The U.S. District Court for the Southern District of New York recently denied a motion to dismiss a plaintiff’s SOX and Dodd-Frank whistleblower claims, ruling that (i) the plaintiff engaged in SOX protected activity even though her purported protected activity was part and parcel of her job duties as Chief Risk Officer, and (ii) she qualified as a Dodd-Frank whistleblower even though she did not lodge a complaint with the SEC.  Yang v. Navigators Group, Inc., Case No. No. 13-cv-2073, 2014 LEXIS 63876 (S.D.N.Y. May 8, 2014).

Background

Plaintiff Jennifer Yang (Plaintiff) was employed from June 25, 2012 through November 2, 2012, as Chief Risk Officer for Defendant Navigators Group, Inc. (Company).  She was responsible for enterprise risk management oversight and tasked with improving the risk management function.  She alleged in her complaint that, in executing these responsibilities, she discovered: (i) the Company’s previous risk assessment results were grossly underestimated; (ii) the Company’s 10-K falsely represented that its reinsurance recoverable credit risk was monitored by a subcommittee; (iii) the Company lacked proper risk control procedures; and (iv) the Company’s SEC filings and presentations to rating agencies inaccurately reflected the its risk management program.  Plaintiff alleged that shortly after she communicated her concerns to Company’s leadership, she suffered a retaliatory termination in violation of the whistleblower protection provisions in SOX and Dodd-Frank.

Ruling

The Company moved to dismiss Plaintiff’s SOX and Dodd-Frank whistleblower claims, asserting her 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 disagreed on both counts.

In ruling that Plaintiff engaged in protected activity under SOX, the court determined that “an employee may engage in protected activity even where the employee is discharging her duties.”  It further ruled that Plaintiff had a reasonable belief (at least in the motion to dismiss context).  According to the court, although Plaintiff never explicitly communicated that shareholder fraud was being committed, improper risk management could influence shareholder investment decisions and thus an individual with Plaintiff’s training and experience could reasonably believe that such faulty management constituted fraud on shareholders and/or violated a SEC rule or regulation.

In addition, in ruling that Plaintiff qualified as a whistleblower under Dodd-Frank’s anti-retaliation provision even though she never reported the Company’s purported violations to the SEC, the court expressly strayed from the Fifth Circuit’s decision to the contrary.

Implications

Courts continue to grapple with the contours of the protected activity requirements in Section 806 of SOX and the Dodd-Frank anti-retaliation provisions.  Employers can be expected to continue to battle on this front, but need to be prepared for disparate rulings.  In addition, in considering the above-referenced defense to the SOX claim that the court rejected, see our recent blog post here on recent activity in New Jersey focused on whether an employee can qualify as a whistleblower where his or her alleged protected activity is part and parcel of his or her job.