violation of the SOX.

PROTECTED ACTIVITY; FOCUS ON ACTIONS ACTUALLY TAKEN RATHER THAN LATER CHARACTERIZATION; CHARGING MATERIAL HARM AGAINST SHAREHOLDERS IS NOT, STANDING ALONE, PROTECTED ACTIVITY, WHICH MUST INCLUDE CHARGES OBJECTIVELY COGNIZABLE AS MISREPRESENTATION AND FRAUD AGAINST SHAREHOLDERS

In Neuer v. Bessellieu , 2006-SOX-132 (ALJ Dec. 5, 2006), the Complainant met with a consultant hired by an official with the publicly traded parent company to help him understand the organization of the subsidiary and make any necessary changes. The Complainant made some recommendations and observations, including inter alia that one manager, although competent, was over tasked and could not meet reasonably expected service delivery goals, that the subsidiary's president's marketing director was incompetent and filled a redundant position, and that the subsidiary was performing poorly due to cronyism and redundancies. Before the ALJ, the Complainant argued that the subsidiary's president had been motivated by self-interest when he made the business and personnel decisions that caused the problems he identified in the meeting with the consultant. The Complainant argued that the president's conduct was against the company's code of conduct, unethical, and a violation of fiduciary responsibilities imposed on managers and directors under SOX; that in reporting their compliance with company policy to the SEC, the president's actions represented a material inconsistency between actual business activities and SEC filings; and that the president had engaged in self dealing because he hired senior managers based on his relationships with them rather than the best interests of the subsidiary.

The ALJ found, in ruling on a motion for summary decision, that while the Complainant may have subjectively held the belief that the president was putting himself before the business welfare of the subsidiary, he had not raised such a concern with the consultant. The ALJ found that the Complainant had not mentioned at the meeting with the consultant that he believed that the president's actions were a misrepresentation and inconsistent with the company's SEC filings. In other words, that the Complainant believed that subsidiary's president's hiring practices violated company had not been communicated to the consultant in such a manner as to leave her with an objectively reasonable basis to conclude that the president was engaging in conduct prohibited by the SEC. The ALJ cited in this respect the ARB's ruling in Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), that the relevant inquiry in determining whether an employee engaged in protected activity is not the allegations made in the OSHA complaint, but what the employee actually communicated to his employer prior to the adverse employment action.

The Complainant also argued before ALJ that the subsidiary's president's actions and management amounted to fraud on shareholders because it deprived shareholders of the intangible right to "honest services" (i.e., the service of more qualified senior employees) and that the marketing director's incompetence required disclosure to shareholders. In ruling on the motion for summary decision, taking these assertions to be true, the ALJ found that "material harm to shareholders is not the only requisite element to show fraud against shareholders." Slip op. at 8-9. Rather, "as noted by the ARB in Platone , misrepresentation and fraud are necessary elements of protected communications under SOX." Slip op. at 9. The Complainant's comments to the consultant charged the president with poor business, organizational, and personnel decisions; but such charges standing alone do not objectively indicate misrepresentation or illegal activity or fraud against shareholders.

PROTECTED ACTIVITY; COMPLAINT THAT REPORT SENT TO CUSTOMERS AND SHAREHOLDERS CONTAINED INACCURACIES IS NOT PROTECTED ACTIVITY WHERE SUCH INACCURACIES WERE NOT MATERIAL TO THE REPRESENTATION OF THE RESPONDENT'S FINANCIAL CONDITION

In Giurovici v. Equinix, Inc. , 2006-SOX-107 (ALJ Nov. 15, 2006), the Respondent's activities included data centers supplying internet exchange services and an uninterrupted power supply to its customers, who maintained their server and network equipment on site. The Respondent's agreements with its customers provided for 100 percent reliability with respect to power, cooling and other factors. The Complainant alleged under the SOX whistleblower provision that he had been terminated in retaliation for having reported to management officials that the company report, sent to customers and shareholders, concerning a power outage at one of the Respondent's facilities, was false in several respects. The Complainant believed that the report was inaccurate because the Respondent did not want to hurt its reputation and share price, since higher management had stock options. The ALJ found that the Complainant's allegations may have amounted to a reasonable belief that the Respondent violated 15 U.S.C. § 7241, section 302 of the SEA, which requires corporate officers to certify that corporate reports do not contain untrue statements of material fact and fairly present, in all material respects, the financial condition of the corporation. The ALJ, however, concluded that the Complainant had not established that any factual inaccuracies in the report sent to customers and shareholders were actually "material" to the representation of the Respondent's financial condition. Nor had he identified a fraudulent scheme in connection with the purchase or sale of any security. Accordingly, the ALJ found that the Complainant failed to establish that he engaged in protected activity or that the Respondent had any knowledge of protected activity.

PROTECTED ACTIVITY; FAILURE TO REPORT MISCONDUCT IS NOT PROTECTED ACTIVITY

In Cook v. Ceridian Tax Services, Inc. , 2006-SOX-102 (ALJ Jan. 9, 2007), the Complainant was a Director of Tax Operations in one of the Respondent's local offices, and was discharged for failing to handle and respond to complaints about the conduct of one of his staff whose conduct in preparing abatement letters to the IRS was found, after investigation by a higher level supervisor, not to conform to the Respondent's standards, thereby exposing the Respondent to preventable inquiries, audits and penalties. The Respondent moved for summary decision on the ground that the Complainant did not engage in protected activity, and supported the motion with the Complaint's admission on deposition that he was not aware of illegal conduct in his department. The Complainant failed to come forward with any admissible evidence to raise an issue of fact in response to the motion. The ALJ considered the allegations made in the Complainant's response - that he was not terminated for voicing some protected activity but "for not appropriately reporting misconduct" - and found that the Complainant's own allegations showed that he did not engage in protected activity.

PROTECTED ACTIVITY; MERE SUSPICION WITHOUT ANY SUPPORTING EVIDENCE CANNOT FORM THE BASIS FOR A REASONABLE BELIEF THAT LAWS ENUMERATED IN SECTION 806 HAD BEEN VIOLATED

In Riedell v. Verizon Communications , 2005-SOX-77 (ALJ Aug. 14, 2006), the ALJ granted summary decision in favor of the Respondent based on a finding that the Complainant had failed to provide any evidence that he had the kind of factual information to support a reasonable belief that the laws detailed in section 806 of the SOX were being violated. The ALJ acknowledged that some of the Complainant's allegations could at least theoretically be related to violations of some of those laws. For example, if, as the Complainant alleged, a Verizon employee was showing favoritism in awarding contracts, such actions it might have included acts of mail or wire fraud, or accounting fraud. The ALJ ruled, however, that "[a]lthough the Complainant's knowledge of the alleged favoritism might have led him to develop a suspicion that mail or wire fraud could have occurred, a suspicion is simply speculation and cannot logically be regarded as a reasonable belief [that such fraud had occurred]." Slip op. at 10. The Complainant made a number of similar allegations about the Respondent, but none of the allegations were shown to have any factual basis.

PROTECTED ACTIVITY; THE COMPLAINANT'S EXPRESSION OF LACK OF COMFORT WITH CERTAIN PRACTICES IS NOT PROTECTED ACTIVITY WHERE HE DID NOT ALLEGE OR BELIEVE THAT THE RESPONDENT HAD BEEN ENGAGED IN ANY ILLEGAL OR FRAUDULENT ACTIVITY

In Gale v. World Financial Group , 2006-SOX-43 (ALJ June 9, 2006), the Complainant voiced "concerns" about the sale of certain projects, and "felt" that a program was "impermissible," and was "uncomfortable" with the rescission of a broker's fee. In none of his allegations, however, did he identify a specific law or regulation that may have been violated, nor did he allege that the Respondent had misrepresented its financial status to the SEC or shareholders or investors. He admitted in deposition that, although he was uncomfortable with some practices, he did not believe that the Respondent had engaged in any kind of illegal or fraudulent activity during his employment. The ALJ therefore found that the Complainant had not engaged in protected activity under the SOX whistleblower provision.

PROTECTED ACTIVITY; FRAUD AGAINST A CLIENT OR ANOTHER ENTITY IS NOT FRAUD AGAINST SHAREHOLDERS; MERE SPECULATION OF VIOLATION OF LAWS SPECIFIED IN SOX IS INSUFFICENT TO CONSTITUTE PROTECTED ACTIVITY; VIOLATION OF NASD OR NYSE RULES ARE NOT COVERED

In Mozingo v. The South Financial Group, Inc. , 2007-SOX-2 (ALJ Dec. 6, 2006), the Complainant was a financial analyst who raised a concern about a co-worker's possibly fraudulent transfer of a deceased client's mutual fund account under his broker number. The ALJ granted summary decision in favor of the Respondent on the ground that this was not protected activity under SOX. The ALJ concluded that "[w[hile this activity may possibly constitute fraud against Bank of America or even [the client's] heirs, it is not fraud against the Respondent Institution's shareholders or investors." Slip op. at 11. Although the Complainant had stated that he believed that other fraudulent conduct involving the deceased client's account may have occurred - or may occur in the future - based on the improper transfer of her account, he provided no facts or evidence in support. The ALJ concluded, therefore, that allegations were mere speculation. The Complainant also asserted that there had been violations of several NASD and NYSE rules. The ALJ found that, although the SEC has the authority to review and approve those rules, they are rules made by self-regulatory organizations.

PROTECTED ACTIVITY; REPORTING THE USE OF UNLICENSED COMPUTER SOFTWARE BY RESPONDENT'S EMPLOYEES

In Reed v. MCI, Inc. , 2006-SOX-71 (ALJ June 20, 2006), the ALJ granted summary decision in favor of the Respondent where he found that the Complainant had not engaged in protected activity when he reported to the Respondent that employees were using unlicensed computer software. The Complainant's theory was that the Respondent defrauded stockholders by reporting profits partly based on use of pirated software, that the penalty per incident could be as high as $150,000, and that thousands of incidents may have occurred. The Complainant also noted that the Respondent was potentially risking loss of good will in using pirated software. The ALJ held that while the Complainant may have believed that the Respondent was violating copyright laws, there was nothing in the complaint or pleadings indicating that the Complainant reasonably believed that the Respondent was violating any of the security laws enumerated in SOX or that the Respondent was committing a fraud on shareholders.

