On December 9, 2019, the U.S. District Court for the Southern District of New York ruled that, as a matter of law, directors cannot be held liable under the anti-retaliation provisions of the Sarbanes-Oxley Act.  Zornoza v. Terraform Global Inc., No. 18-cv-11617.

Background

Plaintiff is the former President and CEO of the defendant companies which were owned and controlled by a third company (“Owner”) for the purpose of purchasing and operating its energy plants.  In 2015, Plaintiff allegedly became concerned that Owner was publicly overstating its liquidity.  Plaintiff alleged that he reported his alleged concerns to Owner’s CEO and CFO and certain board members.  Plaintiff alleged that, in response, he was removed from his position as president and CEO of the Companies, and replaced by an individual whom he claims diverted funds from the two companies to Owner in an attempt to mask its liquidity crisis.  Plaintiff filed suit against the CEO, CFO, the Companies and certain board members, alleging he was retaliated against in violation of Section 806 of SOX.

Ruling

The directors moved to dismiss the claims against them pursuant to Rule 12(b)(6), arguing they cannot be liable as directors.  The court dismissed the claims against the directors, concluding that Section 806 of SOX (Section 1514A(a)) does not provide for director liability.  Section 1514A(a) states that: “[n]o company…or any officer, employee, contractor, subcontractor, or agent of such company” may retaliate against an employee for reporting suspected violations of the securities laws.  Given that Congress had explicitly provided for director liability in other provisions, such as Section 7244(a)(1) (making it unlawful for “any director or executive officer of an issuer” to transact in securities during blackout periods) and Section 7242(a) (making it unlawful for “any officer or director. . . to take any action to fraudulently influence. . . any independent public or certified accountant . . .”), the court found its omission from Section 1514A(a) to be particularly significant.  Finding the plain language of SOX to be clear and unambiguous, the court declined to examine Congress’s intent in passing it, ruling that the directors could not be liable in their capacity as directors.

The court noted that in Wadler v. Bio-Rad Labs., Inc. (N.D. Cal. 2015) (which we blogged about here), a California court came to the opposite conclusion because it determined that the usage in Section 1514A(a) of the word “agent” was sufficiently ambiguous to include “directors” as well.  However, this court disagreed, noting that SOX had used “agents” and “directors” in Section 78u-3(c)(3)(A)(i) to denote separate categories of persons, thus precluding a broad definition of “agent” that could include “directors.”  The court drew additional support from agency law, noting that an individual director has no power to act on the corporation’s behalf, but instead directly controls the corporation as a member of its board.

Implications

Though there is now a division in district court authority as to whether directors can be held liable under Section 806, this decision provides useful and compelling reasoning upon which employers can be expected to rely.