In one of the first whistleblower suits under the Sarbanes-Oxley Act to reach court, a federal judge in New York has raised some eyebrows by allowing the plaintiff to proceed to trial—and striking some potentially ominous tones for corporate defendants.
Whistleblower lawsuits are still largely an unexplored part of Sarbanes-Oxley. The law clearly allows protections for employees who report financial fraud and then suffer retaliation from the company, but no precise definitions have been determined yet for what sorts of fraud or retaliation might invoke those protections. Critics say workers can file all manner of frivolous or unrelated complaints and then claim SOX protection, when they might legitimately be nuisance employees who should be disciplined.
The latest case, Mahony v. Keyspan Corp., involves a former media relations executive at Keyspan, a $7.2 billion electric utility. Judge Sterling Johnson in the Eastern District of New York ruled in March that the case can proceed to trial. The decision is notable, legal observers say, because:
the court defined “protected activity” under the SOX whistleblower provision broadly;
there was a 13-month gap between the plaintiff’s activity and his termination;
the employer was held to a very high standard in showing that its stated reason for letting the plaintiff go was not discriminatory; and
the plaintiff was allowed to pursue damages to his reputation.
Allegra Lawrence-Hardy, a partner at law firm Asbill & Brennan, says the decision “has the potential to expand liability for employers. The protected activity piece is very broad, broader maybe than Congress intended.”
Shapiro
David Shapiro, counsel with the law firm Pepper Hamilton, likewise says the ruling gives companies reason for concern. “Whenever the statute is expanded to encompass a broader scope of employees, it hurts companies,” he says. “It just leads to frivolous litigation.”
But Shapiro cautions that the SOX whistleblower provision is “still a relatively new law” and that while there have been many settlements, little case law exists yet on the scope of the act’s protections. “It takes time for cases to work their way up to the District Court,” he says.
Accounting Issues Raised
The plaintiff in the case, Robert Mahony, worked for KeySpan and its predecessor company from 1988 until he was dismissed in May 2003. He had been in charge of media relations until he was promoted in September 2001 to director of strategic planning for the corporate affairs department.
In June 1998, Frank Fanning, director of accounting research, allegedly told Mahony that KeySpan’s then-chairman and CEO had received much more severance compensation than the $42 million that had been publicly reported. Although the state attorney general eventually conducted an investigation, Mahony played no part in that probe.
DECISION
Below is an excerpt of the KeySpan decision on SOX whistleblower protections.
If Fanning experienced difficulty having his concerns addressed or heard by officers of the company, then plaintiff’s assistance in opening a channel of communication with the company’s CEO would constitute assistance to the investigation. Indeed, plaintiff’s close relationship with [KeySpan CEO Robert] Catell was the reason why Fanning sought his assistance. Fanning believed that plaintiff’s relationship with Catell put plaintiff in a position to suggest to Catell that he remove the “filter” and hear Fanning’s allegations directly. This is exactly what plaintiff did.
In order to reach the conclusion that the defendant wishes this court to reach, this could would have to hold that SOX applies only to those who blow the whistle, but not to those who make the whistle audible. This interpretation not only flies in the face of the plain language of the statute, which clearly includes those who assist in an investigation, but also leads logically to a point that isolates the whistleblower in a way that Congress could not have intended. Given that SOX is a statute designed to promote corporate ethics by protecting whistleblowers from retaliations, it is reasonable to construe that statute broadly. Therefore, although plaintiff’s actions clearly did not rise to the level of Enron whistleblower Sherron Watkins, the mere “fact that the severity or specificity of [his] complaints does not rise to the level of action that would spur Congress to draft legislation does not mean the legislation it did draft was not meant to protect him.” (Collins v. Beazer Home USA) As a result, defendant cannot establish that, as a matter of law, plaintiff did not assist in an investigation.
Defendant further contends that plaintiff did not engage in protected activity because plaintiff could not have reasonably believed that KeySpan was engaging in fraud. To satisfy this prong of protected activity, a plaintiff need only show a reasonable belief that his employer violated a federal law relating to fraud against shareholders. A plaintiff need not show an actual violation of law, nor must a plaintiff cite a particular statute that he believed was being violated.