PROTECTED ACTIVITY; REFUSAL TO VIOLATE STATE LAW IS NOT PROTECTED ACTIVITY UNDER SOX

In Williams v. Sirva, Inc. , 2006-SOX-6 (ALJ Feb. 13, 2006), the Complainant was an insurance adjuster who alleged that she was provided with a list of questions and answers to use when the California Department of Insurance called to randomly investigate the Respondent's insurance and fraud prevention methods. The Complainant believed that some of the answers were incorrect and refused to participate in the telephone calls. The ALJ granted summary decision in favor of the Respondent because, as a matter of law, SOX does not provide protection to employees who report only violations of state statutes or laws. Here, the Complainant presented no evidence that her participation in the telephone questioning would have been a violation of federal law.

PROTECTED ACTIVITY; MERELY QUESTIONING BUSINESS DECISIONS WITHOUT ALLEGING CRIMINAL FRAUD, VIOLATION OF SEC RULES, OR FRAUD AGAINST SHAREHOLDERS IS NOT PROTECTED ACTIVITY; RAISING CONCERNS ABOUT TITLE VII TYPE DISCRIMINATION OR WORKPACE SAFETY IS NOT PROTECTED ACTIVITY UNDER SOX IF IT DOES NOT RISE TO THE LEVEL OF MATERIALITY TO THE RESPONDENT'S FINANCIAL CONDITION

In Levi v. Anheuser-Busch Companies, Inc. , 2006-SOX-37 (ALJ May 3, 2006), the Complainant's SOX complaint was filed with OSHA outside the 90-day limitations period from the date that notice was given that he had been suspended with intent to discharge, and thus was facially untimely. The Complainant earlier had written a series of letters to the Secretary of Labor, company officials, and others, and contended that they should have been treated as SOX complaints. The ALJ thoroughly analyzed the content of those letters, and found that they presented three general categorizes of reported concerns. First, the Complainant expressed numerous concerns with business decisions, omissions, and management determinations which, if objectively accurate, might relate to adverse impact on the value of shareholder's holdings in the Respondent; however, they did not involve any criminal fraud offenses, violations of an SEC rule or regulation, or any federal law relating to fraud against shareholders.

Second, the Complainant expressed concerns about racial discrimination, sexual harassment and intimidation in his work environment. The ALJ found that it could be argued that a company which permits discriminatory practices, harassment and intimidation is acting contrary to the best interests of its shareholders, but that SOX protected activity must involve an allegation of violation of a federal law directly related to fraud against shareholders. Title VII establishes rights and procedures to address illegal employment discrimination, but was not enacted to preclude fraud against shareholders. The ALJ considered whether Section 302 of SOX, which mandates accuracy in corporate disclosures, might be implicated. The ALJ observed that Section 302 requires accuracy in reporting of material facts and had the two key components of accurate accounting and a corporation's financial condition. The ALJ concluded that "[a] manager's failure to fully investigate individual acts of discrimination, sexual harassment, and intimidation has a very marginal connection with those two components." The ALJ acknowledged that failure to disclose a class action lawsuit based on systemic race discrimination or sexual harassment with the potential to sufficiently affect the financial condition of a corporation might support SOX protected activity if the individual complained about the failure to disclose that situation, but that individual discrimination does not reach the materiality threshold in terms of a corporation's financial condition. In the instant case, the Complainant's complaints focused on the alleged existence of discrimination, harassment and intimidation rather than the failure to report it.

Third, the Complainant expressed concerns about the safety of boiler operations and workplace violence, but the ALJ found that they did not rise to the necessary level of materiality that failure to disclose them might represent fraud against shareholders.

PROTECTED ACTIVITY; IMPLIED OR RAMBLING ALLEGATIONS OF FRAUD ARE INSUFFICENT TO ESTABLISH RAISING CONCERNS OF FRAUD AGAINST SHAREHOLDERS OR INVESTORS

In Townsend v. Big Dog Holdings, Inc. , 2006-SOX-28 (ALJ Feb. 14, 2006), the ALJ granted the Respondent's motion for summary decision on the ground, inter alia, that the Complainant did not present a genuine issue material fact for trial showing that she had engaged in protected activity under the SOX. First, the Complainant's request for copies of her paycheck due to a discrepancy between the income she reported on her tax return and the income reported by the Respondent was related to a personal audit by the IRS, and did not contain an allegation of fraud or other conduct by the Respondent that might be covered under SOX. The Complainant had sent a "notice" letter to all agents, employees, officers and shareholders of the Respondent, purporting to copy a number of state, federal and local authorities, and others, in which she attempted to notify recipients that the Respondent had recently escalated the damage and victimization it had caused her over the years, that she had communicated with various federal agencies, and was now protected. The letter was disjointed, full of generalizations and legalese and generally very difficult to comprehend. Although it mentioned fraud on several occasions, it did not describe any specific conduct nor indicate any securities fraud law or regulation that may have been violated. The ALJ found that even if the Complainant's allegations of general fraud were true, he could find no relationship between such allegations and fraud relating to investors or shareholders.

PROTECTED ACTIVITY; REPORTING POTENTIAL FRAUD OF CUSTOMER DOES NOT STATE CAUSE OF ACTION UNDER SOX

In Johnson v. Mechanics and Farmers Bank , 2006-SOX-19 (ALJ June 9, 2006), the ALJ granted summary decision in favor of the Respondent where the Complainant failed to show that he had a reasonable belief that the Respondent was involved in fraudulent activity. Rather, the Complainant had reported his suspicion that certain loan applications might be fraudulent. The bank investigated, and denied the applications due to the applicant's fraudulent behavior. Thus, even assuming that the Complainant's factual assertions were true, there was no cause of action under SOX.

PROTECTED ACTIVITY; WHETHER REPORTING OF VIOLATION OF SEC RULE OR REGULATION MUST RELATE TO FRAUD AGAINST SHAREHOLDERS

In Walton v. NOVA Information Systems , 2005-SOX-107 (ALJ Mar. 29, 2006), the ALJ rejected the Respondent's argument that, to be protected activity under the SOX, the Complainant's allegation of a violation of a SEC rule or regulation must be related to fraud against shareholders. The ALJ found that to rule otherwise would be to in effect remove the phrase "any rule or regulations of the Security and Exchange Commission" from the SOX. The ALJ noted that none of the ALJ decisions cited by the Respondent involved an allegation of violation of an SEC rule, and that the district court's decision in Collins v. Beazer Homes USA, Inc. , 334 F.Supp.2d 1365 (N.D.Ga. 2004), was contrary to the Respondent's position.

PROTECTED ACTIVITY; ALLEGATION THAT COMPLAINANT'S REPORT OF DATA SECURITY LAPSES SHOULD HAVE BEEN INCLUDED IN MANAGEMENT CERTIFICATION REQUIREMENTS OF §§ 302, 404 and 906; COMPLAINANT WHO IS JUST DOING HER JOB

In Walton v. NOVA Information Systems , 2005-SOX-107 (ALJ Mar. 29, 2006), the Respondent, a credit card processor, argued that it should be granted summary decision because the Complainant had only complained of internal dissatisfaction with the internal structure of the Respondent's IT department. The ALJ, however found that the complaint was much more than that - rather the Complainant complained that her disclosures of security lapses in databases should have been revealed to external auditors, and failure to do so violated the management certification requirements of §§ 302, 404 and 906 of the SOX and other laws, and SEC rules. The ALJ found such actions could reasonably be within the zone of protection afforded by SOX, citing Collins v. Beazer Homes USA, Inc. , 334 F.Supp.2d 1365 (N.D.Ga. 2004), as authority consistent with his interpretation. The ALJ rejected the Respondent's argument that recognizing this kind of protected activity would create a private right of action not intended by Congress in enacting SOX. The ALJ also rejected the Respondent's contention that the Complainant's disclosures were not protected because she was doing nothing more than performing her job as a database administrator with security responsibilities.

 

PROTECTED ACTIVITY; OBJECTIVE REASONABLENESS OF BELIEF THAT RESPONDENT'S CONDUCT WAS A MATERIAL FACT THAT SHOULD HAVE BEEN INCLUDED IN A SECTION 302 REPORT; WHETHER REPORTING THE COMPLAINANT'S OWN MISCONDUCT MAY CONSTITUTE PROTECTED ACTIVITY

In Tice v. Bristol-Myers Squibb Co. , 2006-SOX-20 (ALJ Apr. 26, 2006), the Complainant, a sales representative for a drug company, alleged that she was terminated for raising concerns regarding inaccurate sales call reporting by the Respondent and the pressure the Respondent's management placed on representatives to misrepresent sales calls. In support, the Complainant admitted to falsely recording 22 sales calls and stated that other representatives had also falsified calls. She also alleged that her supervisor demanded that his representatives record 10 sales calls a day, which exceeded the Respondent's goal. The Complainant asserted that she believed that this alleged activity constituted fraud against shareholders because she believed that the Respondent would be subject to a substantial financial penalty if it did not meet the sales call quota set forth in a co-promotional contract it had with another drug company.

The ALJ began his analysis by noting that the Complainant's allegations did not implicate any of the criminal fraud or SEC rules types of fraud enumerated in SOX; accordingly, the Complainant's complaint would be analyzed to determine whether the Complainant reasonably believed that the Respondent violated a federal law related to fraud against shareholders. The Complainant argued that she had a reasonable belief that the Respondent had violated 15 U.S.C. § 7241, section 302 of the SOX, which requires corporate officers to certify that corporate reports do not contain untrue statements of material fact and fairly present, in all material respects, the financial condition of the corporation.

In regard to the Complainant's allegations of management pressure to misrepresent sales call data, the ALJ found that the Complainant failed to establish that it was objectively reasonable to believe that a statement of her supervisor at a sales meeting in regard to the sales call requirement that "If they want little red fire trucks, we give them little red fire trucks," was a directive to falsify sales data, and therefore a fraud against shareholders.

In regard to the allegation that other representatives falsified sales call reports, the ALJ observed that the Complainant had declined to identify those representatives to the official that the Respondent had appointed to investigate her claim. At the hearing, the Complainant named her former partner. The ALJ, however, found that this one incident failed to meet the materiality threshold of section 302.

In regard to the Complainant's admission that she herself had falsified reports, the ALJ found that one's own misconduct can constitute protected activity under SOX (distinguishing SOX's provision that the reporting of the misconduct must be lawful). Nonetheless, the ALJ found that the level of false reporting admitted to by the Complainant also did not meet the materiality threshold of section 302. Even when combining the alleged misconduct of her former partner and the Complainant's admitted misconduct, the ALJ still found it objectively unreasonable to conclude that such behavior constituted a material fact that misrepresented the Respondent's financial condition. Moreover, the lack of an objectively reasonable link between the supervisor's metaphor and a directive to falsify calls resulted was found to constitute a lack of additional support for the objective reasonableness of the Complainant's belief.

