October 22, 2019

October 22, 2019

Subscribe to Latest Legal News and Analysis

October 21, 2019

Subscribe to Latest Legal News and Analysis

Supreme Court Decides To Hear Applicability of Sarbanes-Oxley’s Whistleblower Protections

The Supreme Court recently granted certiorari to decide whether the whistleblower protections of the Sarbanes-Oxley Act (SOX), 18 U.S.C. § 1514A, extend to employees of privately held contractors or subcontractors of a public company.  The case, Lawson v. FMR, LLC, is of particular import to the mutual fund industry as well as accounting firms and other privately held companies that assist public companies with financial reporting obligations.

The Supreme Court’s decision to hear the case is noteworthy because the First Circuit’s decision in Lawson conflicts only with decisions from the Review Board of the Department of Labor (“ARB”) and, as highlighted by the respondents, the parties could “not [cite] a single case in which [the Supreme Court] has granted certiorari to review a conflict between a court of appeals decision and a decisions of an administrative tribunal like the ARB.”   Section 1514A prohibits a publicly traded company, a mutual fund or “any officer, employee, contractor, subcontractor, or agent of such company [or mutual fund]” from discriminating against the employee for reporting potential securities violations.  The First Circuit found that § 1514A prohibits privately held contractors or subcontractors from retaliating against employees of the public companies with which they work, but did not bar privately-held companies from retaliating against their own employees.  Lawson v. FMR, LLC, 670 F. 3d 61 (1st Cir. 2012).  After the First Circuit’s decision, the ARB disagreed and found the SOX’s whistleblower protections did extend to employees of privately held contractors.  Spinner v. David Landau & Assocs. LLC, No. 10-111 (ARB May 31, 2012). 

In Lawson, two Plaintiffs brought separate suits alleging unlawful retaliation by their employers, who were privately held investment advisors and sub-advisors to the Fidelity family of mutual funds.  It was not disputed that the mutual funds were “public companies” because they are required to file reports to Section 15(d) of the 1934 Act.  However, these funds, as it is for most mutual funds, have no employees of their own.  Instead, the directors of the funds contract with an investment advisor to provide advising and/or management services.  The First Circuit construed Section 1514A as providing protection only for employees of publicly traded companies and that the provision’s language referencing contractors and subcontractors merely identifies who is barred from taking retaliatory action against the employees of public companies. 

In their petition for a writ of certiorari, the petitioners argued that the consequences of the First Circuit’s decision are serious for the mutual fund industry because “[v]irtually all of the workers in the mutual fund industry are employed, not by the funds, but by investment advisors, and many of the advisors themselves are privately held companies,” thus, leaving many potential whistleblowers unprotected.  The respondents countered that this concern as overstated because, inter alia, the Dodd-Frank Act provides employees of privately held companies a private cause of action if they are discriminated by their employers for providing information to the SEC.

As mentioned above, this decision has far reaching consequences for the mutual fund industry as well as all privately held companies that assist public companies with their financial reporting obligations. 

©2019 Drinker Biddle & Reath LLP. All Rights Reserved


About this Author

Daniel E. Brewer, Attorney, Drinker Biddle, Philadelphia, Commercial Litigation

Daniel E. Brewer has experience in a variety of complex commercial matters, including consumer class actions, complex business disputes, products liability, shareholder derivative actions and other corporate governance matters. In the course of his practice, Daniel handles many aspects of civil litigation, ranging from pre-litigation counseling, to discovery and dispositive motion practice, to trial advocacy and post-trial proceedings. He represents companies and individuals in a broad range of industries, including banking, telecommunications,...

Mary P. Hansen, White Collar Criminal Defense Attorney, Drinker Biddle Law Firm

Mary Hansen is a partner on the firm’s White Collar Criminal Defense & Corporate Investigations team, where she focuses her practice on defending clients in regulatory investigations as well as white collar criminal proceedings in the securities industry.  She also assists clients with internal investigations and compliance and prevention strategies.

Prior to joining the firm, Mary was an Assistant Director of the U.S. Securities & Exchange Commission’s Division of Enforcement, where she was a member of the division’s Market Abuse and Municipal Securities and Public Pensions units.