The Southern District of Florida recently denied a Rule 12(b)(6) motion to dismiss a former employee’s Sarbanes-Oxley and Dodd-Frank whistleblower retaliation claims, finding that the plaintiff sufficiently alleged that she had an objectively reasonable belief regarding alleged securities violations.  Thomas v. Tyco Int’l Mgmt. Co., LLC, No. 16-cv-80501 (Mar. 31, 2017).  This case is noteworthy because it takes an expansive view of the scope of protected activity under SOX with respect to complaints involving internal controls and data security.

Background.  Plaintiff was a former Manager of Financial Reporting for the Company.  She allegedly learned during her employment that an applicant for a manager position misrepresented her educational qualifications in her resume.  Additionally, she allegedly believed that the applicant did not have sufficient training in generally accepted accounting principles (“GAAP”).  According to her complaint, despite raising these concerns with her direct supervisor, the Company hired the applicant for the new manager position.  Plaintiff claimed that the new manager was responsible for reporting $4 billion per year to the Company’s headquarters and ultimately to the SEC.  Plaintiff also allegedly began doubting the reliability of a new monthly “tie-out” process the Company used to ensure that the financial data in the Company’s ledger system was consistent with the consolidated financial data reported to the SEC.  In December 2013, Plaintiff filed a complaint with the internal ombudsman regarding the new manager’s credentials and the tie-out process.  The ombudsman found no wrongdoing.  In March 2014, Plaintiff filed a whistleblower retaliation complaint with OSHA.  In May 2014, her employment was terminated on the grounds that she allegedly improperly accessed another employee’s records.

Rulings.  Plaintiff filed suit under SOX and Dodd-Frank in the Southern District of Florida under Dodd-Frank and SOX, claiming she was retaliated against for protected whistleblowing.  The Company moved to dismiss pursuant to Rule 12(b)(6).  The court denied the motion for the following reasons.

A.        SOX Retaliation Claim

The court found that Plaintiff’s internal complaints regarding the new manager’s qualifications represented broader concerns about internal controls, rather than just personnel issues.  The court found that Plaintiff may have had a reasonable belief that the Company violated securities law due to the fact that the new manager possessed a significant amount of responsibility for financial reporting and her alleged lack of appropriate credentials could have put the accuracy of that reporting at risk.  Additionally, the court concluded that Plaintiff’s claim based upon the monthly tie-out process was sufficiently pleaded.  The court rejected the Company’s argument that the Complaint related only to breaches of internal policy by noting that the allegations “show that Plaintiff complained about the lack of data security, the lack of an appropriate approval process, and the lack of segregation of duties in the process used to verify . . . financial information[,]” which all relate to the accuracy of financial reporting.  Therefore, the court found that complaints concerning lack of data security and internal controls can constitute protected activity under SOX.  The court also noted how the Company’s alleged failure to properly investigate Plaintiff’s complaint regarding the monthly tie-out process raised a reasonable inference that the Company violated its duties to assess the effectiveness of internal controls under SOX.

B.        Dodd-Frank Retaliation Claim

The court rejected the Company’s argument that Plaintiff’s complaints to the SEC were not a factor in her termination and concluded that Dodd-Frank protected internal complaints (an issue that is currently before the U.S. Supreme Court, as noted in our recent blogs on March 9, 2017, May 1, 2017, and June 26, 2017).  In addition, the court rejected the Company’s argument that a showing of more favorable treatment of other similarly situated employees was required to show causation.

Implications.  The court’s conclusion that complaints concerning lack of appropriate data security and internal controls can constitute a basis for a SOX retaliation claim reflects a broad interpretation of the scope of protected activity under SOX.  It may be argued, however, that such claims are not actionable because, at their core, they implicate internal policies.

Posted in Dodd Frank, SEC, SOX Whistleblower Decisions
Tags: Dodd-Frank, Sarbanes-Oxley, SEC, SOX, whistleblower
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Photo of Steven J. Pearlman Steven J. Pearlman

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

Employment, Whistleblower, Restrictive Covenant and Trade Secret Practice.…

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

Employment, Whistleblower, Restrictive Covenant and Trade Secret Practice. Steven’s national practice focuses on defending companies in federal and state courts and arbitration against claims of: discrimination, retaliation and harassment, including claims brought by high-level executives; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations (including class, collective and PAGA actions).

Illustrating his versatility, Steven has successfully handled bench and jury trials in multiple jurisdictions (e.g., Illinois, California, Florida and Texas); defended one of the largest Illinois-only class actions in the history of the federal courts in Chicago; and prevailed following his oral arguments before the Seventh Circuit and state appellate courts. Steven brings his litigation experience to bear in counseling clients to minimize risk and avoid or prepare for success in litigation.

Investigations. 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.

Thought Leadership and Accolades. Steven was named Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He was also named as One of the Top 10 Impactful Labor & Employment Lawyers in Illinois for 2023 by Business Today. 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.” Chambers also reports that “He is someone who can navigate the twists and turns of litigation without difficulty. Steven is great with brief-writing, crafting arguments, and making sure the client is always happy.”

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 was appointed to Law360’s Employment Editorial Advisory Board and selected as a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is often 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.

In 2024, Steven received the Excellence in Pro Bono Service Award from the United States District Court for the Northern District of Illinois and the Chicago Chapter of the Federal Bar Association.

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