PROTECTED ACTIVITY; REPORTING ACCOUNTING DISCREPANCIES IS NOT PROTECTED ACTIVITY WHERE THE COMPLAINANT DID NOT INDICATE ANY BELIEF THAT THE RESPONDENT WAS VIOLATING ANY OF THE LAWS ENUMERATED IN THE SOX WHISTLEBLOWER PROVISION

In Williams-Wilson v. NDC Health Corp. , 2005-SOX-97 (ALJ Jan. 31, 2007), the Complainant was a financial analyst whose duties included review of account contracts, invoices, amendments, billing documents and computerized account entries, and reporting discrepancies to her immediate supervisor. Prior to filing her SOX complaint, the Complainant routinely found account discrepancies and reported them to management. However, in so reporting she never indicated to her supervisors that she believed that the discrepancies constituted a fraud on shareholders or any other illegal activity proscribed by the SOX. The Respondent's managers first learned of that assertion when it received a copy of the Complainant's SOX complaint. The ALJ ruled:

Specific reports of questionable financial actions by a company only rises to "protected activity" under the Act when there is both (1) a specific description of the perceived questionable financial actions by the company, and (2) reasonable identification of the financial action to a perceived violation of one of the six protected areas of the Act. see Henrich v ECOLAB, Inc. , ARB No. 50-030, infra; Bozeman v Per-Se Technologies , WL 2947533 (N.D. Ga, 2006); Fraser v. Fiduciary Trust Co. International , 417 F. Supp. 2d 310 (S.D. NY, 2006) Here the Complainant gave specific description in her August 20, 2004 report, of what she perceived as questionable financial actions by Respondent. However, this was her duty as a financial analyst. Without the additional indication by her that she believed that these discrepancies involved a violation of one of the six protected areas of the Act, her reporting activities did not rise to the level of "protected activity" under the Act. Here there was no such indication made by her until Respondent received a copy of the filed September 24, 2004, SOX complaint. Accordingly, this Administrative Law Judge finds that the activity upon which the original complaint in this case is founded is not "protected activity" under the Act and the Complainant is not entitled to relief on this complaint under the Act. Thus, further issue analysis is not required.

Slip op. at 14.

PROTECTED ACTIVITY; GENERIC ALLEGATIONS OF ACCOUTING ERRORS; LACK OF REASONABLE BELIEF OF SOX VIOLATIONS AT TIME OF REPORTING; LACK OF MATERIALITY

In Wengender v. Robert Half International, Inc. , 2005-SOX-59 (ALJ Mar. 30, 2006), the Complainant was a salesperson for a "temp" firm, who alleged that he was constructively discharged because he reported what he believed to be an accounting violation in the inappropriate assignment of unearned commissions. The ALJ granted summary decision in favor of the Respondent because, inter alia , the Complainant had not engaged in protected activity under the SOX. First, the Complainant first alleged that the reassignment of commissions was a violation of securities or federal regulations or laws when he filed his objections to the OSHA findings and requested an ALJ hearing. Previously, he had characterized the reassignment as an accounting violation, against GAAP, and in terms of general allegations of fraud. The ALJ observed that "SOX does not apply to generic allegations of accounting violations, violations of GAAP, or general allegations of fraud," citing Marshall v. Northrop Grumman Synoptics , 2005-SOX-8, slip op. at 5 (ALJ June 22, 2005). Moreover, the Complainant presented no evidence of intent to deceive shareholders. Rather, the evidence tended to show that the supervisor's reason for reassigning the credits was to provide an incentive to new employees. Second, the ALJ found that the Complainant plainly did not hold a reasonable belief that the reassignment was a violation of securities law or regulations relating to fraud against shareholders at the time he raised the objections; rather, he told his supervisor that he was not against reassigning credits, but that he just didn't want his contribution to the credits to go unrewarded. Although a complainant need not establish an actual violation, he must show that he reasonably or actually believed that the reported activity was a violation. Third, the ALJ found that the estimated dollar amount of the reassigned credits, $12,500, would have been lost in the rounding in form 10-k of the Respondent's financial disclosures, management discussions and other disclosures, and thus did not rise to the level of materiality required under SOX.

PROTECTED ACTIVITY; RELEVANT INQUIRY IS NOT WHAT WAS ALLEGED IN RESPONSE TO MOTION FOR SUMMARY DECISION BUT WHAT WAS ACTUALLY COMMUNICATED TO THE EMPLOYER AT THE TIME OF THE REPORTING ACTIVITY

In Espinoza v. Sysco Corp. , 2005-SOX-25 (ALJ Dec. 27, 2006), the Complainant was the lead diesel mechanic at one of the Respondent's facilities. Another employee had reported to the HR department that vehicles belonging to company managers were being repaired in the facility on company time. When the Complainant was asked if the allegations were true, he confirmed them and provided additional details. Several months later the Complainant was demoted, and a few months after that, terminated from employment. The Complainant filed a SOX complaint. OSHA dismissed based on a finding that the Complainant's report of unauthorized vehicle repairs was not protected activity under the SOX. Before the ALJ, the Respondent filed a motion for summary judgment. The ALJ reviewed similar ALJ decisions, and the then recent ARB decision in Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006). The ALJ observed that the ARB had

confirmed that Sarbanes-Oxley "does not provide whistleblower protection for all employee complaints about how a public company spends its money and pays its bills." Platone , 2003-SOX-27, at 17. In defining the scope of protected activity under Sarbanes-Oxley, the ARB explained that the employee's communications must "definitively and specifically" relate to any of the listed categories of fraud or securities violations under 18 U.S.C. § 1514A(a)(1). Id . The ARB also stated that in determining whether the complainant engaged in protected activity, "the relevant inquiry is not what she alleged in her [OSHA complaint], but what she actually communicated to her employer prior to [her] termination." Id .

Slip op. at 4. In his opposition to the motion for summary decision, the Complainant argued that his disclosure to the HR department about the repairs on manager's personal vehicle was covered under SOX because he reasonably believed that this was a fraud on shareholders. The Complainant explained how each of his disclosures related to the federal laws specified in the SOX whistleblower provision. The ALJ, however, found that the characterizations in the response to the motion for summary decision were not relevant. Rather, the issue was what the Complainant actually communicated to the Respondent, and "whether his communications 'definitively and specifically' related to any of the listed categories of fraud or securities violations under 18 U.S.C. § 1514A(a)(1)." Slip op. at 4 (citation omitted). The ALJ observed that the Complainant in his sworn deposition testimony indicated that he believed that he had been retaliated against for working on personal vehicles in the company shop, not for providing information about those activities, although other statements by the Complainant were at least suggestive of an allegation of retaliation for reporting. The ALJ found that regardless of what he now alleged, the Complainant did not, at the time he provided the information to the HR department, hold the belief that the conduct he referred to violated the laws listed in the SOX. Reviewing the Complainant's testimony, the ALJ found that the Complainant merely felt that it wasn't right to have personal vehicles repaired by company mechanics, not that he believed that such activities constituted a fraud against shareholders. Finally, the ALJ wrote: "Even if the servicing personal vehicles cost the company the value of labor performed, it does not translate into any sort of transaction involving fraud against shareholders or intentionally deceitful statements made to actual or potential investors about the value of the company, or anything else that could reasonably and objectively be deemed a fraud against shareholders." Slip op. at 7.

PROTECTED ACTIVITY; REPORTING CO-EMPLOYMENT VIOLATIONS

In McClendon v. Hewlett Packard, Inc. , 2006-SOX-29 (ALJ Oct. 5, 2006), Complainant alleged that he engaged in protected activity by, inter alia , reporting co-employment violations and related attempts to conceal those violations. The ALJ held that Complainant's reporting of co-employment violations to various supervisors, and his warnings to his supervisors of potential consequences of such violations, were not protected activity under the Act. Complainant contended that the alleged violations would result in significant consequences including an IRS or OSHA investigation and possible violations of the FLSA or ERISA. He argued that such consequences would concern a reasonable shareholder. McClendon, slip op. at 72. The ALJ held "that a mere possibility of a co-employment violation and the potential withholding of the effects of co-employment on the financial condition of a corporation are not enough to secure the protection of the SOX whistleblower provisions." Id. at 72. In his finding, the ALJ relied on the ARB's decision in Harvey v. Home Depot , ARB No. 04-114, 04-115 (ARB June 2, 2006), in which the Board specified that "'[a] mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld from investors, is not enough.'" Id.

In addition, the ALJ held that "[a] co-employment violation by itself is not a violation of any SEC rule or regulation, or any Federal law pertaining to fraud against shareholders." Id. Again, the ALJ relied on the Harvey case, and specifically the ARB's holding "that SOX only protects activities 'directly related to the listed categories of fraud or securities violations.'" Id. , citing to Harvey v. Home Depot , ARB No. 04-114, 04-115 (ARB June 2, 2006).

The ALJ further held that Complainant was unable to prove by a preponderance of the evidence that Respondent tried to conceal the alleged co-employment violations. See McClendon , slip op. at 72-74.

PROTECTED ACTIVITY; REPORTING H-1B VISA VIOLATIONS

In McClendon v. Hewlett Packard, Inc. , 2006-SOX-29 (ALJ Oct. 5, 2006), Complainant alleged that he engaged in protected activity by, inter alia, reporting H-1B Visa noncompliance. The ALJ held that Complainant's H-1B visa complaint was not protected under SOX because it does not relate to one of the categories of fraud or securities violations. The ALJ cited in this regard the ARB decision in Harvey v. Home Depot , ARB No. 04-114, 04-115 (ARB June 2, 2006), in which the ARB held that the Complainant's claim of overtime pay violations was not protected under SOX because it did not involve a securities or fraud violation. McClendon , slip op. at 74, citing to Harvey at 15.

PROTECTED ACTIVITY; FILING OF PRIOR SOX WHISTLEBLOWER CLAIMS

In McClendon v. Hewlett Packard, Inc. , 2006-SOX-29 (ALJ Oct. 5, 2006), Complainant alleged that he engaged in protected activity by, inter alia, filing and appealing two SOX whistleblower claims. The ALJ held that Complainant's filing of two SOX claims was protected activity under the Act, and that Respondent was aware that these claims were filed.

