SOX Whistleblowers Protection

The case discussed below may show that a SOX Whistleblower may have more success redressing corporate coruption in Federal Courts than with Administrative Judges.   Smith v. Corning, Ltd, Inc., No. 06-CV-6516 (W.D.N.Y. July 12, 2007) is a Federal District Court case which may indicate that Federal Courts may have a more expansive view of what constitutes protected activity. 

 In Smith v. Corning, Inc. the New York Federal District court found that the Whistleblower’s contention that a software application, was being implemented in a way that was not correctly reporting financial data with resultant impact on the integrity of quarterly reports may possibly be a report of fraud against shareholders. The court rejected the Defendants’ contention that the complaint was deficient because it did not allege an actual fraud against shareholders. The court found that § 1514A only requires a plaintiff to have a reasonably believed that the problem constituted a violation of a provision of Federal law relating to fraud against shareholders. The court found that the SOX Whistleblower’s complaint met this standard insofar as it alleged that the Plaintiff reasonably believed that the company was violating 15 U.S.C. § 78m(b)(2)(B)(ii), and that he believed that § 78m(b)(2)(B)(ii) was related to fraud against shareholders.

The New York District Court also indicated that the submission of quarterly reports that were not prepared in accordance with GAAP would also violate a SEC rule, namely 17 C.F.R. § 210.4 01(a)(1), citing Richards v. Lexmark Int’l, Inc., 2004-SOX-49 (ALJ June 20, 2006). The court also rejected the Defendants’ contention that the Whistleblower’s complaints were not protected because they involved an internal accounting dispute, and only pertained to a potential for fraud occurring in the future. The court found that the Whistleblower had alleged that the Defendants repeatedly refused to address a problem that was resulting in incorrect financial information being reported to the company’s general ledger B.   The Court then found that this  allegation would survive the Motion to Dismiss Finally, the court rejected the Defendants’ contention that the Whistleblower’s complaint was deficient because he only complained about the software application, and therefore could not allege a basis for reasonably believing that the company’s entire system of accounting controls was so inadequate as to violate § 78m(b)(2), which speaks to systems rather than portions of accounting systems. The court found that based on facts alleged in the complaint and at this stage in the litigation, it could not say as a matter of law that it was unreasonable for the Plaintiff to believe that the company was violating § 78m(b)(2)(B)(ii) when it refused to address problems with the Software. 

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