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Proskauer Whistleblower Defense

District Court Requires SOX Plaintiff To Assert Shareholder Fraud, Consistent with Statute’s Purpose

Posted in SOX Whistleblower Decisions

The U.S. District Court for the District of North Carolina recently dismissed a plaintiff’s Sarbanes-Oxley whistleblower complaint on the ground that the plaintiff had not alleged shareholder fraud.  Gauthier v. Shaw Group, Inc., No. 12-cv-00274, 2012 WL 6043012 (W.D.N.C. Dec. 4, 2012).  This decision is significant because it followed the Fourth Circuit’s seminal decision in Livingston v. Wyeth, Inc., 520 F.3d 344 (4th Cir. 2008), notwithstanding the contrary Obama administration Administrative Review Board (ARB) decisions in Brown v. Lockheed Martin Corp., ARB Case No. 10-050 (Feb. 28, 2011) and Sylvester v. Parexel Int’l LLC, ARB Case No. 07-123 (May 25, 2011).  It is also an important decision because its interpretation of the statute is one that is consistent with the overall purpose of Sarbanes-Oxley, i.e., the protection of the investing public. 

Background

Gauthier was part of a team performing an audit of a nuclear steel supplier, and discovered that the supplier had shipped defective steel to two nuclear reactor sites and two fuel fabrication facilities.  Gauthier informed several directors and managers of the defective shipment and related safety concerns.  On their face, none of these complaints had anything to do with shareholder fraud.  His supervisor directed him to inform personnel at two nuclear facilities that they had received nonconforming steel and to forward part of his report on the matter to one of the fuel fabrication facilities. 

Gauthier alleged that the Shaw Group tried to cover up the audit report by changing the report’s conclusions and that the Shaw Group management harassed him and excluded him from meetings as soon as he reported his concerns.  Gauthier was terminated almost immediately after the Shaw Group’s management learned that he had sent the audit information to the fuel fabrication facility. 

The Court’s Ruling

In analyzing Gauthier’s SOX retaliation claim, the court considered whether Gauthier had engaged in protected activity.   According to the court, 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.  The relevant laws listed in Section 1415A relate to mail fraud, wire fraud, bank fraud, securities fraud, violations of SEC regulations and fraud on shareholders.  Gauthier argued that a complaint regarding any of these laws constitutes protected activity under SOX even if the fraud does not specifically relate to fraud upon shareholders. 

The court relied on Livingston for the proposition that “[t]o be protected under Sarbanes-Oxley, an employee’s disclosures must be related to illegal activity that, at its core, involves shareholder fraud.”  Thus, the court would only consider Gauthier’s SOX complaints if they related to fraud against shareholders

The court found that the complaints were not within the purview of SOX, since any fraudulent modification of the safety-related report had nothing to do with an attempt to defraud shareholders.  Gauthier’s Amended Complaint clearly showed that he had complained to his employer of alleged violations of nuclear safety regulations, not securities violations.  The court made clear that the reporting of safety concerns is not SOX protected activity. 

Gauthier’s claims under the Dodd-Frank Act were dismissed on similar grounds.  His claims under the Energy Reorganization Act (ERA) were also dismissed because the ERA retaliation provision applies only to actions taken by an employer. The court found that, of the defendants, only the Shaw Group could be considered Gauthier’s employer.

Implications

Whether appellate courts will follow the current Administrative Review Board’s decisions remains to be seen, but, for now, another district court has decided to follow pre-Obama Administrative Review Board precedent and require SOX plaintiffs to engage in protected activity that bears some relation to the statute’s purpose.  At least two appellate courts, the Tenth and Third Circuits, will likely address the issue this year in Lockheed Martin Corp. v. Dep’t of Labor, No. 11-cv-9524 (10th Cir. argued Sept. 19, 2012) and Wiest v. Lynch, No. 11-cv-4257 (3rd Cir. argued Oct. 5, 2012).