PROTECTED ACTIVITY; THREAT TO FILE COMPLAINTS WITH EEOC, DOL AND OTHER AGENCIES FOR RESPONDENT'S ALLEGED SYSTEMIC RACE DISCRIMINATION IS NOT, STANDING ALONE, SUFFICIENT TO ESTABLISH FRAUD AGAINST SHAREHOLDERS

In Smith v. Hewlett Packard , 2005-SOX-88 to 92 (ALJ Jan. 19, 2006), the ALJ found that the Complainant did not engage in protected activity under the whistleblower provision of the SOX when he told an Employee-Relations manager that if he did not see appreciable effort by the Respondent to address longstanding and institutional discriminatory practices he would bring the issue to the attention of the EEOC, the Department of Labor and other appropriate agencies. Citing Harvey v. The Home Depot, Inc. , 2004-SOX-20 (ALJ May 28, 2004), the ALJ noted that protected activity under the SOX must involve an alleged violation of a federal law directly related to fraud against shareholders. There had been rumors of a class-action law suit against the Respondent. The ALJ observed that had such a suit actually been filed, and if the Respondent had prevented that information from reaching shareholders, and if the Complainant had learned of this omission and reported it, then he would have engaged in protected activity under SOX. However, in the instant case, "[m]ere knowledge that an employee-evaluation process adversely affected minorities (without knowing whether this result was intentional), coupled with an insider's access to disgruntled employees' conversations about 'external' resolutions, is not enough." Slip op. at 10. The ALJ noted that "[f]raudulent disclosures to shareholders about a company's diversity or opportunities for those within protected classes could very well impact a company's value on the public market. Socially responsible investors may move their money upon learning of a company's discriminatory practices." However, in the instant case the Complainant's allegations did not establish the making of a report related to fraud against shareholders.

PROTECTED ACTIVITY; VIOLATION OF STATE LAW NOT COVERED

In Williams v. Sirva, Inc. , 2006-SOX-6 (ALJ Feb. 13, 2006), the Complainant alleged that the Respondent violated the whistleblower provision of the SOX when it took adverse actions against her and constructively discharged her after she refused to participate in random telephone questioning by the California Department of Insurance about insurance fraud prevention methods. The Complainant believed that a script provided by her supervisor gave incorrect answers. The Respondent filed for summary judgment on the ground that the Complainant's decision not to participate in the telephone questioning had no relationship to federal securities law or any other federal law relating to fraud against shareholders -- rather her decision related only to possible state insurance law violations. The Complainant presented no evidence to the contrary, and the ALJ, finding that SOX does not provide protection to employees who only report violations of state statutes or laws, granted summary decision in favor of the Respondent.

PROTECTED ACTIVITY; DISTINCTION BETWEEN COMPLAINANT'S MISTAKEN, BUT REASONABLE BELIEF AND A COMPLAINANT'S BELIEF THAT WAS UNREASONABLE FROM THE OUTSET

The Complainant did not engage in protected activity when he accused the company's CEO of insider trading where the Complainant's suspicions where not based on a reasonable belief from the outset. The Complainant thought that the CEO had been attempting to purchase company stock based on advance knowledge of the results of a lawsuit that would bring a large amount of cash into the company. The ALJ, however, found that the Complainant's belief was based on very thin evidence -- a draft press release found in the trash that referred to the company's success in the litigation, a snippet of a telephone conversation the Complainant overheard in which the CEO was asking someone how he could buy 10,000 shares of something, and a rumor that a member of the Board of Directors had advance knowledge that the litigation had been resolved in Respondent's favor. The ALJ found that the Complainant did not consider the CEO could have been talking about anything. The ALJ distinguished instances where the Complainant has a reasonable belief that later turns out to be wrong from instances where the Complainant's belief was unreasonable from the outset. The ALJ also took into consideration the Complainant's own conduct -- he had not followed the company's standards of conduct procedure for making allegations regarding insider trading, and did not relate his suspicions to the head of audit committee. Although the Complainant might have believed that the head of the audit committee was involved in disseminating the insider information, he nonetheless did not alert any other Board member either. The ALJ also noted that the subject of insider trading had not been mentioned during the OSHA investigation or in response to the ALJ's order directing the Complainant to identify the bases for his SOX complaint. Bechtel v. Competitive Technologies, Inc. , 2005-SOX-33 (ALJ Oct. 5, 2005).

PROTECTED ACTIVITY; MUST IMPLICATE FRAUD

In Tuttle v. Johnson Controls Battery Division , 2004-SOX-76 (ALJ Jan. 3, 2005), the Complainant's SOX whistleblower complaint was grounded in the allegation that he was terminated due to complaints to the Respondent that significant numbers of its batteries were defective. The ALJ granted summary judgment against the Complainant because the complaint did "not address any kind of fraud or any transactions relating to securities. Moreover, there has been no allegation that the activities complained of involved intentional deceit or resulted in a fraud against shareholders or investors." Slip op. at 3-4. The ALJ wrote:

    The legislative history of the Act makes it clear that fraud is an integral element of a cause of action under the whistleblower provision. See, e.g . S. Rep. No. 107-146, 2002 WL 863249 (May 6, 2002) (explaining that the pertinent section "would provide whistleblower protection to employees of publicly traded companies who report acts of fraud to federal officials with the authority to remedy the wrongdoing or to supervisors or appropriate individuals within their company.") The provision is designed to protect employees involved "in detecting and stopping actions which they reasonably believe are fraudulent." Id . In the securities area, fraud may include "any means of disseminating false information into the market on which a reasonable investor would rely." Ames Department Stores Inc., Stock Litigation , 991 F.2d 953, 967 (2d Cir. 1993) (addressing SEC antifraud regulations). While fraud under the Act is undoubtedly broader, an element of intentional deceit that would impact shareholders or investors is implicit.

    Protected activity is defined under SOX as reporting an employer's conduct which the employee reasonably believes constitutes a violation of the laws and regulations related to fraud against shareholders. While the employee is not required to show the reported conduct actually caused a violation of the law, he must show that he reasonably believed the employer violated one of the laws or regulations enumerated in the Act. Thus, the employee's belief "must be scrutinized under both subjective and objective standards." Melendez v. Exxon Chemicals Americas , ARB No. 96-051 (July 14, 2000).

PROTECTED ACTIVITY; ENVIRONMENTAL CLAIM NOT RELATED TO SHAREHOLDER FRAUD IS NOT PROTECTED ACTIVITY

The ALJ found that the Complainant was not engaged in protected activity under the SOX where her reports concerned air quality and had nothing to do with fraud or the protection of investors. The ALJ was not convinced otherwise by the Complainant's speculation that poor air quality might ultimately result in financial loss to the Respondent. The ALJ granted summary judgment to the Respondent based on the Complainant's failure to establish an essential element of a prima facie case. Minkina v. Affiliated Physician's Group , 2005-SOX-19 (ALJ Feb. 22, 2005).

PROTECTED ACTIVITY; COMPLAINANT'S PERSONAL WAGE PAYMENT PROBLEMS DID NOT RISE TO LEVEL OF CAUSING A MATERIAL INACCURACY IN THE RESPONDENT'S FINANCIAL REPORTS

In Harvey v. Safeway, Inc. , 2004-SOX-21 (ALJ Feb. 11, 2005), the Complainant contended that his complaints about shortages in his pay constituted protected activity under the whistleblower provision of the Sarbanes-Oxley Act. The ALJ concluded that, "while complaints of systemic violation of the [the Fair Labor Standards Act] might reach the necessary magnitude to effectively perpetuate a fraud on shareholders," slip op. at 30, Section 302 of the SOX (corporate officer certification of financial disclosure) "establishes a requirement for the accuracy of material facts relating to finances." Id . at 31 (emphasis as in original). The ALJ concluded that "[t]his provision demonstrates Congress' intention to protect shareholders by requiring accurate reporting of significant information concerning a corporation's financial condition." Id . (emphasis as in original). The ALJ concluded that the Complainant's reports of underpayment of his wages failed to reach the requisite level of materiality -- even if uncorrected -- they "would have a microscopic, if any, effect on any financial report prepared by [the Respondent] for the benefits of its shareholders." Id . The ALJ also found that the Respondent had attempted to remedy the underpayments in a timely manner, and therefore its financial reports were not likely to have been affected by the temporary wage shortages. The Complainant alleged that underpayments were systematic - thereby increasing the Respondent's profits from unpaid wages. The ALJ, however, found that the Complainant had not presented an objectively reasonable factual foundation for this allegation.

PROTECTED ACTIVITY; DISCLOSURE TO PERSON WITH AUTHORITY TO INVESTIGATE AND ACT; COMPANY'S DEALINGS WITH UNLICENSED BROKER RELATING TO PRIVATE PLACEMENT; DIRECTION TO TURN OVER FILE TO AUDITORS; REFUSAL TO ATTEND MEETING

In Jayaraj v. Pro-Pharmaceuticals, Inc. , 2003-SOX-32 (ALJ Feb. 11, 2005), the Complainant was Vice-President of Investor Relations for a small biotech company working to increase volume and price of publicly traded stock and engaged in a private placement offering. The Complainant was fired because she raised concerns about an unlicensed broker's activities relative to the private placement. The ALJ found that the Complainant had a reasonable basis for concluding that this was not proper (the ALJ not reaching the issue of whether it actually was improper), and that she engaged in protected activity when she directed the Chief Operating Officer (COO) to turn the unlicensed broker's file over to auditors.

Under the corporate structure, the COO was the Complainant's peer rather than her supervisor. The ALJ found nonetheless that the COO had sufficient authority and involvement in investor relations, auditing and private placement to conclude that she was a person with authority to investigate, discover and terminate misconduct related to securities law under 18 U.S.C. § 1514A(a)(1)(C), and therefore a person to whom disclosures of potential securities law violations are protected.

The ALJ also found that the Complainant's refusal to meet with the unlicensed broker and persons that he was referring to the company also was protected activity. The Complainant had informed the CEO that she did not want to attend the meeting because it was with the unlicensed broker's referrals.

PROTECTED ACTIVITY; THREE COMPONENTS - PURPORTED VIOLATION OF LAW RELATING TO FRAUD AGAINST SHAREHOLDERS - OBJECTIVELY REASONABLE BELIEF IN PURPORTED VIOLATION - COMMUNICATION OF CONCERN; ACTIONS CAUSING LOSSES TO CLIENTS AS PROTECTED ACTIVITY

In Hughart v. Raymond James & Associates, Inc. , 2004-SOX-9 (ALJ Dec. 17, 2004), the ALJ looked at similar case law developed in environmental and nuclear safety whistleblower cases, and determined that a protected activity under SOX has three components:

 

• the report or action must involve a purported violation of a Federal law or SEC rule or regulation relating to fraud against shareholders.

• the complainant's belief about the purported violation must be objectively reasonable.

• the complainant must communicate his concern to either his employer, the Federal Government or a member of Congress.

