Alabama Federal Court Partially Grants Motion to Dismiss SOX Claim On Exhaustion Grounds

On May 29, 2018, the U.S. District Court for the Northern District of Alabama granted a motion to dismiss in part Plaintiff’s whistleblower retaliation claims under SOX on the grounds that the Plaintiff failed to exhaust his administrative remedies against the Defendant CEO.  Wingo v. S. Co., 17-cv-01328.

Background.  Plaintiff, a Project Manager, informed his supervisor that a project was on track for a delayed Commercial Operation Date (“COD”).   Plaintiff alleged that after he informed his supervisor of his findings, management pressured employees to take dangerous shortcuts and continued to tout that an on-time COD was possible, because governmental and private incentives were contingent on a timely execution of the project.  Plaintiff allegedly reiterated his concerns to management and ultimately expressed his concerns to the CEO.  Plaintiff alleged that management began to retaliate against him and he was subsequently terminated.  Plaintiff then submitted a report to the SEC and filed a SOX whistleblower retaliation complaint with OSHA.  He then filed suit in federal district court, naming his employer and the CEO as defendants. 

Rulings.  The CEO moved to dismiss the SOX claim against him individually, arguing that Plaintiff’s OSHA filings poorly communicated his charges and failed to properly reference him, despite naming him as a defendant.  The court agreed, concluding that OSHA was not on notice that it should investigate the CEO’s alleged conduct.  Thus, the court granted the CEO’s motion to dismiss.   

Implications.  This decision is a favorable result for individual defendants in SOX cases, who are sometimes improperly named as parties and where claims against them in OSHA complaints are lacking.


Update on BofI Whistleblower Litigation

We previously reported in March and last October on a whistleblower litigation brought by Charles Erhart, a former Bank of Internet Holding, Inc. (BofI) internal auditor.  On December 3, 2015, in a separate action, the shareholders of BofI brought a derivative suit, based in part on the facts of the whistleblower case, claiming BofI’s board of directors engaged in multiple schemes that caused a drop in stock price.  On May 11, 2018, the United States District Court for the Southern District of California tentatively dismissed a sizeable portion of the suit due to the claims being “unripe.”  In Re: BofI Holding, Inc. Shareholder Litigation, No. 3:15-cv-02722.

BofI shareholders filed a putative class action securities fraud suit when BofI’s stock price fell over 30% after news broke of the whistleblower litigation. The suit was dismissed March 2017. The present suit was brought against the bank’s directors and officers for knowingly breaching their duties, taking no action after learning Erhart was fired despite his whistleblower status, disregarding internal controls, and producing misleading securities disclosures, among other actions.

The company moved for a judgment on the pleadings, and the court found  “derivative plaintiffs do not state a ripe claim when it is dependent on the conclusion of securities or whistleblower litigation regarding the same conduct.”  As a result, the plaintiffs have two options: (1) filing an amended complaint and proceeding with the claims that are ripe and supported by sufficient allegations of Article III standing, or (2) seeking to stay the case until the whistleblower litigation concluded.

As for the original whistleblower case, Erhart v. BofI Holding, Inc., No. 15-cv-02287, a jury trial has been set for June 11, 2019.

We will continue to monitor developments in these related matters.  This decision highlights that issues arising from employee whistleblower claims can have implications beyond the employment litigation itself.


ARB Rejects SOX Claim Due to Complainant’s Harassment

The ARB recently affirmed a motion for summary decision against a Complainant claiming retaliatory discharge under SOX, finding that he failed to demonstrate that he engaged in protected activity and that the Company would have discharged him in the absence of any protected activity given his misconduct. Latigo v. ENI Trading & Shipping, 2018 DOL Ad. Rev. Bd. LEXIS 15, Arb. No. 16-076, ALJ No. 2015-SOX-031 (Mar. 8, 2018).

