The U.S. Supreme Court has agreed to hear a case concerning the rights of whistle blowers under Sarbanes-Oxley, a case that may have important consequences for the asset management world.
The litigation, Lawson v. FMR, arose out of an incident in 2005-07 that involved a whistle-blower within defendant FMR LLC, a private company – an investment advisor – affiliated with the giant mutual fund concern Fidelity.
First-named plaintiff Jackie Hosang Lawson was a fourteen-year employee of Fidelity when in 2005 she raised questions within the company about how the IA was calculating expenses incurred in the operation of the funds it advised. She eventually complained to Fidelity’s General Counsel that overstatement of expenses amounted to fraud against fund shareholders.
Lawson was allegedly subjected to intimidation within the company as a consequence of making these points, and she responded initially by complaining to OSHA and the Securities and Exchange Commission. This, unsurprisingly, didn’t make her reception within the firm any less hostile, and in November 2007 she resigned, alleging that a campaign of harassment had made her position there intolerable (“constructive discharge”).
Sarbanes-Oxley
Sarbanes-Oxley had created a private right of action for the whistleblowing employees of public companies [that is, either of companies whose stock is publicly traded or of entities that file section 15(d) reports with the Securities and Exchange Commission.]
Lawson filed an action in U.S. District Court and Fidelity moved to dismiss. The defendants’ argument was that it is the mutual fund proper, not the IA, that is required to file reports under section 15(d) of the Securities and Exchange Act. This, the mutual fund is the public company under Sarbanes-Oxley. The fund doesn’t have any employees.
FMR, which does have employees, is a contractor of a public company, not a public company itself.
The district court denied the motion to dismiss, relying on SOX’s section 1514A, which includes “any officer, employee, contractor” of a public company also among those who may not discharge employees, constructively or otherwise, on the basis of the whistles they’ve blown. [Italics added.]
Narrow Interpretation
FMR appealed. It contended that the specific reference to contractors in SOX doesn’t help Lawson, because that language is only there to bar a contractor from retaliating against the public firm’s employees. The public firms not only may not retaliate themselves, they may not contract out their retaliation: that is the message of the 1514A language as the defendant sees it, but intra-firm retaliation within a contractor of a public company doesn’t raise a SOX issue.
A split three-judge panel of the First Circuit Court of Appeals agreed with the defendant, ordering the dismissal of the complaint. (The territory covered by the First Circuit Court of Appeals, by the way, includes Puerto Rico and the four easternmost New England states – the two western New England states, Connecticut and Vermont, are with New York in the Second Circuit.)
On April 6, 2012, the full First Circuit declined to rehear the matter en banc, and that set up this appeal to the Supreme Court, a gauntlet the Justices have now picked up, granting the petition on May 20.
As an issue of statutory construction, the problem is that when Congress wrote this statute it had in mind companies like Enron, or WorldCom, or Tyco International – the big names of the 2000-2002 wave of accounting and governance scandals that forced the passage of SOX. All of those companies issue securities that are publicly traded and all of them have lots of employees performing various in-house functions, bookkeeping functions among them. Those employees might well be whistle blowers, and that activity is what the law was designed to protect and even encourage.
The very different world of investment advisers and their funds wasn’t on the minds of Senator Sarbanes or Representative Oxley or the members of their respective staffs.