Fraud Against Shareholders as Element of Protected Activity under SOX, Section 806 - Review of Appellate Decisions 1

[Last Updated Nov. 15, 2013]

Administrative Review Board

In Sylvester v. Parexel International, LLC , ARB No. 07-123, ALJ Nos. 2007-SOX-39, 42 (ARB May 25, 2011)(available at 2011 WL 2165854, 2011 DOL Ad. Rev. Bd. LEXIS 47, *43), the Administrative Review Board (ARB) held that a complaint of shareholder or investor fraud is not required to establish Sarbanes-Oxley Act (SOX) protected activity. 2 This was a significant change of course from its 2006 decision in Platone v. FLYi, Inc. , ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006) (available at 2006 WL 3246910, 2006 DOLSOX LEXIS 105, 25-26), in which the ARB held that when a SOX whistleblower complaint is grounded in federal mail and wire fraud statutes, "the alleged fraudulent conduct must at least be of the type that would be adverse to investor's interests." 3

Decisions in the federal courts have reached differing conclusions on whether fraud against shareholders in a necessary element of a SOX complaint. The chart below consolidates known federal court decisions on the issue, focusing on the impact, if any, of the Sylvester and Platone decisions.

1. First Circuit

The main case in the First Circuit addressing protected whistleblower activities under SOX is Day v. Staples , 555 F.3d 42, 55 (1st Cir. 2009) (case below 2006-SOX-34). The plaintiff in this case alleged that he was fired because he reported shareholder fraud committed by his direct manager. In particular, he complained that she mishandled customer credits and that she manipulated orders seeking to increase her chances for a bonus. Id. at 46.

In determining whether practices complained of were specifically related to shareholder fraud, the Court stressed that "fraud," as used by SOX, is a technical term which presupposes misrepresentation and deceit, and stated that it must at least approximate the basic elements of a claim of securities fraud. Id. at 55-56. The court concluded that internal policies, even if they decreased efficiency, were not shareholder fraud. Id. at 56.

Because the plaintiff alleged violations of federal laws relating to shareholder fraud, the court did not have to consider whether the other violations listed in § 1514A also have to be related to shareholder fraud. However, the court did suggest that many claims alleging violations of SEC rules or regulations "will also involve fraud." Id. at 55

Since the Sylvester decision, no court in the First Circuit has examined this issue. In Lawson v. FMR, LLC , 670 F.3d 61 (1st Cir. 2012) (case below ARB No. 08-078, ALJ No. 2007-SOX-27), the court of appeals reversed on other grounds a decision by the district court finding that all the violations listed by § 1514A had to be related to fraud against shareholders. As the district court had put it, the issue was whether the words "'relating to fraud against shareholders' modif[y] (1) the phrase �any provision of federal law,' or instead (2) the entire clause, �a violation of [18 U.S.C.] section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law." Lawson v. FMR, LLC , 724 F. Supp. 2d 141, 158 (D. Mass. 2010). The district court had cited Platone as concluding that "a plaintiff must state with sufficient particularity why she believes the actions would violate securities laws and constitute fraud." Id. at 163-64.

The court of appeals never examined whether the district court was correct in this interpretation because it concluded that the plaintiffs were not protected by SOX at all. Lawson v. FMR , 670 F.3d 61. They were outside of the scope of § 1514A because they were employees not of a publicly traded company, but of a private company hired to provide advising or management services to a publicly traded company. The court of appeals examined the language of the statute and its legislative history and concluded that it did not extend protection to employees of private companies. Id. at 65-70.

2. Second Circuit

The Court of Appeals for the Second Circuit has not yet had the opportunity to determine whether all the violations listed in § 1514A must relate to shareholder fraud. District courts in the circuit have differed in their interpretation. In 2008, the District Court for the Southern District of New York held in O'Mahony v. Accenture, Ltd. , 537 F. Supp. 2d 506 (S.D.N.Y. 2008)(case below 2005-SOX-72), that the plain language of § 1514A limits the "fraud against shareholders" requirement to the violation of "any provision of federal law." Id. at 517. Therefore, the other five violations did not have to relate to shareholder fraud.

Since the ARB's decision in Sylvester , only a few cases have addressed the "shareholder fraud" requirement, and only one of them explicitly cited the ARB's decision. In a memorandum opinion in Andaya v. Atlas Air, Inc. , No. 10-CV-7878, 2012 WL 1871511, 2012 U.S. Dist. LEXIS 78654 (S.D.N.Y. Apr. 30, 2012), the court, without reference to any administrative decision, found that "the employee's allegations of wrongdoing must resemble the allegations of shareholder fraud." Id. at *2.