Complainant, a trading analyst, was hired by ENI Trading & Shipping (“Company”) to analyze and reconcile crude oil production volumes and sales. In October 2014, Complainant allegedly expressed concerns to his supervisor about a discrepancy between the oil volume measured and the amount invoiced to third parties, stating that “the missing amount was not accounted for in [the Company’s] profit and loss statement, and that profits were overstated.”  Complainant’s supervisor responded that there was no unaccounted-for discrepancy since the imbalance had been accruing as a future payable.

At or around the same time, an employee complained to the Company that Complainant had been blackmailing and harassing a female co-worker, who had attempted suicide due to the alleged harassment. Outside counsel investigated the complaint, concluded that Complainant had engaged in harassing behavior and recommended termination of his employment.  Shortly thereafter, the Company terminated Complainant’s employment.

Complainant then filed a complaint with OSHA alleging whistleblower retaliation under SOX. After OSHA dismissed the Complaint, Complainant appealed to the ALJ.  The Company moved for summary decision, arguing that Complainant failed to show that he engaged in protected activity because while the reasonableness of his belief “ceased . . . when Complainant’s supervisor explained that the discrepancy did not in any way impact” the Company’s profit and loss statement.   The Company further argued that Complainant’s alleged protected activity did not contribute to his discharge and that it would have taken the same action if Complainant had not engaged in protected activity because the Company’s acting president had no knowledge of the alleged protected activity until the moment he suspended Complainant, and instead based his decision to suspend and terminate Complainant solely on the results of the independent investigation of harassment.  In response, Complainant alleged that his co-worker and the Company were colluding and hacked his computer “to prevent [Complainant] from reporting [the Company] to OSHA and federal securities authorities.”

The ALJ granted the Company’s motion for summary judgment, finding that Complainant failed to show he engaged in protected activity because after learning that the alleged discrepancy on the profit and loss statement was not actually a misstatement, he never voiced continued concern or offered any other affirmative evidence to demonstrate anything to the contrary. The ALJ also found that Complainant failed to establish causation because in response to the substantial evidence from the independent investigation into his harassing behavior, Complainant relied only on his own unsupported allegations to demonstrate that his alleged protected activity was a contributing factor in the Company’s decision to terminate his employment. In addition, the ALJ found that the Company demonstrated that it would have terminated Complainant even if he had not engaged in protected activity because he failed to provide any affirmative evidence to demonstrate that the independent investigation was inaccurate with respect to his harassing behavior.

The ARB affirmed, finding that the Company’s basis for its termination decision was supported by the evidentiary record. As the ARB explained, Complainant failed to “provide any affidavits, sworn statements, or other admissible evidence to rebut the clear and convincing evidence [the Company] adduced in support of its affirmative defense.”  The ARB did not make a determination as to the ALJ’s protected activity analysis.


This is a welcome decision for employers because it shows that the ARB is apt to affirm ALJ grants of summary judgment where complainants may be using whistleblower provisions to shield themselves from their own misconduct.

Chicago Federal Court Rejects Retaliatory Discharge Claim Due To Existence Of SOX Whistleblower Claim

On April 23, 2018, the U.S. District Court for the Northern District of Illinois ruled that a plaintiff’s SOX claim precluded his claim for common law retaliatory discharge.  Cohen v. Power Solutions International, Inc., No. 17-cv-4385.

Plaintiff, a COO, claimed that in early 2016, he became suspicious of the Company’s financial dealings and believed the Company “had engaged in sham transactions, channel-stuffing, and other financial and accounting misconduct.”  Plaintiff reported his purported concerns to senior executives, employees at the Company and the Board of Directors and Audit Committee.  Shortly after his report to the Board, the CEO issued Plaintiff an “Action Plan,” dated the day before Plaintiff’s report to the Board and Audit Committee.  The Action Plan outlined areas of concern with Plaintiff’s performance and action items.  Plaintiff responded to the Action Plan in writing a few days later and again raised concerns regarding financial misconduct.  Plaintiff’s employment was terminated a few weeks later.