In the instant case, the ALJ found that the Complainant engaged in protected activity when aggressively presenting concerns regarding his belief that the Respondent was not taking sufficient steps to protect clients' unclaimed property from being escheated by the state government, was improperly permitting the withholding of foreign taxes from clients' investments funds, and was permitting improper over-the-counter trades of limited partnership shares.

PROTECTED ACTIVITY; PARTICIPATION IN INVESTIGATION OF ACTIVITY REASONABLY PERCEIVED TO BE FRAUD ON SHAREHOLDERS

In Hendrix v. American Airlines, Inc. , 2004-AIR-10, 2004-SOX-23 (ALJ Dec. 9, 2004), the ALJ found that the Complainant engaged in protected activity under the Sarbanes Oxley Act when he participated in the investigation of an employee whom the Complainant reasonably believed was committing fraud against the Respondent and its shareholders by creating art objects for personal gain out of company material, on company time. The Respondent asserted that the Complainant was only a "witness" to a manager's protected activity because it was that other manager who reported the alleged fraudulent activity to upper management. The ALJ, however, found that the Sarbanes Oxley Act protects an employee who provides information or otherwise assists in the investigation of fraudulent activity. The ALJ found that although the Complainant never identified a particular code section he believed had been violated, the Sarbanes Oxley Act merely requires that a complainant have a reasonable belief that he is blowing the whistle on fraud and protecting investors.

PROTECTED ACTIVITY; ALLEGED FRAUD ON NASA COULD ALSO BE A FRAUD ON SHAREHOLDERS UNDER THE RIGHT CIRCUMSTANCES -- THEREFORE SUMMARY DECISION NOT APPROPRIATE

In Mann v. United Space Alliance, LLC , 2004-SOX-15 (ALJ Feb. 18, 2005), the ALJ declined to grant summary judgment to the Respondents on the issue of protected activity because the Complainant's allegation of a perpetration of a fraud on NASA by improperly favoring certain vendors in violation of federal acquisition regulations, although less than direct, could also perpetrate a fraud on stockholders under certain circumstances.

PROTECTED ACTIVITY; COMPLAINANT'S REASONABLE BELIEF THAT RESPONDENT WAS ENGAGED IN AN ILLEGAL AND CRIMINAL ACT

In Taylor v. Wells Fargo, Texas , 2004-SOX-43 (ALJ Feb. 14, 2005), the ALJ found that the Complainant was engaged in protected activity under the SOX when she notified the Respondent of her supervisor's practice of backdating letters of credit. The ALJ found that the Complainant met the "threshold standard, demonstrating by a preponderance of the evidence that she reasonably believed that when backdating the letters of credit, Respondent was falsifying a bank document, which she believed would constitute an illegal and criminal act." Slip op. at 11.

PROTECTED ACTIVITY; SEC RULE REQUIRING REPORTING OF LEGAL PROCEEDINGS; MAIL FRAUD; COMPLAINANT'S BELIEF AT THE TIME OF THE ALLEGEDLY PROTECTED COMMUNICATION

In Nixon v. Stewart & Stevenson Services, Inc. , 2005-SOX-1 (ALJ Feb. 16, 2005), the ALJ granted the Respondent's motion for summary decision where the Complainant originally alleged that his cause of action was based on SEC Regulatory S-K item 103, which mandates reporting of material pending legal proceedings, but where the Complainant presented no evidence that there was such a pending legal proceeding or that any governmental legal proceedings were being contemplated. The Complainant argued that the Respondent had a history of illegal environmental, health and safety activities that would eventually lead to legal proceedings, but the ALJ found that, while this may be true in the long run, at the time the Complainant made the communications he asserted were protected under the SOX whistleblower provision, legal proceedings were neither pending nor contemplated by government agencies; the Complainant's belief that such proceedings would soon be contemplated was not the same as a belief that the government actually was contemplating proceedings.

The Complainant, following discovery, amended his complaint to allege that he also reasonably believed that the Respondent was engaged in mail fraud. The ALJ, however, found that mail fraud includes a scheme or artifice to obtain money or property, of which there was no evidence. Moreover, the ALJ found that there was no evidence that the Complainant considered the Respondent's conduct to have constituted mail fraud at the time he made his communication; rather, the first time this assertion was made was following a conference call in which the ALJ had asked if there was any other basis for the complaint beyond the alleged SEC rule.

PROTECTED ACTIVITY; RAISING A CONCERN ABOUT ACCOUNTING OR FINANCES IS NOT, IN ITSELF, PROTECTED ACTIVITY UNDER SOX; MUST RELATE TO FRAUD AGAINST SHAREHOLDERS

In Marshall v. Northrup Grumman Synoptics , 2005-SOX-8 (ALJ June 22, 2005), the ALJ granted the Respondent's motion for summary decision on the ground that the Complainant's raising of concerns that certain accounting practices violated the Respondent's internal and ethics policies did not qualify as protected activity under the SOX whistleblower provision. The Complainant had alleged that certain managers and the Respondent's controller had willfully misclassified labor hours, depreciation and capital expenses. The ALJ, however, found that the Complainant's concerns, even if true, did not demonstrate fraud against shareholders or actual violations of federal law, but only a grievance with internal company policy. The ALJ wrote that "[r]aising a concern about a violation of an ethics policy is not protected activity. The fact that the concerns involved accounting and finances in some way does not automatically mean or imply that fraud or any other illegal conduct took place." Slip op. at 5 (citation omitted).

PROTECTED ACTIVITY; NO REQUIREMENT THAT THE RESPONDENT WAS NOT ALREADY AWARE OF THE INFORMATION PROVIDED BY THE COMPLAINANT

In Allen v. Stewart Enterprises, Inc. , 2004-SOX-60, 61 and 62 (ALJ Feb. 15, 2005), the ALJ rejected the Respondent's contention that to be protected activity, a complainant must provide information that was not already known by the company. The ALJ found no support for such an assertion in the either the SOX or its legislative history.

PROTECTED ACTIVITY; FRAUD AS INCLUDING AN ELEMENT OF INTENT

In Allen v. Stewart Enterprises, Inc. , 2004-SOX-60, 61 and 62 (ALJ Feb. 15, 2005), the ALJ found that SOX conveys protection to whistleblowers who report activity reasonably believed to be fraudulent in nature, and that "a fraudulent activity cannot occur without the presence of intent." Slip op. at 84. The ALJ stated that "[u]nder the subjective and objective standards applied to the Act, Complainants must actually believe Respondent acted fraudulently and that belief must be reasonable 'based on the knowledge available to a reasonable [person].' See Lerbs [ v. Buca Di Beppo , 2004-SOX-8 (ALJ June 15, 2004)]." Slip op. at 84-85.

The ALJ found that the Complainants had not engaged in protected activity in reporting a variety of accounted irregularities. For example, he found that one Complainant testified that she did not believe that the Respondent had acted intentionally with respect to incorrect interest calculations resulting from an unintentional mistake within the computing system. Moreover, that ALJ found that the Complainants could not show a reasonable belief that the Respondent was engaged in fraud because the record demonstrated that the Respondent already knew about the problem before the Complainant reported it and was making it a priority to remedy the problem.

PROTECTED ACTIVITY; REPORT OF VIOLATION OF STATE LAW

In Allen v. Stewart Enterprises, Inc. , 2004-SOX-60, 61 and 62 (ALJ Feb. 15, 2005), the ALJ found that a Complainant's concerns about possible violations of state laws that could result in sanctions and revocation of the Respondent's state licenses were not protected activity under the SOX, which only provides protection to employees who report violations of federal laws.

PROTECTED ACTIVITY; MAKING AN INQUIRY ABOUT COMPLIANCE WITH A REGULATOR BUT NOT RAISING A CONCERN THAT THE RESPONDENT WAS VIOLATING THE REGULATION

In Allen v. Stewart Enterprises, Inc. , 2004-SOX-60, 61 and 62 (ALJ Feb. 15, 2005), the ALJ found that a Complainant's inquiry into whether the Respondent was taking steps to comply with a securities regulation in regard to prior years' accountings was not protected activity because she did not raise a complaint or concern that the Respondent had violated the law in reference to those prior years. The ALJ also found that even if she had raised such a complaint, it was not protected activity because she would not have harbored a reasonable belief of a violation of a SEC rule; the documents involved were internal working documents not for submission to the SEC; the Complainant testified that she was not aware of any law making the SEC rule applicable to internal working documents and she testified that she did not believe that there had been any intentional violation of the SEC rule.

PROTECTED ACTIVITY; COMPLAINANT'S BELIEF NOT REASONABLE WHEN ALL THE OBJECTIVE EVIDENCE OF RECORD WEIGHED AGAINST SUCH A BELIEF

In Barnes v. Raymond James & Associates , 2004-SOX-58 (ALJ Jan. 10, 2005), the ALJ found that the Complainant could not be found to have had a reasonable belief that her supervisor was engaged in unethical conduct when the only objective evidence of record weighed against such a belief. The Complainant had told a manager that she believed that her supervisor was engaging in improper switches involving mutual funds thereby generating unnecessary fees for his clients. The record, however, contained no evidence of a single improper transaction by the supervisor. The Complainant's own testimony tended to undercut her claim. In addition, managers reviewed the supervisor's accounts following the Complainant's accusation and found no evidence of impropriety, and an annual internal audit conducted only days after the Complainant made the allegation revealed no evidence of any such activity.

PROTECTED ACTIVITY; PROOF OF REASONABLE BELIEF; FACT THAT COMPANY INVESTIGATED IS NOT, BY ITSELF, PROOF THAT THE COMPLAINANT'S BELIEF WAS REASONABLE

In Grant v. Dominion East Ohio Gas , 2004-SOX-63 (ALJ Mar. 10, 2005), the ALJ observed that the mere fact that a company investigates a complaint does not establish that the complainant had a reasonable belief of illegal conduct. Rather, "[i]n this age of high profile corporate scandal, corporate watchdogs, and since the term 'whistleblower' has become routine headline, it is in any company's best interest to investigate each and every allegation of wrongdoing no matter how insignificant or ludicrous." Slip op. at n.35.

PROTECTED ACTIVITY; REASONABLENESS OF BELIEF; RELEVANCE OF EXPERT TESTIMONY

In Grant v. Dominion East Ohio Gas , 2004-SOX-63 (ALJ Mar. 10, 2005), the Complainant proffered the testimony of a forensic accounting witness as expert testimony. The ALJ permitted the witness to testify and reserved a ruling on whether such testimony would be considered expert.