The court's holding in Andaya seems to be at odds with its decision two months earlier in Gladitsch v. Neo@Ogilvy , No. 11 Civ. 919 DAB, 2012 WL 1003513, 2012 U.S. Dist. LEXIS 41904 (S.D.N.Y. Mar. 21, 2012). In Gladitsch , the court concluded that "an allegation of shareholder fraud is not a necessary component of protected activity under Section 1514A." Id. at 20. Not only did the court recognize that the ARB had reached a similar conclusion in Sylvester , it also stressed that prior cases from the Second Circuit stood for the same proposition. Id. at 20-21; see O'Mahony , 537 F. Supp. 2d 506, 518 (S.D.N.Y. 2008); Sharkey v. J.P. Morgan Chase & Co. , 805 F. Supp. 2d 45, 57 (S.D.N.Y. 2011).

3. Third Circuit

The Court of Appeals for the Third Circuit has not addressed this issue. In Wiest v. Lynch , 10-cv-03288, 2011 WL 5572608, 2011 U.S. Dist. LEXIS 79283, 18 (E.D. Penn. July 21, 2011), the district court concluded that in order to receive protection under SOX the employee must have communicated shareholder fraud. When asked to reconsider its decision in light of the change in the ARB's position in Sylvester , the district court refused to do so. Wiest v. Lynch , 10-cv-03288, 2011 WL 2923860, 2011 U.S. Dist. LEXIS 132114 (E.D. Penn. Nov. 15, 2011). In its original decision the court had relied on Platone to dismiss plaintiff's claim against his employer because the alleged communication regarding corporate expenses "did not relate to shareholder fraud or a law covered by [§ 1514A]." Id. at 2-3.

The court refused to reconsider its prior judgment for four reasons: (1) the Sylvester decision had been issued before the court's decision and therefore could not be considered a change in law, id. at 10; (2) the ARB's decision was not "controlling" because it did not constitute binding precedent, id. at 11-12; (3) the court had relied on other case law in addition to Platone , id. at 11-13, and (4) the court still concluded that the plaintiff failed to show "an objectively reasonable belief that the complained-of conduct constituted a violation of relevant law." Id. at 11-15.

4. Fourth Circuit

The Court of Appeals for the Fourth Circuit has concluded that employees will only receive whistleblower protection under SOX if they report violations that are adverse to shareholders' interests. 4 In Livingston v. Wyeth, Inc. , 520 F.3d 344, 351 & n.1 (4th Cir. 2008) (case below M.D.N.C. No. 1:03-cv-00919, ALJ No. 2003-SOX-25), the Fourth Circuit held that in order for an employee to obtain SOX whistleblower protection for communicating a violation of SEC rules or regulations the employee must also show that this violation constituted fraud. The court argued that "[t]o conclude otherwise would absurdly allow a retaliation suit for an employee's complaints about administrative missteps or inadvertent omissions from filing statements." Id. Moreover, the court found that the statute's legislative history supported the assertion that "whistleblowing is protected by § 1514A when it relates to �fraud.'" Id. This approach was followed in the district courts. See, e.g. , Garland v. CACI Int'l Inc. , No. 10-cv-316, 2010 U.S. Dist. LEXIS 109200 (E.D. Va. Oct. 4, 2010) (no Westlaw citation available). No cases were located addressing this issue since the ARB's decision in Sylvester .

5. Fifth Circuit

The Fifth Circuit has not had the opportunity to determine whether all of the six listed violations under § 1514A must relate to shareholder fraud, or if only the last one must meet this standard. The main case from the circuit on SOX whistleblower protections is Allen v. Administrative Review Board , 514 F.3d 468 (2008) (case below ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62). The court in this case did not have to decide whether shareholder fraud is a requirement of all alleged violations because the employee's communication alleged a violation of an SEC rule that is only applicable to financial statements submitted to the SEC (and the statements involved in the controversy had not been made available to shareholders) and a violation under the last catch-all category.

