Categories: Financial Services

By:  William J. Milani and Anna Kolontyrsky

The New York Court of Appeals has rejected a wrongful discharge cause of action brought by a hedge fund compliance officer who claimed that he was terminated for questioning a series of personal stock trades by the company’s president.  Sullivan v. Harnisch, No. 82 (N.Y. May 8, 2012) (PDF)

Sullivan, who was the Chief Compliance Officer, Executive Vice President, Treasurer, Secretary and Chief Operating Officer of the hedge fund, was terminated after confronting the hedge fund's president about stock trades that Sullivan believed amounted to “front-running.”  In other words, Sullivan claimed that the trades took advantage of an opportunity from which the firm’s clients were excluded.  Sullivan argued that his termination constituted a breach of implied contract. Based on the legal and ethical duties of his securities firm and his position as a compliance officer, Sullivan asserted that the Court should expand an existing exception to the employment-at-will doctrine to his situation as a compliance officer who was fired for objecting to misconduct.
While New York has long recognized that employees may be discharged at any time with or without cause, a very narrow exception to that doctrine based on an attorney’s adherence to professional ethical requirements was established in Wieder v. Skala (PDF).  Wieder involved an associate at a law firm who was discharged for insisting that his firm report the unethical conduct of another associate at the firm, as required by certain disciplinary rules.  Finding that the distinctive relationship between a law firm and a lawyer created an implied-in-law obligation based on the ethical standards of the legal profession, the Court created a narrow exception to New York’s employment-at-will doctrine.

Most lower court decisions have found that the exception applies to attorneys only, despite many attempts in the last 20 years to broaden the scope to other professions that are similarly governed by professional codes of conduct.  Those courts that have attempted to expand the exception to other professions have been reversed on appeal.  Indeed, the last time the issue reached New York’s highest court, in Horn v. New York Times (PDF), the Court refused to expand the exception to an in-house physician who had argued that medical professionals must adhere at all times to their professional, ethical obligations no less so than attorneys.

In Sullivan, the New York State Court of Appeals once again refused to broaden the Wieder exception. The Court decided that, unlike the attorney in Wieder, Sullivan's role in regulatory compliance was not at the core of, nor was it the only purpose of, his job. The court noted that Sullivan’s compliance officer role was only one of the five positions he held, and he was not associated with other compliance officers in a firm where all were subject to self-regulation as members of a common profession, as was the case in Wieder.

Although the Court acknowledged that the securities business requires compliance officers to comply with various federal regulations, it also found the existence of these regulations in the securities business was not sufficient to “make state common law governing the employer-employee relationship more intrusive.” Instead, the Court deferred to Congress to create additional protections, concluding that “[n]othing in the federal law persuades us that we should change our own law to create a remedy where Congress did not.”   According to the Court, Sullivan's conduct was not covered under Dodd-Frank because his reporting was internal and he did not alert the SEC or others outside the company about the alleged misconduct. Sullivan did not “claim to have blown a whistle… but only to have confronted [the fund’s president] himself.”

Interestingly, Judge Ciparick, who was in the  5 -1 majority in Horn, joined Chief Judge Lippman’s dissenting opinion in the 5 -2 decision in Sullivan.   Because she did not write separately, there is no way to know whether her views have changed or whether she simply found compliance officers more akin to attorneys than physicians in this context.  Nevertheless, the Sullivan decision firmly reestablishes that, absent statutory or contractual protection, internal whistleblowers who rely on a professional code of conduct are not entitled to an exception from New York’s at-will employment doctrine, and compliance officers are not entitled to rely on the Wieder exception any more so than doctors, accountants, or any of the other professionals whose attempts to expand the exception have been denied.

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