SDNY Refuses to Dismiss Executive’s Dodd-Frank Retaliation Claim

by Proskauer - Whistleblowing & Retaliation
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On August 24, 2016, the Southern District of New York denied Defendants’ motion to dismiss a Dodd-Frank whistleblower retaliation claim brought by its former co-CEO and Executive Chairman of its Board of Directors, finding that the Plaintiff made a protected complaint alleging securities law violations to a person with supervisory authority.  Kuhns v. Ledger, No. 15-cv-3246.

Background.  Plaintiff claimed that a Board member “resorted to fraud” by making “baseless representations” to raise money for the Company and that he told that Board member he should not be making such representations.  Following a separate disagreement about a financing proposal, Defendants allegedly informed Plaintiff that they wanted him to resign.  Plaintiff refused and demanded they cure what he perceived as violations of his employment agreement.  Shortly thereafter, two Defendants provided a draft Form 10-K to Plaintiff, but he refused to sign it unless numerous disclosures were added, including a mention of the purportedly atypical fashion in which the Company was offering securities, and how that could offering could prompt a inquiry from regulators that would be “expensive and difficult to defend.”  The next day, Plaintiff received a Notice of Termination which stated that his employment was being terminated for “Cause.”

Court Denies Defendants’ Motion to Dismiss.  Plaintiff proceeded to file a Dodd-Frank whistleblower retaliation claim in the Southern District of New York.  Defendants moved to dismiss per Rule 12(b)(6), arguing that the statutory text in Section 806 of SOX, cross-referenced by Dodd-Frank, required plaintiff to make his disclosure to someone with supervisory authority over him who also “has the authority to investigate, discover, or terminate misconduct.”  Rejecting this argument, the court reasoned that the plain text of the statute states that disclosure must be made to a senior employee “or” someone with such investigatory authority.  The court also rejected Defendants’ contention that Plaintiff did not reasonably believe Defendants’ conduct rose to the level of securities fraud.  But the court held that, even though Plaintiff did not specify a particular statutory subsection that the alleged fraud implicated, his statement about the possibility of a regulator inquiry arising from the way securities were being offered was sufficient to give Defendants notice that he was asserting a violation of securities laws.

Implications.  This decision reveals the degree of latitude some courts may afford Plaintiffs who allege generalized violations of securities laws in the context of Dodd-Frank whistleblower actions.

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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.

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