In denying a bank’s bid for summary judgment on an Internal Audit and SOX Administrator’s SOX whistleblower claim, the U.S. District Court for the Western District of Washington highlighted the present conflict on the standard governing protected activity under Section 806 of SOX—i.e., the “definitively and specifically” standard or the more liberal “reasonable belief” standard.  McEuen v. Riverview Bancorp., Case No. 12-cv-5997 (W.D. Wash. Dec. 19, 2013).  However, without expressly embracing one standard over the other, the court denied the employer’s motion on protected activity and causation grounds.

Background

The defendant bank (“Company”) hired Plaintiff Tracey McEuen as an Internal Auditor and SOX Administrator.  Her responsibilities included:  generating SOX reports; conducting audits of the Company’s departments and branches; documenting work; assisting in evaluating the adequacy of internal control systems and compliance with applicable state and federal regulations; identifying findings and recommendations; and preparing reports.  The Company terminated Plaintiff’s employment based on its assertion that she violated a policy prohibiting the use of an external hard drive at work.

Ruling

Plaintiff filed suit alleging her termination violated Section 806 because it resulted from her complaints that her supervisor:  altered her audit reports to lessen the severity of audit findings, which could mislead the Company’s board as to actual risks, materially affect financial statements and deceive investors; “contaminat[ed]” audits; improperly placed audit findings on “verbal lists”; blocked her update of the SOX program; and falsified annual risk assessments and SOX attestations.  In addition, she allegedly complained that a human resources professional engaged in fraud.  She further alleged that she was discharged “less than two months after reporting her concerns,” and that “deficiencies in her performance were not noted until after she reported the fraudulent conduct of her supervisor … .”  Plaintiff also asserted that her termination occurred less than one month after she reported allegedly “fraudulent HR activities.” 

Moving for summary judgment, the Company argued that Plaintiff did not engage in protected activity.  It relied on Ninth Circuit authority for the proposition that an actionable SOX whistleblower complaint must “definitively and specifically” relate to one of the categories of fraud or securities violations listed in Section 806.  The court acknowledged that the Administrative Review Board (ARB) rejected that standard and that the Third Circuit recently embraced the ARB’s position.  But it did not did not expressly choose to side with the Ninth Circuit or ARB/Third Circuit.  Instead, it stated:

Regardless of whether the Ninth Circuit would adopt the rule enunciated [by the ARB], the Court finds that there are genuine issues of material fact as to whether [Plaintiff’s] communications definitively and specifically related to one of the listed categories of fraud or securities violations in [Section 806 of SOX], whether [Plaintiff] had a subjective, good faith belief that her employer violated provisions listed in SOX, and that her belief was objectively reasonable.

The court then added that “Plaintiff also raises a genuine issue of material fact demonstrating the reasonableness of her beliefs that [her manager] was committing fraud.”

The Company also sought summary judgment on causation grounds.  Rejecting the Company’s motion, however, the court focused on the temporal proximity between her complaints and her discharge:  Plaintiff was discharged less than two months after complaining that her supervisor engaged in fraud and less than one month after complaining of “fraudulent HR activities.”  The court also noted that while the Company purported to base the termination decision on Plaintiff’s use of an external hard drive in violation of its policy, Plaintiff testified that she was granted permission by her supervisor and IT personnel to use her external hard drive.

Implications

The question of which standard governs a determination of whether a plaintiff engaged in protected activity may ultimately ascend to the U.S. Supreme Court for resolution.  In the meantime, as this case illustrates, judicial opinions may expose concerns as to how to proceed on this issue.  In addition, this case illustrates that more SOX whistleblower cases are being pursued by compliance personnel with access to sensitive information.

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Photo of Steven J. Pearlman Steven J. Pearlman

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular…

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular focus on defending companies against claims of employment discrimination, retaliation and harassment; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations. He has successfully tried cases in multiple jurisdictions, and defended one of the largest Illinois-only class actions in the history of the U.S. District Court for the Northern District of Illinois. He also secured one of only a few ex parte seizures orders that have been issued under the Defend Trade Secrets Act, and obtained a world-wide injunction in federal litigation against a high-level executive who jumped ship to a competitor.

Reporting to boards of directors, their audit committees, CEOs and in-house counsel, Steven conducts sensitive investigations and has testified in federal court. His investigations have involved complaints of sexual harassment involving C-suite officers; systemic violations of employment laws and company policies; and fraud, compliance failures and unethical conduct.

Steven was recognized as Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He is a Fellow of the College of Labor and Employment Lawyers.  Chambers describes Steven as an “outstanding lawyer” who is “very sharp and very responsive,” a “strong advocate,” and an “expert in his field.” Steven was 1 of 12 individuals selected by Compliance Week as a “Top Mind.” Earlier in his career, he was 1 of 5 U.S. lawyers selected by Law360 as a “Rising Star Under 40” in the area of employment law and 1 of “40 Illinois Attorneys Under Forty to Watch” selected by Law Bulletin Publishing Company. Steven is a Burton Award Winner (U.S. Library of Congress) for “Distinguished Legal Writing.”

Steven has served on Law360’s Employment Editorial Advisory Board and is a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is regularly quoted in leading publications such as The Wall Street Journal.

The U.S. Chamber of Commerce has engaged Steven to serve as lead counsel on amicus briefs to the U.S. Supreme Court and federal circuit courts of appeal. He was appointed to serve as a Special Assistant Attorney General for the State of Illinois in employment litigation matters. He has presented with the Solicitor of the DOL, the Acting Chair of the EEOC, an EEOC Commissioner, Legal Counsel to the EEOC and heads of the SEC, CFTC and OSHA whistleblower programs. He is also a member of the Sedona Conference, focusing on trade secret matters.

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.