The Northern District of Texas was faced with the issue in Hemphill v. Celanese Corp. , 2010 WL 2473845, 2010 U.S. Dist. LEXIS 60037 (N.D. Tex. 2010) (case below 2008-SOX-00031), aff'd Hemphill v. Celanese Corp. , No. 10-10746 (5th Cir. June 23, 2011) (unpublished). 5 Because a shareholder fraud requirement for all violations was not clear from the text of the statute, and because the court of appeals had not issued a clear ruling on the matter, the court refused to impose such a requirement on the plaintiff. Id. at *16. No cases were located addressing this issue since the ARB's decision in Sylvester .

6. Sixth Circuit

No decisions in the Sixth Circuit discussing this issue were located.

The following cases addressed related issues:

  • Riddle v. First. Tenn. Bank , No. 3:10�cv�0578, 2011 WL 4348298 at *8, 2011 U.S. Dist. LEXIS 105597, 21-22 (M.D. Tenn. Sept. 16, 2011) (not reported) ("The Bank Bribery Act is not one of the specifically enumerated violations covered by SOX; consequently, Plaintiff attempts to "bootstrap" an alleged Bank Bribery Act violation into the "catch-all" shareholder fraud claim.")
  • Walton v. NOVA Info. Sys. , No. 06-cv-292, 2008 WL 1751525, 2008 U.S. Dist. LEXIS 29944, 23-25 (E.D. Tenn. Apr. 11, 2008) (not reported) (case below 2005-SOX-107 and 2006-SOX-18) (plaintiff's complaint to employer about "database security compliance" was "too speculative to form a reasonable belief of a violation of securities laws")
  • Mann v. Fifth Third Bank , Nos. 1:09�cv�014, 1:09�cv�476, 2011 WL 1575537, 2011 U.S. Dist. LEXIS 44853, 29-31 (S.D. Ohio Apr. 25, 2011) (not reported) (case below 2009-SOX-51) (discussing the requirements of claims that allege the "catch-all" category of shareholder fraud).

7. Seventh Circuit

No decisions from the Court of Appeals for the Seventh Circuit were found on this issue. However, the Northern District of Illinois concluded, in Bishop v. PCS Admin. (USA), Inc. , No. 05-cv-5683, 2006 WL 1460032, 2006 U.S. Dist. LEXIS 37230 *30 (N.D. Ill. May 23, 2006) (not reported) (case below 2005-SOX-110), that "[a]ll the statutes and regulations referenced in § 1514A(a)(1) are ones setting forth fraud", and that "�relating to fraud against shareholders" � must be read as modifying each item in the series, including �rule or regulation of the Securities and Exchange Commission." There have been no new cases since the ARB's decision in Sylvester .

8. Eighth Circuit

The Court of Appeals for the Eighth Circuit has not issued a ruling on this question. However, in Skidmore v. ACI Worldwide Inc. , No. 08-CV-1, 2008 WL 2497442, 2008 Dist. LEXIS 64313 (D. Neb. June 18, 2008) (not reported) (case below ALJ No. 2007-SOX-00077), the district court held, citing the Fourth Circuit decision in Livingston , 520 F.3d at 353, that "[e]mployee disclosures must be related to illegal activity and involve shareholder fraud." No cases were located addressing this issue since the ARB's decision in Sylvester .

9. Ninth Circuit

The main decision on SOX whistleblower protections in the Ninth Circuit is Van Asdale v. International Game Technology , 577 F.3d 989 (9th Cir. 2009). In this case, the court did not have to determine whether fraud against shareholders is an indispensable element of an SOX whistleblower complaint because, in denying a motion for summary judgment by the defendants, it concluded that the plaintiffs had created a genuine issue of material fact as to whether they had communicated fraud against shareholders. See id. at 996-1002. No further decisions discussing this issue were located for the Ninth Circuit.

10. Tenth Circuit

No decisions in the Tenth Circuit discussing this issue were located.