The ALJ acknowledged that the witness had qualifications that may qualify as expert; however, she noted that expert testimony is only relevant when it will help the trier of fact understand the evidence or determine a fact in issue. In the instant case, the issue was whether the Complainant reasonably believed that the Respondent was violating one of statutes or regulations enumerated in the whistleblower provision of the SOX. The ALJ noted that SOX does not require proof that an actual accounting fraud took place; nor is the standard whether an accounting expert reasonably believes that fraud occurred. Rather the Complainant must show that he had a reasonable belief that accounting fraud had occurred. The ALJ found that the forensic accounting witness' opinion added nothing to the relevant inquiry.

The ALJ noted that there may be circumstances in which the issue of protected activity may be appropriate for expert testimony, but that facts in evidence in the case before her did not lend themselves to a need for an expert to explain the reasonableness of the Complainant's belief.

The ALJ also found that the witness did not have thorough knowledge of the facts of the case, nor was his testimony particularly relevant to the reasonable belief issue before her. Thus, she declined to grant the witness "expert" status under 29 C.F.R. § 18.702, and afforded his testimony little-to-no evidentiary weight.

PROTECTED ACTIVITY; MERELY QUESTIONING OR REQUESTING EXPLANATIONS OF COMPANY PRACTICES IS NOT PROTECTED ACTIVITY; THERE MUST BE A COMMUNICATION REFERENCING FRAUD

In Grant v. Dominion East Ohio Gas , 2004-SOX-63 (ALJ Mar. 10, 2005), the ALJ found that the Complainant had not engaged in protected activity where he had simply voiced discontent and requested explanations about projects, accounting, and software that he did not understand, and never made any reference to fraud or implied that the company had acted intentionally to mislead shareholders or misstate the company's bottom line. The ALJ wrote: "To be sure, an accounting error does not amount to fraud under the Act. And simply raising questions and lodging complaints without any reference to or suspicion about fraud against shareholders is not protected activity." Slip op. at 40 (footnote omitted). The ALJ found that the purpose of the Act does not support a conclusion that any time a complaint "raises a question about the company's accounting programs or procedures, or about anything else regarding the everyday functioning of the company, he would be engaging in protected activity." Id. In a footnote, the ALJ explained that fraud is an integral element of a SOX cause of action, and that such fraud includes an element of intentional deceit that would impact shareholders or investors. Id . at n.40, citing Hopkins v. ATK Tactical Systems , 2004-SOX-19 (ALJ May 27, 2004). The ALJ also noted that the reported information needs to have a certain degree of specificity to be protected.

The ALJ summarized:

The limited scope and application of the Sarbanes-Oxley Act does not cover the complaints and allegations lodged by Complainant here. Sarbanes-Oxley is a corporate governance statute designed to ensure ethical and legal corporate practices by providing protection from retaliation or discrimination to employees who report reasonable beliefs based in articulable fact of illegal activity designed to defraud shareholders . The Act does not protect an employee who simply raises questions about virtually everything with which he disagrees or does not understand. The Act also does not protect an employee who simply assumes a company has retaliated against him because he raised a lot of questions, lodged a lot of complaints, and labels himself a "whistleblower." The Act affords protections only to so-called whistleblowers who blow the whistle about something covered by the Act. 43 / Stated another way, an employer's "retaliation" or "discrimination" is only a violation under the Act if it is in response to that employee's reasonable and articulated belief of fraud related to shareholders or a violation of one of the statutes enumerated in the Act. Here, Complainant has provided no evidence satisfying the requirements of the Act in that regard.

_________
43 / Quite frankly, there is nothing in the Act that prohibits a company from firing or otherwise retaliating against an employee just because that employee lodged a number of general complaints, or is otherwise a "loose cannon"....

Slip op. at 43-44 (emphasis as in original).

PROTECTED ACTIVITY; COMPLAINANT'S BELIEF IN FRAUDULENT ACTIVITY, EVEN IF REASONABLE, MUST BE COMMUNICATED

In Trodden v. Overnite Transportation Co. , 2004-SOX-64 (ALJ Mar. 29, 2005), the Respondent was a transportation services business; in the industry companies differentiated themselves with good on-time percentages. The ALJ found that the Complainant, a terminal manager, had a realistic belief that the SEC had been provided an inflated on-time percentage which may have led to an inflated stock price. The ALJ also found, however, that there was no evidence that the Complainant had ever told a superior, a member of Congress, or a federal officer that the Respondent was engaging in questionable activities. Thus, the Complainant did not engage in protected activity -- in effect, he never "blew the whistle."

[Editor's note: In the ALJ's findings of fact, he noted that the Complainant had ceased providing inflated on-time delivery statistics for a two-month period; this cessation, however, was motivated by an attempt to highlight problems at the terminal such as understaffing. The Complainant returned to the practice of reporting inflating statistics after allegedly being harassed and threatened with replacement.]

PROTECTED ACTIVITY; COMPLAINT THAT THE RESPONDENT MADE FINANCIALLY UNSOUND CHOICES IS NOT THE SAME AS A COMPLAINT OF FRAUD AGAINST SHAREHOLDERS

In Stojicevic v. Arizona-American Water Co. , 2004-SOX-73 (ALJ Mar. 24, 2005), the ALJ found that the Complainant did not engage in protected activity under the SOX when he complained to his superiors about poor project decisions. In his pretrial statement, the Complainant stated that the Respondent's considerable end-of-the-year earnings were the result of a failure to make necessary capital investments rather than good business management. The ALJ wrote that "[a]n allegation that Respondent made financially unsound choices ... is quite distinct from an allegation that Respondent engaged in fraud. Regardless of Respondent's 2003 earning statement, Complainant has not offered any proof that Respondent made false statements or misrepresentations to its shareholders and investors regarding its earnings, such that its conduct constituted fraud." Slip op. at 7.

PROTECTED ACTIVITY; REASONABLE BELIEF ESTABLISHED WHERE THE COMPLAINANT WAS IN-HOUSE COUNSEL AND HAD DOCUMENTARY EVIDENCE TO BACK-UP ALLEGATIONS OF IMPROPER ACTIVITIES

In Kalkunte v. DVI Financial Services, Inc. , 2004-SOX-56 (ALJ July 18, 2005), the Respondent DVI Financial was in financial trouble and eventually filed for bankruptcy. The ALJ found that the Complainant's allegation that the Respondent's senior management had altered delinquency reports and incorporated those reports into disclosure statements filed to the public was a protected activity as a report of blatant fraud against shareholders. The Complainant also alleged that following default the Respondent improperly commingled funds with a subsidiary. The ALJ found that this allegation was also protected activity, as commingling of funds was an overt violation of SEC regulations. The ALJ found that the Complainant had a reasonable belief that these were violations. Complainant was in-house counsel, and understood that these activities were potential violations of SOX; in addition, the allegations were not based on mere conjecture, but backed up with documentary evidence.

PROTECTED ACTIVITY; WORKPLACES DISPUTES; BANK FRAUD

In Heaney v. GBS Properties LLC , 2004-SOX-72 (ALJ Dec. 2, 2004), the Complainant was a real estate agent. The ALJ held that Complainant's vocal concern over a purchaser's use of an unlicensed home inspector was not protected activity under the Sarbanes Oxley Act whistleblower provision (neither the Complainant nor the Respondent had anything to do with the choice of the inspector). Likewise, the ALJ held that the Respondent's refusal to intervene in a dispute between the Complainant and another agent was not protected activity. The ALJ,. however, found that the Complainant's concerns over a condominium project allegedly built in violation of certain codes within the knowledge of the Respondent was arguably a bank fraud against mortgage lenders and therefore protected activity under the Sarbanes Oxley Act.

PROTECTED ACTIVITY; PARTICIPATION IN INVESTIGATION OF ACTIVITY REASONABLY PERCEIVED TO BE FRAUD ON SHAREHOLDERS

In Hendrix v. American Airlines, Inc. , 2004-AIR-10, 2004-SOX-23 (ALJ Dec. 9, 2003), the ALJ found that the Complainant engaged in protected activity under the Sarbanes Oxley Act when he participated in the investigation of an employee whom the Complainant reasonably believed was committing fraud against the Respondent and its shareholders by creating art objects for personal gain out of company material, on company time. The Respondent asserted that the Complainant was only a "witness" to a manager's protected activity because it was that other manager who reported the alleged fraudulent activity to upper management. The ALJ, however, found that the Sarbanes Oxley Act protects an employee who provides information or otherwise assists in the investigation of fraudulent activity. The ALJ found that although the Complainant never identified a particular code section he believed had been violated, the Sarbanes Oxley Act merely requires that a complainant have a reasonable belief that he is blowing the whistle on fraud and protecting investors.

PROTECTED ACTIVITY; MATERIALITY STANDARD

In Henrich v. Ecolab, Inc. , 2004-SOX-51 (ALJ Nov. 23, 2004), the Complainant raised issues relating to whether certain inventory was improperly accounted for as "good bulk" rather than "inventory at risk" thereby inflating the value of the inventory. The Respondent argued, inter alia , that the Complainant's alleged whistleblowing activity was immaterial to the company's accounting procedures because the inventory at issue had a relatively low value in terms of the company's overall revenue ($300,000 as compared to approximately $4 to 4.5 billion a year in sales) and auditing standards ($20 million materiality standard to trigger an outside audit). The ALJ found that OSHA had considered a materiality standard during notice and comment rulemaking, but found it inappropriate to "specify a percentage or formula for use in defining protected activity." 69 Fed. Reg. 163 (Aug. 24, 2004) (discussion of § 1980.102). The ALJ reviewed the case law precedent and found that it provides, albeit indirectly, the complainants do not need to meet a materiality requirement as to the extent of alleged SOX whistleblower violation. Rather, the standard is that a complainant must show a reasonable belief that a law had been violated and must plead specific incidents and material facts that give rise to the alleged violation.

PROTECTED ACTIVITY; MEANING OF "PROVIDED INFORMATION TO THE EMPLOYER"

In Gonzalez v. Colonial Bank , 2004-SOX-39 (ALJ Aug. 20, 2004), the Complainant informed two executive employees of the Respondent bank (a regional CEO and a regional president) that a lending company they had formed possibly violated banking laws, was a fraud against shareholders, and violated employment contracts with the Respondent that prohibited them from engaging in business in competition with the Respondent. The Respondent moved for summary decision before the ALJ based on the assertion that the Complainant did not "provide information" to the regional CEO because he already knew about it. The ALJ found that while the CEO clearly knew about the lending company he had formed, the Complainant had advised him to sell it or shut it down because of possible violations of banking and mail fraud laws, and that this type of communication was protected by the SOX whistleblower provision. The ALJ found that the same was true of the Complainant's communications to the regional bank president.

