SOX Whistleblower Provisions Cover Mutual Fund Workers

In a case of first impression, the U.S. District Court for the District of Massachusetts held in Lawson v. FMR LLC (Case Nos. 08 CV 10466 and 08 CV 10758), that the whistleblower protection provisions in Section 806 of the Sarbanes-Oxley Act of 2002 (SOX) apply to private mutual fund companies and their employees who act as investment advisers to publicly held mutual funds. This decision is noteworthy because Section 806 has been commonly understood to apply only to employees of public companies, with certain narrow exceptions. In fact, Section 806 is titled “Protection For Employees of Publicly Traded Companies Who Provide Evidence Of Fraud,” and subsection (a) is titled “Whistleblower Protection for Employees of Publicly Traded Companies.”

In Lawson, the Court jointly addressed motions to dismiss in two separate cases that shared a common defendant and raised similar novel legal questions. Plaintiffs are former employees of several affiliated privately held companies who acted as investment advisers to mutual funds, which are publicly held companies without employees. Plaintiffs claimed they were retaliated against for various protected whistleblowing activity in violation of SOX. Defendants moved to dismiss, arguing plaintiffs were not covered by Section 806 because they were employees of privately held companies.

The Court noted ambiguities in Section 806 regarding the scope of its coverage and relied on legislative history revealing Congress’s concern “with failures to report instances of fraud against shareholders, failures not only on the part of public company employees, but also ‘employees’ of those institutions working with the public company.” The Court likewise noted that defendants made fundamental decisions as to how the publicly held mutual funds are invested and thus concluded that to meet SOX’s goals, “contractors and subcontractors, when performing tasks essential to insuring that no fraud is committed against shareholders, must not be permitted to retaliate against whistleblowers.”

Moreover, the Court observed that this concern is “especially strong for mutual funds, which have no employees and implement the funds’ management through contractual arrangements with investment advisers.” The Court likewise reasoned that “[i]f Section 806 only protected employees of public companies, then any reporting of fraud involving a mutual fund’s shareholders would go unprotected, for the very simple reason that no ‘employee’ exists for this particular type of public company.”

Though this ruling specifically applies to employees who act as investment advisors to publicly held mutual funds, plaintiffs can be expected to attempt to rely on it in seeking to expand Section 806’s coverage to other private companies providing services to publicly held companies.

In considering this expansion of Section 806, employers should be aware of proposed federal legislation that would further widen Section 806’s reach. Specifically, on December 11, 2009, the House of Representatives passed the Wall Street Reform and Consumer Protection Act (H.R. 4173), which would extend SOX’s coverage to subsidiaries or affiliates of public companies whose financial information is included in a public company’s consolidated financial statements. The House bill was received in the Senate on January 20, 2010, and is currently pending in the Committee on Banking, Housing, and Urban Affairs. Likewise, on April 15, 2010, the Senate introduced the same language in the Restoring American Financial Stability Act of 2010 (S. 3217). The Senate bill has been placed on the Senate Legislative Calendar and is awaiting further action. We will continue to monitor and keep you abreast of this legislative activity.

If you have any questions about Sarbanes-Oxley whistleblower claims, please contact the Seyfarth Shaw attorney with whom you work, or any Labor and Employment attorney on our website.