By Allen B. Roberts, Douglas Weiner

The U.S. District Court for the District of Massachusetts held in Lawson v. FMR LLC (pdf) that SOX coverage can apply not only to employees of publicly traded companies, but to employees of private management services firms as well.

The typical business model in the financial services industry is that public mutual fund companies generally have no employees of their own, but are managed by private investment advisors. The public company’s investment assets are thus managed by employees of a private employer.

Plaintiffs, employees of a private investment advisor to a public mutual fund, alleged they had engaged in activity protected by SOX, for which they suffered retaliation. The employer moved to dismiss the lawsuit, arguing plaintiffs were not covered by the Section 806 whistleblower protections because they were not employees of a publicly traded company. The defendants noted the very title of the whistleblower section of SOX is “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.” The plaintiffs countered that Congress intended to extend coverage to private employees in cases such as the plaintiffs.

The Lawson court, the first federal court to decide the issue, agreed with the putative whistleblowers and held that SOX covers employees of private firms providing contract services to the public company.

The court found that the private employers in question made fundamental decisions as to how the publicly held mutual funds are invested. The court held that, “For the goals of SOX to be met, contractors and subcontractors, when performing tasks essential to insuring that no fraud is committed against shareholders, must not be permitted to retaliate against whistleblowers.”

The court looked to the legislative history of SOX, citing Congress’s attempt to address “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.” Finding broad coverage was consistent with Congressional intent, the Court stated 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.”

What may employers expect next? There are indications that Secretary of Labor Hilda Solis and other newly appointed officials and members of the DOL’s Administrative Review Board will be examining positions and precedents in prior interpretations of SOX protections that had been criticized by advocates as not sufficiently inclusive of intended whistleblower rights. The Lawson decision, coming from outside the DOL, suggests more aggressive litigation by whistleblowers urging an expansive reading of SOX protections – and some measure of receptivity to theories that previously had not won mainstream acceptance.


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