PROTECTED ACTIVITY; COMPLAINANT'S REPORT OF APPARENTLY FRAUDLENT UNION DUTY CLAIMS BY UNION OFFICIALS WHICH IMPACTED ON RESPONDENT'S BOTTOM LINE

In Platone v. Atlantic Coast Airlines , 2003-SOX-27 (ALJ Apr. 30, 2004), the ALJ found that the Complainant was engaged in protected activity under the whistleblower provision of the Sarbanes-Oxley Act where she reported suspicions to her supervisor that the company, a regional air carrier, was complicit in a scheme to permit pilots to fraudulently make flight loss claims (the process whereby pilots were reimbursed for being called away from flight duties to attend to official union business). Essentially, the Complainant believed that the company looked the other way in regard to apparent misuse of flight loss claims filed by union officials in order to gain leverage in upcoming contract negotiations where the pilots were going to be asked to make significant concessions because of post-911 financial woes. The ALJ found that "[s]uch a scheme, by its very nature, would involve the use of the mail and wires, and could constitute fraud on ... shareholders." The ALJ noted that the cost of the claims cost the employer between $20,000 and $25,000 a month.

PROTECTED ACTIVITY; BLOWING THE WHISTLE ON ALLEGEDLY IMPROPER MANIPULATION OF INTERNAL REPORTS; VIOLATION OF ACCOUNTING PRINCIPLES AND INADEQUACY OF INTERNAL CONTROLS AS RELATED TO FEDERAL LAWS RELATING TO FRAUD AGAINST STOCKHOLDERS; NO MINIMUM DOLLAR VALUE MATERIALITY REQUIREMENT

In Morefield v. Exelon Services, Inc. , 2004-SOX-2 (ALJ Jan. 28, 2004), the Respondents contended that the complaint must be dismissed prior to hearing because the whistleblowing concerned alleged manipulations of financial information in internal reports, budgets and forecasts, and it is not a violation of any law for the management of a subsidiary to deceive the parent as long as the external financial reports and statements are not effected. The Respondents' argued that no third party was misled or defrauded and therefore no federal interest was implicated. The Respondents also noted that the questions raised by the Complainant only involved less than .0001% of the parent's revenues and therefore he had no reasonable basis for believing that his concerns were material. The Respondents also noted that the Complainant had not identified the law that the alleged manipulation would have violated. The ALJ found that dismissal was not warranted on these grounds prior to hearing, finding that there was no support for the proposition that manipulations must appear in an external report, and that SOX provides "ample latitude to include rules governing the application of accounting principles and the adequacy of internal accounting controls implemented by the publicly traded company in compliance with [federal rules and regulations 'relating to fraud against stockholders']." The ALJ also agreed with the Complainant that SOX places no minimum dollar value on the protected activity it covers.

PROTECTED ACTIVITY; REASONABLE BELIEF THAT REPORTED CONDUCT WAS ILLEGAL, EVEN WHERE INVESTIGATION LATER ESTABLISHED THAT IT WAS NOT

In Halloum v. Intel Corp. , 2003-SOX-7 (ALJ Mar. 4, 2004), the Complainant told the SEC that he had been instructed to delay the payment of invoices to subsequent quarters to increase cash on Intel's balance sheet. Because of intense news coverage at the time of Enron's creative accounting, he believed that the instructions amounted to a fraud on Intel's investors. Subsequently, an internal investigation required by the SEC, and accepted by that agency after review, exonerated Intel. Nonetheless, the ALJ found that the Complainant believed that he had been asked to delay invoices (although he actually was working with receiving notices rather than invoices). Citing case law from other whistleblower cases adjudicated by DOL, the ALJ observed that "[a] belief that an activity was illegal may be reasonable even when subsequent investigation proves a complainant was entirely wrong. The accuracy or falsity of the allegations is immaterial; the plain language of the regulations only requires an objectively reasonable belief that shareholders were being defrauded to trigger the Act's protections." Slip op. at 15 (footnote omitted).

PROTECTED ACTIVITY; REASONABLE BELIEF THAT RESPONDENT VIOLATED THE LAW; FINANCIALS OVERSTATED INCOME; RESTRICTIONS ON ACCESS OF CFO TO EXTERNAL AUDITORS; UNTRAINED PERSONNEL MAKING JOURNAL ENTRIES

In Welch v. Cardinal Bankshares Corp. , 2003-SOX-15 (ALJ Jan. 28, 2004), the ALJ concluded that under the SOX whistleblower provision, the "Complainant is not required to show the reported conduct actually constituted a violation of the law, but only that he reasonably believed Respondent violated one of the enumerated laws and regulations. . . . The standard for determining whether Complainant's belief is reasonable involves an objective assessment. See, e.g., Minard v. Nerco Delamar Co., 92-SWD-1 (Sec'y Jan. 25, 1995), slip op. at 8." The ALJ found that the Complainant had raised five alleged protected activities, and upon analyzing the facts concluded that at least three of the five allegations were based on a reasonable belief that violations were being committed (the ALJ did not reach the last two allegations). First, the Complainant (Respondent's Chief Financial Officer) refused to sign the Respondent's third quarter certification because he believed that two journal entries appearing in the Respondent's financial statements totaling $195,000 overstated income by almost 14%. According to the Complainant, third quarter financial statements would be relied upon by investors, and in fact apparently were based on increases in stock prices after the third quarter report. The ALJ found the Respondent's arguments to the contrary unconvincing. Second, the Complainant alleged that his access to Respondent's external auditors was so restricted that he could not attest to the validity the Respondent's financials prepared by the auditors (the auditors instead communicated directly with the Respondent's President/CEO and Chairman). Again, the ALJ found that the Respondent's arguments to the contrary were not convincing. Finally, the ALJ found that the Complainant engaged in protected activity when he alleged that the Respondent had inadequate internal controls because too many individuals outside the finance department were making journal entries without the CFO's review or knowledge.

PROTECTED ACTIVITY; INTERNAL REPORT; NO REQUIREMENT THAT INFORMATION BE PROVIDED IN SUPPORT OF AN INVESTIGATION

In Getman v. Southwest Securities, Inc. , 2003-SOX-8 (ALJ Feb. 2, 2004), the Respondent argued that the Complainant was not engaged in protected activity under the whistleblower provision of the SOX when she refused to change her rating of a stock because she did not provide information in support of an investigation. The ALJ, however, citing notes from the regulatory history of the SOX interim final rules interpreting protected activity to include both reporting violations and participating or assisting in a proceeding, found that "Complainant's refusal to change her rating, done in the presence of her managers, was an act of whistleblowing protected by the Act."

PROTECTED ACTIVITY; ANALYST'S REFUSAL TO CHANGE STOCK RATING; REFERENCE TO SEC REGULATIONS

In Getman v. Southwest Securities, Inc. , 2003-SOX-8 (ALJ Feb. 2, 2004), the Complainant was a research analyst at a securities firm covering healthcare technology. At a review committee meeting, the Complainant declined to change her rating on a company from "accumulate" to a stronger "buy" rating. Although the committee did not tell the Complainant to change her rating or tell her that they were displeased with the rating, the Complainant interpreted the questioning as pressuring her to provide a stronger rating. The Respondent stood to participate in a banking deal to raise capital for the company if the securities report was favorable. The Respondent contested whether such a meeting actually took place and argued that even if the meeting took place, the Complainant's case was grounded merely in her perception of being pressured. The ALJ found, however, that there was definitive evidence in the record showing that such a meeting had occurred, and concluded that the Complainant's theory that the Respondent had attempted to conceal the existence of the meeting showed a motive to hide a securities law violation.

The ALJ next considered whether the Complainant's actions were protected activity under the SOX whistleblower provision through reference to the "manipulative practices" provision of SEC regulation 17 C.F.R. 240.10-5. The ALJ wrote:

    These antifraud provisions are catchalls expressly designed to thwart misrepresentations in securities trading. See Affiliated Ute Citizens v. United States , 406 U.S. 128, 151 (1972); SEC v. Texas Gulf Sulphur Co. , 401 F.2d 833, 859 (2d Cir. 1968) (en banc); SEC v. Softpoint, Inc. , 958 F. Supp. 846, 861 (S.D.N.Y. 1997), aff'd , 159 F.3d 1348 (2d Cir. 1998) (unpublished table decision). They are thus liberally construed to embrace a wide range of misconduct. Softpoint , 958 F. Supp. at 862. To prove a violation of these provisions, the party asserting that a violation has occurred must show: (1) that a misrepresented or omitted fact was made in an offer, attempt to induce a purchase or sale, or an actual purchase or sale of security; (2) that the misrepresented or omitted fact was "material"; and (3) that the respondent acted with the requisite "scienter." Basic, Inc. v. Levinson , 485 U.S. 224, 240 (1988); Aaron v. SEC , 446 U.S. 680, 701-02 (1980). The jurisdictional requirements of the antifraud provisions are interpreted broadly and are satisfied by intrastate telephone calls and even very ancillary mailings. Softpoint , 958 F. Supp. at 865. 7 /

___

7 / The jurisdictional requirement of the Securities Act is satisfied here through Complainant's use on Respondent's behalf of the telephone system in carrying out the research necessary to prepare the Cholestech report.

Slip op. at 19 (one footnote omitted). The ALJ found the Respondent attempted to misrepresent the value of the stock because it attempted to rate it at a level higher than its own expert, the Complainant deemed accurate, based on a motive not grounded in the characteristics of the stock but it own interests in a potential banking deal. The ALJ found materiality because investors relied on the Respondent's ratings in making investment decisions. Finally, the ALJ found scienter based on evidence that the Respondent was seeking to enter into a banking deal that depended on a higher rating, and on evidence that the Respondent attempted to conceal the review committee meeting.

 

PROTECTED ACTIVITY; GENERAL INQUIRIES ABOUT ACCOUNTING PRACTICES

In Lerbs v. Buca Di Beppo, Inc. , 2004-SOX-8 (ALJ June 15, 2004), the ALJ noted that under the pertinent case law, in order for a whistleblower to be protected the reported information must have a certain degree of specificity. Thus, where the Complainant merely made general inquiries about the propriety of certain accounting entries, and never identified particular concerns about the Respondent's conduct that the Complainant may have believed to be illegal, the ALJ found that the Complainant failed to establish that he had engaged in protected activity under the whistleblower provision of the SOX.