Plaintiff then filed suit claiming retaliation under SOX and Illinois common law.  The Company filed a motion for judgment on the pleadings pursuant to Rule 12(c), arguing that the Plaintiff’s “SOX claim provides an adequate alternative remedy, and so Illinois law precludes a common law retaliatory discharge claim for the same act of retaliation.”  The court agreed, finding that “Illinois courts do not permit common law claims for retaliatory discharge where there is an adequate alternative remedy available that renders the common law remedy superfluous.”  The court noted that where the act of retaliation violates a statutory right – such as SOX – “common law retaliatory discharge claims cannot stand.”

This case precludes Illinois plaintiffs from adding common law retaliation claims to SOX claims in hopes of raising the specter of punitive damages that SOX does not provide.

Federal Court Rules That Providing Testimony to FINRA Is Not Protected Activity Under Dodd-Frank

On April 19, 2018, the United States District Court for the District of New Jersey held that providing testimony to FINRA (which is overseen by the SEC) does not constitute protected activity for purposes of establishing a Dodd-Frank whistleblower claim.  Price v. UBS Financial Services, Inc., No. 2:17-01882.

Background.  Plaintiff, a former UBS Private Wealth Advisor, testified before FINRA regarding allegedly unlawful activities by company management.  After Plaintiff was terminated, Plaintiff brought anti-retaliation claims under Dodd-Frank and the Florida Whistleblower Act.  The Court denied the dismissal of the Florida Whistleblower Act claim, but stayed the Dodd-Frank pending the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers.  On February 21, 2018, the Supreme Court issued their decision, holding that the anti-retaliation provision in Dodd-Frank does not extend to individuals who failed to report the potential violation to the SEC.  Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767, 772 (2018).

Ruling.  Following the decision in Digital Realty Trust, Inc. v. Somers, UBS moved to lift the stay and dismiss Plaintiff’s Dodd-Frank claim with prejudice arguing that testifying before FINRA did not equate to providing information to the SEC.  Plaintiff opposed the dismissal, arguing that his disclosures were sufficient since the SEC oversees FINRA and its rulemaking process and disciplinary proceedings.  The court dismissed Plaintiff’s Dodd-Frank claim, holding that the Digital Realty decision makes clear that the “core objective of Dodd-Frank’s robust whistleblower program… is to motivate people who know of securities law violations to tell the SEC.”  Digital Realty, 138 S. Ct. at 777.  (internal quotations and citations omitted).  Accordingly, the Court determined that Plaintiff’s testimony to FINRA did not meet the statutory requirement to report information to the SEC.

Implications.  This decision demonstrates that federal courts may take narrow view as to the definition of “whistleblower” under Dodd-Frank’s anti-retaliation provisions and that plaintiffs must report misconduct to the SEC in order to be protected by Dodd-Frank.


SDNY Grants Summary Judgment Against Plaintiff in SOX Blacklisting Suit

The U.S. District Court for the Southern District of New York recently granted a motion for summary judgment against a Plaintiff claiming retaliatory blacklisting under SOX, holding that a former employer’s policy of refusing to conduct business with plaintiff was not actionable under the circumstances of the case.  Kshetrapal v. Dish Network, 2018 U.S. Dist. Lexis 48493 14-CV-3527 (PAC) (S.D.N.Y. Mar. 23, 2018). Continue Reading

DC Circuit Upholds SEC’s Denial of Dodd-Frank Bounty Award

On March 20, 2018, the DC Circuit upheld the SEC’s denial of a Claimant’s application for a Dodd-Frank whistleblower bounty award because the SEC did not rely on the information provided by the Claimant in pursuing an enforcement action against Management Solutions.   In upholding the SEC determination, for first time, the court identified the standard of review for an appeal of the SEC’s denial of an award in a whistleblower action, holding that the appropriate standard under 5 U.S.C.A. § 706(2)(E) is whether the SEC’s determination was based on “substantial evidence.”  Doe v. SEC, 2018 U.S. App. Lexis 7449 No. 16-1414 (D.C. Cir. Mar. 20, 2018). Continue Reading

