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Retaliation Claims Under SOX: A Survival Guide For Financial Industry Whistleblowers

Recent federal appellate precedent has made prosecuting companies for whistleblower retaliation more plausible, at least on paper.  There’s still the issue of working up the courage to actually go through with making a formal compliant, a paralyzing moment for nearly all of  the potential whistleblower clients who come through our office.   More on that later; here’s the good news:

Under the SOX whistleblower provision, employers of a publicly traded company cannot retaliate against an employee who reports suspected or existing illegal activity or participates in an investigation. Illegal corporate activities that should be reported  include municipal bond fraud, procurement fraud, wire fraud, mail fraud, and securities fraud, to name only a few.

While the Department of Labor has consistently interpreted the statute liberally, federal trial and appellate courts have been relatively quiet on the subject, and when they have taken a stance, it has been without any uniformity.  Mercifully, that trend appears to be changing.

In a recent Third Circuit opinion, Wiest v. Lynch, No. 11-4257 (3d Cir. Mar. 19, 2013), the Court of Appeals reaffirmed the broad scope of protected activity in SOX whistleblower  retaliation cases.  Specifically, the Court held that protected activity under SOX includes reporting an employee’s conduct that the whistleblower “reasonably believes” violates certain enumerated federal statutes or SEC rules.   In embracing the “reasonably believes” standard, the Third Circuit rejected defendant’s argument that a higher standard requiring a whistleblower to “definitively and specifically” report unlawful conduct to a supervisor with respect to to an existing violation should be applied.   Under a “reasonably believes” standard, a SOX plaintiff reporting unlawful conduct need not be correct that the law had been broken, provided that he/she maintained a good faith belief that the law had been violated.

In a similarly expansive interpretation of the SOX whistleblower provision, the Tenth Circuit Court of Appeals in Lockheed Martin Corporation v. ARB, 10th Cir No. 11-9524 (June 4, 2013) held that complaints of illegal activities do not need to be directly related to shareholder fraud to be actionable as protected activity.  This particular issue was been highly contentious, with firms who typically represent employers balking in unusually strong terms about the risk of “opening the floodgates” to “tenuous” lawsuits.

So what does this mean for our nervous whistleblower, afraid to pull the trigger?  It means that the judiciary increasingly feels your pain, and the importance of your cause, and may be more willing to find in your favor in the event of litigation.  That may be cold comfort for someone who fears losing their job, but I offer the wise words spoken to fellow Brooklynite Tony Manero (aka John Travolta in Saturday Night Fever) by his father in a moment of crisis, “The only way you’re gonna survive is to do what you think is right, not what they keep trying to jam you into.”

Christopher Davis is an experienced employment litigator specializing in class actions, overtime wage recovery, discrimination, whistleblower retaliation, and Wall Street bonus disputes. Before entering private practice, Mr. Davis served as an Assistant District Attorney in the Manhattan District Attorney's Office where he prosecuted violent crimes as a member of the Sex Crimes Unit.

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