 

PROTECTED ACTIVITY; REQUIREMENT OF FRAUD AGAINST SHAREHOLDERS

In Hopkins v. ATK Tactical Systems , 2004-SOX-19 (ALJ May 27, 2004), the Complainant filed a SOX whistleblower complaint premised on his raising the question of whether Respondents' systems illegally resulted in the release of sludge water into the ground water system. The ALJ found that such an activity fails to state a cause of action under the whistleblower provision of the SOX, which contemplates the prevention of fraudulent actions relating to securities. The ALJ wrote:

   The Sarbanes-Oxley Act provides whistleblower protection for employees of publicly traded companies who provide information or participate in an investigation relating to violations of certain criminal code provisions relating to fraud (including "fraud and swindles"; "fraud by wire, radio, or television"; bank fraud; and securities fraud), rules or regulations of the Securities and Exchange Commission, or any provisions of Federal law relating to fraud against shareholders. The legislative history of the Act makes it clear that fraud is an integral element of a cause of action under the whistleblower provision. See, e.g. S. Rep. No. 107-146, 2002 WL 863249 (May 6, 2002) (explaining that the pertinent section "would provide whistleblower protection to employees of publicly traded companies who report acts of fraud to federal officials with the authority to remedy the wrongdoing or to supervisors or appropriate individuals within their company.") The provision is designed to protect employees involved "in detecting and stopping actions which they reasonably believe are fraudulent." Id. In the securities area, fraud may include "any means of disseminating false information into the market on which a reasonable investor would rely." Ames Department Stores Inc., Stock Litigation, 991 F.2d 953, 967 (2d Cir. 1993) (addressing SEC antifraud regulations). While fraud under the Act is undoubtedly broader, an element of intentional deceit that would impact shareholders or investors is implicit.

   The protected activity alleged in the complaint involves the Complainant's reporting (both internally and to regulatory agencies) of ATK's release of sludge water into the ground water system due to poor maintenance and overdue inspections. The complaint does not address any kind of fraud and it does not involve transactions relating to securities. Moreover, there has been no allegation that the activities complained of involved intentional deceit or resulted in a fraud against shareholders or investors. Therefore, the matters complained of within the complaint do not fall within the purview of the employee protection provisions of the Act.

The ALJ found that Complainant's complaint may have fallen within the environmental statutes, but did not remand to OSHA for an investigation under those laws because the complaint was also untimely under any of those statutes.

 

PROTECTED ACTIVITY; SCOPE OF SOX COVERAGE; RACIAL DISCRIMINATION

In Harvey v. The Home Depot, Inc. , 2004-SOX-20 (ALJ May 28, 2004), the Complainant first filed a distinct SOX complaint beyond 90 days of his termination, and therefore that complaint was untimely. In addition, he had mailed three letters to the Secretary of Labor within 90 days of his termination from employment. If one of those filings raised a SOX complaint, Complainant would have filed a timely complaint. Thus, the ALJ analyzed what, specifically, constitutes a viable complaint under the whistleblower provision of SOX. The ALJ wrote:

   In regards to protected activities, a fundamental protected activity under SOX, and the activity most relevant in Mr. Harvey's case, involves an employee providing information to supervisory authority based on a reasonable belief that a SOX violation has occurred. Under the statute, 18 U.S.C. § 1514A (a) (1), a SOX violation must relate to at least one of the following specific categories:

   1. Title 18, Crimes and Criminal Procedure, Chapter 63, Section 1341, Frauds and swindles. This provision establishes that use of the Post Service or private or commercial interstate carrier as a means to intentionally defraud or obtain property by false or fraudulent pretenses is a felony crime punishable by up to five years (or thirty years if the victim is a financial institution) imprisonment.

   2. Title 18, Crimes and Criminal Procedure, Chapter 63, Section 1343, Fraud by wire, radio, or television. This provision establishes that use of wire, radio, or television communication as means to intentionally defraud or obtain property by false or fraudulent pretenses is a felony crime punishable by up to five years (or thirty years if the victim is a financial institution) imprisonment.

   3. Title 18, Crimes and Criminal Procedure, Chapter 63, Section 1344, Bank fraud. This provision establishes that executing a scheme or artifice to defraud a financial institution is a felony crime punishable by not more than thirty years imprisonment.

   4. Title 18, Crimes and Criminal Procedure, Chapter 63, Section 1348, Securities fraud. This provision establishes that executing a scheme or artifice a) to defraud any person in connection with any security of an issuer of a class of securities registered under Section 12 of the Securities Exchange Act or that is required to file reports under Section 15 (d) of the Securities Exchange Act; or b) to obtain by means of false or fraudulent pretenses any money or property in connection with the purchase of such security identified in a) above is a felony crime punishable by not more than twenty-five years imprisonment.

   5. Any rule or regulation of the Securities Exchange Commission.

   6. Any provision of federal law relating to fraud against shareholders.

Slip op. at 12-13 (footnotes omitted).

The ALJ found that the Complainant's allegations did not relate to mail fraud, wire fraud, bank fraud or securities fraud -- nor did they point to violations of SEC rules. That left the question of federal law relating to fraud against shareholders. The Complainant's central complaint was about systemic and individual racial discrimination. The ALJ found that the Complainant had failed to show that he had raised a reasonable complaint of systemic discrimination. In regard to individual discrimination, the ALJ wrote:

   ... In determining whether these alleged violations of individual employment rights involve a federal law related to fraud against shareholders, an implicit argument may be made that a company which permits discriminatory practices despite its public policy of equal opportunity is acting contrary to the best interests of its share holders. While that argument has understandable appeal, a SOX protected activity must involve an alleged violation of a federal law directly related to fraud against share holders. In this case, the federal law actually prohibiting individual employment discriminatory practices, Title VII, is based on individual rights and establishes procedures to address illegal employment discrimination; it was not enacted to preclude fraud against shareholders. In contrast, a federal law directly linked to the prevention of fraud against shareholders is the SOX statute itself. As set out in the SOX preamble, Congress imposed additional, specific legal requirements and standards on corporations, directors, senior financial officers, lawyers, and accountants to protect shareholders by improving the accuracy and reliability of corporate disclosures made pursuant to securities laws and for other purposes. For example, SOX includes Section 302 (corporate officer certification that a financial disclosure is accurate and does not contain any untrue statement of material fact), Section 401 (enhanced disclosure requirements for mandated financial reports), and Section 406 (code of ethics for senior financial officers).

   I have also considered another reasonable argument that since SOX mandates the accuracy of corporate disclosures, a reported incident of racial discrimination within a publicly traded company that represents itself to be non-discriminatory may amount to violation of a SOX disclosure requirement and thus involve a federal law related to fraud against shareholders. That is, although the racial discrimination is prohibited by a different federal law, its existence may also adversely affects the accuracy of corporate disclosures mandated by SOX, which is a federal law concerning fraud against shareholders.

   While this presentation also has some logical appeal, the connection becomes tenuous upon close examination of SOX. Specifically, Section 302's requirement for the accuracy of material facts relating to finances, demonstrates Congress' intention to protect shareholders by requiring accurate reporting of a corporation's financial condition. The two key components are accurate accounting and financial condition. Whether a supervisor's acts of individual discrimination comply with the company's stated equal opportunity standards has a very marginal connection with those two components. Perhaps, the failure to disclose a class action lawsuit based on systemic racial discrimination with the potential to sufficiently affect the financial condition of a corporation might become the subject of a SOX protected activity if an individual complained about the failure to disclose that situation. However, individual, rather than systemic, discrimination does not reach that materiality threshold in terms of a corporation's financial condition. Alleged individual violations of Title VII would not fall into the category of SOX mandated disclosures. Further, Mr. Harvey's particular discrimination complaints to supervisors and the Board of Directors centered on the alleged existence of racial and employment discrimination rather than the company's failure to report such discrimination to the public.

Slip op. at 14-15 (footnote omitted).

 

PROTECTED ACTIVITY; SCOPE OF SOX COVERAGE; CHALLENGE TO INTERNAL COMPANY POLICY

In Reddy v. Medquist, Inc. , 2004-SOX-35 (ALJ June 10, 2004), the Complainant alleged that the Respondent violated the whistleblower provision of the SOX because she was terminated from employment after expressing concerns to management regarding an internal company policy and its alleged deleterious impact on the rate of pay for medical transcriptionists. The ALJ granted Respondent's motion to dismiss for failure to state a claim upon which relief can be granted because the Complainant failed to show that she was engaged in protected activity. The ALJ found that "the evidence demonstrates the complaints concerned internal company policy as opposed to actual violations of federal law."

PROTECTED ACTIVITY; COMPLAINANT'S REPORT OF HER BELIEF THAT INSIDER TRADING HAD OCCURRED AS A REASONABLE BELIEF THAT A SOX-RELATED VIOLATION MAY HAVE OCCURRED

In Reines v. Venture Bank and Venture Financial Group , 2005-SOX-112 (ALJ Mar. 13, 2007), the Complainant, the former CFO for Respondent, alleged that she engaged in protected activity under SOX when she notified her supervisor, along with the Respondent's Stock Oversight Committee, "of her belief that the price [her supervisor] sought for 45,000 shares of stock he offered for repurchase by the Respondent was 'excessive as an inside trade.'" Reines , slip op. at 43, 46. The Respondent argued that the Complainant's objection to the offered share price was not a "report" to someone with investigation authority that the Respondents were "engaging in an actual or suspected legal violation, or about to commit fraud." Id . at 46.

The ALJ held that the Complainant engaged in a protected activity. Reines at 48. He stated that "Complainant 'provided information' and/or 'caused information to be provided' to [her supervisor], who is 'a person with supervisory authority' over her, by refusing to approve his proposed transaction and alerting him of her belief that the price he requested was not the fair market value of the stock." Id . at 46. He also held that the Complainant provided information about her concerns to the Stock Oversight Committee and the Board of Directors, both entities enabled to "investigate, discover or terminate misconduct" under SOX. Id . at 46. Finally, he held that although the Complainant did not utilize the Respondent's formal whistleblower policy, she still engaged in protected activity "as she brought her concerns to the attention of appropriate authorities." Id. at 47.

In reaching his conclusion, the ALJ also noted that the Complainant reasonably believed that a SOX law could be violated, and that the Complainant was reasonable in her belief that share prices were inflated and transactions unfavorable to the Respondent's shareholders may have occurred. Reines , slip op. at 47. The ALJ observed that the Respondent had created its Stock Oversight Committee in response to similar concerns the Complainant had raised a year before. Id . at 47. Such a remedial action taken by the Respondent, he said, further supported the reasonableness of the Complainant's concerns a year later. Id . at 47. Finally, the ALJ stated that there was no dispute as to whether the Respondent was aware of the Complainant's activity. Id . at 48.

 

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