[ Update Nov. 15, 2013: In Lockheed Martin v. Adm. Review Bd., USDOL , No. 11-9524 (10th Cir. June 4, 2013) (case below ARB No. 10-050, ALJ No. 2008-SOX-49), the court found that the phrase in 18 U.S.C. � 1514A(a)(1) �relating to fraud against shareholders� modifies only the phrase that immediately precedes it -- �any provision of Federal law.� Thus, the court held that Complainants who report violations of 18 U.S.C. 1341, 1343, 1344, and 1348 are not required to also establish that such violations relate to fraud against shareholders. Although the court found that the text was not ambiguous, even if it was, Chevron deference to the ARB's interpretation of SOX applied, even though the ARB had changed its previously expressed position. See Sylvester v. Parexel Int�l LLC , ARB No. 07-123, 2011 WL 2165854 at *15�16 (ARB May 25, 2011). ]

11. Eleventh Circuit

No decisions from the Court of Appeals for the Eleventh Circuit discussing this issue were located. However, in Reyna v. ConAgra Foods, Inc. , 506 F. Supp. 2d 1363, 1381-83 (M.D. Ga. 2007) (cases below 2004-SOX-44 and 45), the district court examined the language of § 1514A and concluded that it clearly did not require that all enumerated violations relate to shareholder fraud. No cases were located addressing this issue since the ARB's decision in Sylvester .

12. D.C. Circuit

No decisions in the D.C. Circuit discussing this issue were located.


1 Courts have often ruled on this issue in unreported decisions, and OALJ cannot verify that this chart is comprehensive. Moreover, this chart only addresses the issue of whether fraud against shareholders is a required element of a SOX complaint. It does not address the additional question addressed in Sylvester and Platone of whether the complainant's allegations must "definitively and specifically" raise concerns related to one of the categories of conduct listed in SOX, Section 1514A.

2 In Sylvester , the case was brought by two employees of a publicly-traded company that performed tests for drug manufacturers. 2011 DOL Ad. Rev. Bd. LEXIS 47 at 2. The plaintiffs claimed to have reported errors on time charts to their superiors. Id. at 5-6. They were both terminated sometime after their complaints. Id. at 8.

Despite the fact that neither employee "expressly referred to fraud, shareholders, securities, statements to the SEC, or SOX in their reports of false reporting of clinical data in violation of applicable drug testing protocols," the Board concluded that they had met the requirements of § 1514A. Id. at 50. According to the ARB, "the violation [communicated by the employee] may be one which, standing alone, is prohibited by law, and the violation may be merely one step in a process leading to shareholder fraud." Id. Additionally, the ARB rejected its previous conclusion in Platone that the purpose of SOX was to protect investors, stating that instead the statute "was implemented to address not only securities fraud � but also corporate fraud generally." Id. at 46.

3 The facts of Platone involved an agreement between a regional passenger carrier and the airline pilots' union. 2006 DOLSOX LEXIS 105 1-25. Under the terms of this agreement, the carrier would not discount from the pilots' paycheck the days spent doing union work, and the union would in exchange reimburse the carrier for those expenses. Id. at 6-7. According to the plaintiff, she reported to management that the pilots were selecting off days to work for the union. Id. at *7-9. They still received salaries from the carrier for those days, but because of union policy the carrier was never reimbursed for those payments. Id. at 10.

Platone alleged that she suffered adverse action from her employer as a result of communicating this "flight pay loss." However, according to the Board, "[h]er revelations � d[id] not even approximate any of the basic elements of a claim of securities fraud � a material misrepresentation (or omission), scienter, a connection with the purchase, or sale of a security, reliance, economic loss and loss causation." Id. at 44.

The ARB interpreted SOX to require that the violation communicated by the employee be detrimental to the interests of shareholders. Platone , ARB Case No. 04-154, 2006 DOLSOX LEXIS 105, 25-26 (Dep't of Labor Sept. 29, 2006). While not present in the text of the statute, these restrictions were found by the Board to be necessary to comply with the statute's purpose. Platone , ARB Case No. 04-154, 2006 DOLSOX LEXIS 105, 26 & n. 107 (Dep't of Labor Sept. 29, 2006) (purpose of statute was to " protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws" (quoting Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002) (emphasis in the original))).

4 When reviewing the ARB's Platone decision, the Fourth Circuit deferred to the ARB's holding that the whistleblower's allegations must be definitively and specifically related to one of the areas accorded protection in § 1514A(a)(1); however, the court did not reach the question of whether the complaint, when alleging mail or wire fraud, must demonstrate that the fraud would be adverse to the interests of shareholders or investors. Platone v. United States Dept. of Labor , 548 F.3d 322 (4th Cir. 2008), cert denied Platone v. Department of Labor , 130 S.Ct. 622, 175 L.Ed.2d 478, (U.S. Nov 16, 2009) (No. 09-55) (case below ARB No. 04-154, ALJ No. 2003-SOX-27).

5 On appeal, the 5th Circuit did not address the "fraud against shareholder" issue.