The U.S. Supreme Court Extends Sarbanes-Oxley Whistleblower Protections to Employees of Mutual Fund Investment Advisers and Other Privately-Held Contractors to Public Companies

by Dechert LLP
Contact

Introduction

The Supreme Court of the United States on March 4, 2014 held that employees of a privately-held mutual fund investment adviser are protected under a whistleblower provision enacted as part of the Sarbanes-Oxley Act of 2002 (SOX).1 Although the SOX whistleblower provision explicitly protects employees of publicly traded companies, the Supreme Court’s ruling extended the protections afforded under the provision to employees of a privately-held investment adviser because the adviser served as a contractor to mutual funds. As Justice Sotomayor’s dissenting opinion recognized, this decision “threatens to subject private companies to a costly new front of employment litigation.”

This Dechert OnPoint discusses: (i) the SOX whistleblower provision; (ii) the Supreme Court’s decision; and (iii) the steps that privately-held contractors and subcontractors of public companies should consider in light of the decision in Lawson. Private companies should pay particular attention to this statute because it applies to a broader scope of conduct than is covered by the whistleblowing protections created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).2

Background on SOX Whistleblower Protections

Section 806 of SOX (codified in Section 1514A of Title 18 of the United States Code) protects a whistleblower who provides information or assistance to federal authorities or to his or her supervisor regarding fraudulent conduct. Under Section 1514A, no public company or any contractor of such company may retaliate against an employee who blows the whistle on fraud, and any whistleblower who suffers retaliation can file a complaint seeking reinstatement with back pay, attorney fees, and litigation costs. In particular, Section 1514A reads in relevant part:

WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICALLY TRADED COMPANIES.—No [public] company . . . or any officer, employee, contractor, subcontractor, or agent of such company . . . may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee . . . because of [whistleblowing or other protected activity] . . . .

Supreme Court’s Decision

In Lawson, the Supreme Court addressed whether Section 1514A shields only those employed by the public company itself, or whether it also shields employees of privately-held contractors and subcontractors. The Court concluded that Section 1514A’s whistleblower protection includes employees of a public company’s private contractors and sub-contractors.3 The Court based its decision on the statute’s text and its purpose to “ward off another Enron debacle,” pointing out that if Section 1514A did not protect employees of private companies, “[t]here would be a huge hole . . . Contractors’ employees would be disarmed; they would be vulnerable to retaliation by their employers for blowing the whistle on a scheme to defraud the public company’s investors, even a scheme engineered entirely by the contractor.” In her dissenting opinion, Justice Sotomayor stated that “[t]he Court’s interpretation gives [Section] 1514A a stunning reach. As interpreted today, the Sarbanes-Oxley Act authorizes a babysitter to bring a federal case against his employer—a parent who happens to work at the local Walmart (a public company)—if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud.”

Steps to Consider in Light of the Court’s Decision

Given the Court’s decision in Lawson, privately-held investment advisers of, and privately-held contractors to, mutual funds and other public companies should consider taking steps to become familiar with Section 1514A and ensure that they have the necessary controls and policies in place to prevent and remedy potential violations of the law. The following are the key features of Section 1514A:

  • The statute creates a cause of action for employees who allege they were discharged or discriminated against because of their whistleblowing. A person who alleges discharge or other discrimination in violation of the statute may seek relief by filing a complaint with the Secretary of Labor, or, if the Secretary has not issued a final decision within 180 days of filing, by bringing an action in federal district court. A party to an action brought in district court is entitled to a trial by jury.
  • The statute protects employees who blow the whistle on a wide range of conduct. The scope of conduct covered under Section 1514A is substantially broader than the conduct covered under the whistleblowing protections under Dodd-Frank. Section 1514A covers employees who provide information or assistance regarding “any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities or commodities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.” Although a primary focus of the statute is on investor fraud, the statute sweeps in a broad range of other fraudulent conduct because violations of the federal mail and wire fraud statutes can reach almost any type of fraud. On the other hand, the Dodd-Frank whistleblower provisions protect individuals who blow the whistle on only violations of the securities laws.
  • The statute applies to employees of contractors and subcontractors of public companies, not just employees of public companies themselves. The statute provides that no company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (Exchange Act) or that is required to file reports under Section 15(d) of the Exchange Act, or any officer, employee, contractor, or subcontractor of such company, may retaliate against whistleblowing employees. Prior to the Supreme Court’s decision in Lawson, it was unclear whether Section 1514A covered employees of private companies that perform work for public companies. Lawson has resolved this issue by holding that the statute does protect such private company employees.
  • The statute applies to whistleblowing regarding fraudulent conduct that occurred at a private company. Based on the Supreme Court’s decision, the statute is not limited to whistleblowing regarding fraudulent conduct that happened at a public company. Rather, the statute also covers misconduct at a privately-held company, as long as that company is a contractor or subcontractor of a public company.
  • The statute covers whistleblowing to a federal regulatory or law enforcement agency, a member or committee of Congress, or any “person with supervisory authority over the employee.” Thus, an employee who expresses concerns internally to his or her supervisor regarding conduct he or she reasonably believes is fraudulent or that violates SEC rules is covered by Section 1514A. This is a key difference from the Dodd-Frank whistleblowing protections, which expressly only cover individuals who provide information or assistance to the Securities and Exchange Commission, although some district courts have concluded that Dodd-Frank’s protections extend to individuals protected under SOX regardless of whether the disclosures were made to the SEC itself.4
  • The statute entitles whistleblowers who suffer retaliation to “all relief necessary to make the employee whole.” Section 1514A expressly provides that relief shall include reinstatement with the same seniority status that the employee would have had but for the discrimination, back pay with interest, and compensation for any special damages, including litigation costs, expert witness fees, and reasonable attorney fees.
  • The statute forbids waiver or arbitration. The rights and remedies provided for by Section 1514A may not be waived by any agreement, and no pre-dispute arbitration agreement shall be valid or enforceable if the agreement requires arbitration of a dispute arising under the statute.

As the above discussion shows, Section 1514A now exposes privately-held investment advisers of, and other privately-held contractors to, mutual funds and other public companies to a broad swath of potential claims. Although many such companies may already have policies and procedures in place to address the whistleblower protections afforded under Dodd-Frank, companies may wish to update those policies and procedures to encompass the broader scope of Section 1514A in light of the Lawson decision. Furthermore, companies that may not previously have considered themselves covered by Dodd-Frank or SOX should evaluate whether they are now covered and need to implement new policies or tailor their existing policies to address these concerns. Accordingly, we recommend that privately-held investment advisers—and any other private companies that perform work for public companies—contact their attorneys for advice on how to implement policies and controls to address Section 1514A and minimize the risks created by the Supreme Court’s ruling.

Footnotes

1

 
Lawson v. FMR LLC, No. 12-3 (March 4, 2014) (Lawson). Dechert LLP submitted a brief in Lawson on behalf of the Investment Company Institute as amicus curiae.

2

 
See 15 U.S.C. § 78u-6.

3

 
The opinion of the Court was joined by four justices. Justices Scalia and Thomas also concurred in principal part and in the judgment. Justices Sotomayor, Kennedy and Alito filed a dissenting opinion.

4

 
See 15 U.S.C. § 78u-6; but see Ellington v. Giacoumakis, No. 13-11791, 2013 WL 5631046, at *3 (D. Mass. Oct. 16, 2013); Murray v. UBS Sec., LLC, No. 12-5914, 2013 WL 2190084, at *4 (S.D.N.Y. May 21, 2013).
 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP
Contact
more
less

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.