Are Contractors and Sub-Contractors Protected From Retaliation Under Sarbanes-Oxley?

The Sarbanes-Oxley Act is a federal statute enacted in 2002 in order to promote accountability for public companies. The statute contains a whistleblower protection clause stating that no officer, employee, contractor, sub-contractor or agent may be fired or otherwise face retaliation for reporting unlawful conduct. The legislative intent of the act was to hamper the “corporate code of silence” and eliminate a culture wherein corporate misconduct occurs with near absolute impunity. Congress considers the whistleblower protections to be crucial to the effectiveness of the SOX Act.

SOX

In a series of holdings by the First Circuit Court of Appeals, several potential whistleblowers were excluded from filing a lawsuit under the SOX Act by construing the language of Section 1514A to mean only employees of publicly traded companies are protected from retaliation – not those of privately-held subsidiary organizations. In a case involving two terminated employees of a subsidiary organization, which was dismissed by the First Circuit, Petitioners contend that the SOX Act does not expressly limit recovery to those employees who are directly employed by the public corporation, but is intended to prevent corporate fraud on all levels – including sub-ordinate, sub-contracting or subsidiary organizations.

Details of Lawson v. FMR, LLC

The Respondents in this case are subsidiary organizations providing services to mega-mutual fund company Fidelity, Inc. Fidelity relies on several subsidiary organizations to manage its portfolio, which consists of trillions of dollars in investments. Naturally, Fidelity must make quarterly reports to the SEC, rendering it subject to the SOX Act.

Fraud

Image from fbi.gov

Petitioner Lawson worked for Fidelity Investments for nearly fourteen years and had risen to the level of Senior Director of Finance. In 2005, Lawson raised concerns over Fidelity’s reporting and accounting procedures with regard to certain expenses, thereby depleting its reported profits. Lawson alerted Fidelity’s general counsel to these practices and expressed his concern that the expense reporting violated Fidelity’s duty of candor to its shareholders. Lawson also alleged that several quarterly reports sent to shareholders and the SEC contained false and misleading information.

Thereafter, Lawson alleges she was passed over for a promotion, asked to take a sabbatical and routinely harassed as a result of her reporting. She eventually resigned.

Lawson is joined in her lawsuit by another employee, Jonathan Zang, who worked for Respondents as a research analyst. Despite Respondents’ assertion that he was terminated due to disappointing research, lack of documentation and inadequate performance of duties, Zang contends he was fired after bringing to light misrepresentations on a quarterly report with regard to portfolio manager compensation. Zang also questioned “veiled index funds,” which are fees assessed for the review of an account that did not actually take place. Approximately two months later, Zang was terminated.

Supreme Court’s Review

  The crux of this case centers on whether the SOX Act protects subsidiary employees like Zang and Lawson from retaliation, or whether – as Fidelity and FMR interpret – the Act pertains only to Fidelity’s direct employees. Petitioners argue that the spirit and intent of the law, as stated by Congress, is to eliminate the corporate code of silence and prohibit the very situation presented herein. Petitioners also enjoy support from the United States, namely the Department of Labor, Solicitor General, the Securities and Exchange Commission, and the Department of Justice, who filed a collective amicus curiae brief in August of this year.

 The Court is also presented with contentions from Respondents that the SOX Act, in text, purpose, structure and history, applies solely to direct employees of public companies and is not intended to reach contractors, sub-contractors and subsidiaries. It relies heavily on Congress’ use of the word “employees” in its language, and contends that no other interpretation other than direct employee is appropriate.

Oral argument for this case is set for November 12, 2013.

Whistleblowers are Often Met With Adversity, But Must Persevere

The case above outlines an extreme example of pushback from targets of whistleblower litigation. While it is not uncommon for companies to deny liability under certain whistleblower statutes like the SOX Act or the False Claims Act, it is rare for these cases to make it to the Supreme Court, as many Respondents would rather avoid the publicity.

If you are aware of potential securities fraud, or other instances of mismanagement of government funds, a whistleblower lawsuit may be the best course of action for your case.

By | 2018-03-26T11:21:33+00:00 October 15th, 2013|SEC Fraud|