Feb 16

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First Circuit limits SOX whistleblower protection

In a February 3, 2012 Opinion, the First Circuit Court of Appeals reversed a Massachusetts District Court and held that, while the whistleblower protections of the Sarbanes-Oxley Act apply to employees of “public companies” (i.e., a company with registered securities or one that files reports under Section 15(d) of the Exchange Act), they do not apply to an employee of a contractor or subcontractor of such a public company.

The District Court certified the following issue for appellate review:

Does the whistleblower protection afforded by Section 806(a) of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A, apply to an employee of a contractor or subcontractor of a public company, when that employee reports activity which he or she reasonably believes may constitute a violation of 18 U.S.C. §§ 1341, 1343, 1344, or 1348; any rule or regulation of the Securities and Exchange Commission; or any provision of Federal law and such a violation would relate to fraud against shareholders of the public company?”

Both plaintiffs worked for related parties that provided investment advisory services to the Fidelity mutual funds. Although the investment companies themselves were public companies, the related investment advisor is not.

One would think that both of the complaints were sufficiently serious and relevant to the public company that the complainants would be afforded retaliation protection.  One of the two defendants raised concerns regarding inaccuracies in a draft registration statement which he thought violated securities laws. The other plaintiff raised concerns relating to cost accounting between the various entities.

Nevertheless, the First Circuit interpreted the protections quite narrowly and reversed the District Court. The First Circuit invited Congress to change the law if Congress thought its ruling was too narrow.



About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

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