Tenth Circuit Reverses Grant of Summary Judgment on SOX Whistleblower Claim

On February 22, 2018, the Tenth Circuit Court of Appeals reversed a district court’s grant of summary judgment against Plaintiff who claimed that his employment was terminated in violation of the SOX whistleblower protection provision.  The court concluded that genuine issues of material fact existed as to whether Plaintiff actually believed that the complained-of conduct was unlawful and whether the complaints were a contributing factor in Plaintiff’s termination. Genberg v. Porter, No. 16-cv-1368.

Background.  Plaintiff was an executive at a biopharmaceutical company.  In March 2010, he sent a pair of e-mails to the company’s board of directors, which alleged, among other things, that the CEO was engaged in insider trading.  The board hired an attorney to investigate, and the investigation found no evidence of insider trading but allegedly uncovered that Plaintiff had been involved in an attempt to acquire the company.  Allegedly on that basis, the board discharged Plaintiff.  Plaintiff proceeded to sue the CEO under SOX in the United States District Court for the District of Colorado, arguing that the e-mails constituted protected activity.  The district court granted the employer’s motion for summary judgment, holding that at least one of Plaintiff’s two e-mails had not been protected by SOX because it did not “definitively and specifically” relate to a violation of one of the laws enumerated in Section 806 of SOX.

Rulings.  The Tenth Circuit reversed the district court, ruling that the lower court had incorrectly applied the “definitively and specifically” standard when it should have applied the standard articulated by the Administrative Review Board in Sylvester v. Parexel, No. 07-123 (ARB May 25, 2011).  The court wrote, “[the district court’s] statement of the burden was incorrect, for the Administrative Review Board of the Department of Labor has explicitly disavowed the definitive and specific evidentiary standard… [and] [u]nder Chevron deference, we follow the Administrative Review Board’s interpretation if it is based on a permissible construction of an ambiguous statute.”  Further, the Tenth Circuit found that genuine factual disputes existed as to whether Plaintiff’s e-mails contributed to the decision to terminate his employment.  The court reasoned that the temporal proximity between the e-mails and the board’s decision to discharge the Plaintiff meant that a reasonable factfinder could potentially conclude that the e-mails had been a contributing factor in the decision.

Implications.  The Tenth Circuit’s opinion is another example of a court deferring to the ARB’s standard in Sylvester, which lowers the burden for a plaintiff who seeks to demonstrate that he or she engaged in protected activity under SOX.

Mississippi Federal Court Denies Summary Judgment on SOX Whistleblower Claim

On February 12, 2018, the United States District Court for the Northern District of Mississippi recently denied a motion for summary judgment in a SOX whistleblower claim where the defendant company alleged that it terminated the plaintiff pursuant to a reduction-in-force (RIF). Hendrick v. ITT Engineered Valves, LLC, No. 16-cv-204.

Background. Plaintiff began working as Operational Excellence Manager at a company that was considering a RIF to respond to a decline business.  Recognizing that he may lose his job, Plaintiff offered to management that he take off Fridays off to reduce expenses.  Later that month, Plaintiff allegedly observed fraudulent inventory figures.  Plaintiff photographed the proof of the alleged fraud and gave the pictures to a co-worker, who submitted an anonymous ethics complaint.  Three hours after the report was filed, Plaintiff was informed that his job was being restructured, and Plaintiff interpreted this as a demotion.  Plaintiff then e-mailed management about the alleged fraud.  He and his co-worker who submitted the anonymous ethics complaint were both terminated months later.  The organization cited a RIF as its reason for the layoffs.  Plaintiff filed suit alleging he was terminated because of his co-worker’s anonymous ethics complaint in violation of SOX.

