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).

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Photo of Lloyd B. Chinn Lloyd B. Chinn

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative…

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd’s practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media, education and technology, he focuses a substantial portion of his practice on the financial services sector. He has tried to final verdict or arbitration award substantial disputes in this area.

Due to Lloyd’s litigation experience, clients regularly turn to him for advice regarding the full range of employment matters, including terminations, whistleblower policy and procedure, reductions in force, employment agreements, and employment policies. For example, in the wake of the financial crisis, he has counseled a number of firms through reductions in force and related bonus and deferred compensation disputes. Lloyd has also been retained to conduct internal investigations of allegations of workplace misconduct, including claims leveled against senior executives.

Lloyd has represented global businesses in matters involving Sarbanes-Oxley and Dodd-Frank whistleblower claims. He has taken an active role in the American Bar Association on these issues, currently serving as Co-Chair of the Whistleblower subcommittee of the ABA Employee Rights and Responsibilities Committee. Lloyd has spoken on whistleblowing topics before a numerous organizations, including the American Bar Association, ALI-ABA, Association of the Bar of the City of New York, and New York University School of Law. He has testified twice before Congressional subcommittees regarding whistleblower legislation and has also published blog postings, articles and client alerts on a variety of topics in this area, including the Dodd-Frank Act’s whistleblower provisions. Lloyd is a co-editor of Proskauer’s Whistleblower Defense Blog, and he has been widely quoted by on whistleblower topics by a number of publications, including the New York Times, the Wall Street Journal, the National Law Journal and Law 360.

Lloyd has also become active in the International Bar Association, presenting on a variety of subjects, including: the #MeToo movement, the COVID-19 pandemic and employment law, and cross-border harmonization of employment provisions in transactions. Lloyd also hosts a quarterly roundtable discussion among financial services industry in-house employment lawyers. He has also published articles and given speeches on a variety of other employment-law topics, including non-solicitation provisions, FINRA arbitration rules, cross-border discovery, e-discovery, and the use of experts.

Photo of Rachel Fischer Rachel Fischer

Rachel S. Fischer is a senior counsel in the Labor & Employment Law Department.

Rachel represents employers in all types of employment-related disputes, including defending clients against claims of discrimination, harassment, retaliation, wrongful discharge, whistleblowing, breach of contract, and in wage and hour…

Rachel S. Fischer is a senior counsel in the Labor & Employment Law Department.

Rachel represents employers in all types of employment-related disputes, including defending clients against claims of discrimination, harassment, retaliation, wrongful discharge, whistleblowing, breach of contract, and in wage and hour matters. She represents employers in federal and state courts, arbitration tribunals, and before administrative agencies, and has litigated both single plaintiff and class action lawsuits. As an experienced trial lawyer, Rachel has successfully litigated numerous cases from complaint through jury verdict or arbitral award.

Rachel represents employers across a wide variety of industries, including banking and finance, law firms, media and entertainment, sports, and higher education.

Rachel also counsels clients on a broad range of employment law matters, including investigations, employee terminations and discipline, and employment policies and procedures.