Under this standard, plaintiff can demonstrate that he was reasonable in his belief that there were accounting irregularities. Although plaintiff admits he had neither personal knowledge of the fraud nor the educational background to discover the fraud on his own, there is no requirement that a whistleblower have any particular expertise. Plaintiff understood the basic accounting principles that Fanning believed were violated while compiling a fraudulent financial statement. Plaintiff’s lack of expertise was supplemented by the credibility Fanning derived from his position as director of financial accounting. Further, plaintiff was shown emails which confirmed Fanning’s allegations. In short, a fair and reasonable juror could find that plaintiff reasonably believed that the company was engaging in accounting practices that needed to be corrected before its financial statements misled shareholders. In sum, the court finds that the defendant cannot establish as a matter of law that plaintiff did not engage in protected activity under SOX.
Source
U.S. District Court Of Eastern New York (March 12, 2007)
In July 2001, Fanning again spoke with Mahony and allegedly expressed concern about certain accounting issues that resulted in KeySpan’s assets being overstated by $150 million. Mahony had no knowledge of KeySpan’s accounting practices other than what he heard from Fanning, and had limited knowledge of accounting in general. Fanning also showed Mahony a series of emails written to KeySpan officers advising them of the accounting errors. Mahony agreed to help Fanning get his concerns addressed by upper management.
In 2001 and 2002, Mahony spoke with KeySpan’s general counsel and outside legal counsel about the accounting issues. He also urged the company’s new CEO to attend a meeting to hear Fanning out on the alleged accounting fraud. The CEO did attend the meeting; two days later, a document detailing Fanning’s allegations was sent to the Keyspan employee who eventually fired Mahony, and the document was placed in Mahony’s personnel file.
Mahony claimed that the company’s attitude toward him changed after that and this “cooling attitude” lasted until he was terminated in May 2003 as part of a company-wide budget cut that also saw 54 other nonunion employees let go.
The Department of Labor initially dismissed Mahony’s SOX whistleblower complaint. Mahony objected to the ruling and exercised his right to file a claim in federal court when an arbitrator did not act on the objections within 180 days.
Jury Questions
In denying KeySpan’s motion for summary dismissal, Judge Johnson first rejected the company’s argument that Mahony didn’t engage in a protected activity because he didn’t “assist” with any “investigation.”
If Mahony had only given moral support to Fanning and his suspicions about fraud, that would not be protected activity, the judge wrote. But “[Mahony’s] assistance in opening a channel of communication with the company’s CEO would constitute assistance to the investigation,” Johnson said. “To reach the conclusion that [KeySpan] wishes this court to reach, this court would have to hold that SOX applies only to those who blow the whistle but not to those who make the whistle audible.”
Johnson also rejected KeySpan’s assertion that Mahony hadn’t established a causal relationship between any protected activity and his termination. Although the 13-month gap between Mahony’s activity and his termination “is … one factor which a jury can consider when determining causation,” the judge said, jurors could also “look to other facts to decide whether the protected activity precipitated the adverse employment action, including evidence of a strained relationship between the parties that portended the employee’s termination.”
Johnson noted that an employer could defeat a SOX whistleblower claim by demonstrating “with clear and convincing evidence that it ‘would have taken the same unfavorable personnel action in the absence of [protected] behavior.’” But the judge said the bare fact that Mahony was let go along with 54 other nonunion workers did not satisfy this burden because KeySpan didn’t establish whether these other employees were “similar” to Mahony.
“The court is left to guess as to the salaries, titles, and seniority of these employees,” Johnson said.
SOX Liberally Construed
Brink
Scott Brink, a partner with the law firm Jeffer Mangels Butler & Marmaro, says “one of the things that is remarkable about the decision is that—contrary to the hopes of employers—the court liberally construes the protected activity requirement” in deference to the broad remediation purposes of Sarbanes-Oxley. Brink also says it’s notable that the court held KeySpan’s arguments that Mahony’s firing was permissible to a higher standard of proof than Mahony faced arguing that he was wrongly fired.
Brink does warn that people should not read too much into the future of SOX whistleblower protections based on one court case. But, he says, if SOX whistleblower theory evolves along the same lines as similar actions under various state laws, “the Mahony case may prove to be a blueprint for future decisions.”
And Stuart Chanen, a partner with the Katten Muchin Rosenman law firm, notes that it will be interesting to see whether judges—in interpreting the SOX whistleblower—provision, look to other statutes with whistleblower provisions that have been around for much longer, such as the federal False Claims Act.
Chanen
“There is an entire body of case law” built around whistleblower protections under the False Claim Act about issues such as who is a proper plaintiff and when it is too late to claim whistleblower status, he says. “Those principles may be equally applicable to the whistleblower provisions of Sarbanes-Oxley. But whether judges in SOX cases will [apply False Claims Act principles] or will make it up themselves remains to be seen.”
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