Rulings. The company moved for summary judgment, arguing that because Plaintiff failed to identify any fraudulent activity that would qualify as a protected activity.  Specifically, it argued that Plaintiff never accused the company of any SOX violation and failed to articulate his fraud claim in deposition testimony.  But the court determined that there were questions as to whether Plaintiff’s purported beliefs were objectively and subjectively reasonable.  The company also argued that there was no materially adverse employment action, as the restructuring was not a demotion and because Plaintiff’s termination was planned prior to the whistleblowing activity.  For summary judgment purposes, however, the court found that Plaintiff established a prima facie case that the alleged demotion and termination were adverse actions. Notably, moreover, even though the organization provided a “first pass” of names to be included in the RIF, it was not deemed to be “clear and convincing” evidence that the organization would have terminated Plaintiff in the absence of his protected activity.

Implications. While a pre-planned RIF may in many cases provide a compelling explanation as to why one was not terminated for whistleblowing activity, this decision shows that this defense is not always an impenetrable shield to a SOX claim at the summary judgment phase.

U.S. Supreme Court Holds That Anti-Retaliation Provisions of Dodd-Frank Apply Only to Whistleblowers Who Report to the SEC

On February 21, 2018, the U.S. Supreme Court unanimously ruled that an individual is not covered by the anti-retaliation provision of the Dodd-Frank Act unless they have provided information regarding a violation of law to the U.S. Securities and Exchange Commission. Digital Realty Trust, Inc. v. Somers, No. 10-1276, 583 U.S. ___ (2018).

Somers was a Vice President of Digital Realty, a real estate investment trust, who filed suit alleging a claim of whistleblower retaliation under Dodd-Frank. Somers alleged that he was terminated for reporting suspected securities law violations to senior management.  Digital Realty moved to dismiss Somers’ claim on the basis that Somers did not qualify as a “whistleblower” because he never reported any alleged violations to the SEC.

The Dodd-Frank Act defines a “whistleblower” as a person who provides “information relating to a violation of the securities laws to the Commission.” The Dodd-Frank Act’s anti-retaliation provision protects a “whistleblower” in three situations, including when he or she makes disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.  Sarbanes-Oxley includes several provisions regarding internal reporting of securities laws violations.  In interpreting this provision, the SEC issued Rule 21F-2, which expressly allows an individual to gain anti-retaliation protection as a whistleblower without providing information to the SEC.

The District Court denied Digital Realty’s motion to dismiss, and the Ninth Circuit affirmed. In particular, the Ninth Circuit found the statutory scheme ambiguous and held that the SEC’s Rule 21F-2 warranted deference under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984).

In reversing the Ninth Circuit’s decision, the Supreme Court unanimously held that the anti-retaliation provision must be interpreted in accordance with the statute’s definition of a “whistleblower.” Because this definition was “clear and conclusive” and “Congress [had] directly spoken to the precise question at issue,” Chevron deference to the SEC’s Rule was not appropriate.  The Court reasoned that this interpretation is in line with Dodd-Frank’s core objective of prompting reporting to the SEC.

Proskauer represented the U.S. Chamber of Commerce in its submission of an amicus brief in support of Digital Realty and a reversal of the Ninth Circuit’s decision.

The Court’s decision settles a circuit split between the Second and Fifth Circuits on the issue. The Ninth Circuit had followed the Second Circuit’s decision in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015), holding that a whistleblower need not report a securities law violation to the SEC.  The Second Circuit concluded that the tension between the definition of “whistleblower” and the protection provided by Dodd-Frank’s anti-retaliation provision was sufficiently ambiguous to warrant Chevron deference to the reasonable interpretation of the SEC.  In contrast, the Fifth Circuit held in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), that employees must provide information to the SEC to avail themselves of the anti-retaliation safeguard. The Fifth Circuit held that Congress defined a “whistleblower” unambiguously and rejected the SEC’s more expansive interpretation of that term.