On March 21, 2017, the Northern District of Texas dismissed a former employee’s whistleblower retaliation claim on the ground that her allegations of fraud were too far removed from potentially harming the shareholders of a publicly-traded company to be covered under SOX’s anti-retaliation protections. Brown v. Colonial Savings, F.A., No. 4:16-cv-00884 (N.D. Tex. Mar. 21, 2017).


Plaintiff Joann Brown was Defendant Colonial Savings, F.A.’s Assistant Vice President of Business Support. In February 2015, she allegedly learned that Defendant, which is a privately-owned bank that services mortgage loans for other banks (including publicly-traded banks) and on its own behalf, had mailed untimely and backdated notices to certain customers informing them of material changes to its automatic clearing house services.  As a result, Plaintiff alleged, approximately 40,000 customers incurred overdraft fees and negative account balances.  According to Plaintiff, however, Defendant underreported the scope of the error to the publicly-traded banks for which it services mortgages, causing those banks to materially misstate their financial statements, which in turn harmed shareholders of the banks who purchased or sold securities in reliance on such financial statements.

After learning about the untimely notices, Plaintiff alerted both her supervisor and the Human Resources Department that Defendant was potentially violating one of the consumer finance laws. In response to her complaints, Plaintiff alleged that her direct supervisor and another supervisor verbally abused her, excluded her from a leadership training event, issued a critical performance review to her, placed her on a “vague and impossible” performance improvement plan, and subsequently presented a severance package to her with the intention of terminating her employment.  Plaintiff also alleged that Defendant defamed her and obstructed her unemployment benefits after she resigned.

Plaintiff filed suit against Defendant for violations of SOX and Dodd-Frank’s anti-retaliation provisions, in addition to common law tort claims. With respect to her SOX whistleblower claim, Plaintiff asserted that Defendant’s actions, including its alleged underreporting of the notice error to the “investors, banks, and government entities” for which Defendant services mortgages, constituted fraud and thus brought her complaints within the scope of SOX’s whistleblower protections.  Defendant moved to dismiss Plaintiff’s whistleblower claims for failure to state a claim.


Reviewing Plaintiff’s allegations, the Court concluded that she had not alleged any “facts that would bring any of her claims within the coverage of § 1514A.” In particular, the Court dismissed Plaintiff’s claims that she was unlawfully retaliated against after reporting Defendant’s allegedly untimely and backdated notices as too far removed from potentially or actually harming shareholders of any publicly-traded companies.  The Court reasoned that “[e]xpanding whistleblower protection as plaintiff requests would transform SOX into a general anti-retaliation statute, which it is not.”  As a result, her complaints to Defendant were not protected activity for purposes of pleading a SOX whistleblower claim.

In reaching its decision, the Court relied heavily on the Supreme Court’s holding in Lawson v. FMR LLC, 572 U.S. ___, 134 S. Ct. 1158 (2014) and the Eastern District of Pennsylvania’s subsequent ruling in Gibney v. Evolution Mktg. Research, LLC, 25 F. Supp. 3d 741 (E.D. Pa. 2014).  In Lawson, the Supreme Court held that SOX’s whistleblower protections extend to employees of contractors and subcontractors.  In its Gibney decision, however, the Eastern District of Pennsylvania held that there are important limitations to Lawson’s reach.  As the Gibney court explained, “[n]othing in the text of § 1514A or the Lawson decision suggests that SOX was intended to encompass every situation in which any party takes an action that has some attenuated, negative effect on the revenue of a publicly-traded company, and by extension decreases the value of a shareholder’s investment.”  Instead, the Gibney court emphasized, “the specific shareholder fraud contemplated by SOX is that in which a public company – either acting on its own or acting through its contractors – makes material misrepresentations about its financial picture in order to deceive its shareholders.”


The Court’s decision is a helpful reminder that, although Lawson greatly expanded the universe of companies regulated by SOX’s whistleblower provision, there may be meaningful limitations to its reach.  This is a valuable win for employers – and especially for contractors of publicly-traded companies – confronting SOX whistleblower claims based on alleged fraudulent activities that are two or more steps removed from any potential harm to shareholders.

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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.