On May 11, 2017, the Northern District of New York applied the Second Circuit’s standard for evaluating a Dodd-Frank retaliation claim in response to a motion to dismiss under F.R.C.P. Rule 12(b)(6).  The court denied the employer’s motion to dismiss unlawful retaliation claims brought by a former employee under Dodd-Frank, finding that the whistleblower had sufficiently alleged a reasonable belief of plausible securities law violations in his complaint.  McManus v. Tetra Tech Construction, Inc., et al., 2017 U.S. Dist. LEXIS 71838 (N.D.N.Y. May 11, 2017).

Plaintiff’s Allegations

Defendant Tetra Tech Construction is a publicly traded company that provides construction and technical services to both governmental and private sector clients.  Tetra Tech hired Plaintiff in 2000 and named him Director of Business Development in its wind power division, located in Gloversville, New York, in 2007.

Beginning in 2014, Plaintiff claims that he began voicing concerns to colleagues and senior management that Tetra Tech was falsifying bonus numbers and failing to adequately and timely report business losses, based on his past experiences and conversations with high-ranking officials and accounting personnel.  At another meeting with senior officials on July 21, 2014, Plaintiff repeated his earlier concerns that Defendant’s accounting practices were not in compliance with federal securities laws.  On October 7, 2014, Plaintiff sent an email to senior officials and human resources detailing his suspicions that Defendant’s practices were not in compliance with SEC/SOX practices, and continued to reiterate his concerns with senior officials on later occasions.

Plaintiff was subsequently notified on January 27, 2015 that he would be terminated the following week.  Later that day, Plaintiff received a bonus that was half the size he had been promised at an earlier time.

Plaintiff filed suit against Defendant for violations of Dodd-Frank’s anti-retaliation provisions.  Defendant moved to dismiss Plaintiff’s whistleblower claims on the grounds that Plaintiff failed to state a claim under Dodd-Frank.  On November 22, 2016, Plaintiff moved for leave to file an amended complaint.

Ruling

The court denied Defendant’s motion to dismiss, concluding that Plaintiff asserted an objectively reasonable belief that Defendant’s conduct violated the securities laws as required by the Second Circuit’s Nielson v. AECOM Tech. Corp., 762 F.3d 214, 221 (2d Cir. 2014), decision.  According to the Second Circuit, a plaintiff “must show not only that he believed that the conduct constituted a violation” of the covered laws, “but also that a reasonable person in his position would have believed that the conduct constituted a violation.”  It is not enough for plaintiffs to present unduly speculative allegations of whistleblower violations.  Instead, plaintiffs must allege potential securities law violations with some level of specificity and a plausible basis for such knowledge.

Here, the court found that Plaintiff’s allegations satisfied the reasonable belief standard.  Plaintiff alleged that he was terminated approximately five months after raising SOX concerns.  In his proposed amended complaint, Plaintiff stated that he “believed there was likely to be a company-wide pattern of delaying the reporting of [project] costs and refusing to report other actual costs, which would serve to inflate [Defendant’s] appearance of profitability and subsequently [its] stock price.”  The court found that Plaintiff’s amended complaint sufficiently alleged SOX violations, presenting specific examples of conduct that he believed violated federal securities law.  According to the court, Plaintiff “clearly alleged that [Defendant] provided fraudulent information to investors by delaying the reporting of losses, and that it did so with an intent to deceive the public.”

Finding that Plaintiff  sufficiently alleged that he had an objectively reasonable belief that Defendant had plausibly violated securities laws, the court found that Plaintiff’s claims were not subject to dismissal and granted his motion to amend the complaint.

Implications

Whistleblower plaintiffs are required to meet the objective reasonableness standard in order to state a claim under Dodd-Frank.  While the court here found that the whistleblower had satisfied the Second Circuit’s articulated standard, there have been instances in which plaintiffs were not able to do so, including Diaz v. Transatlantic Reinsurance Co., No. 16-cv-1355.  Employers should be cognizant of this standard when attempting to dispose of whistleblower claims at the motion to dismiss stage.