SOX Whistleblowers Protection

 As reported by Financial News Online, and Mutual Fund Wire  a  former employee of Fidelity Investments in the US is suing the company for wrongful discharge, including violations of Section 806 of the Sarbanes-Oxley Act of 2002.  The former employee alleges that she was harassed and forced out after bringing attention to problems in the way Fidelity reports profitability figures for its funds. The case was filed in Boston Massachusetts. The complaint  also alleges that Fidelity contends that US whistle-blower protection regulations, do not apply.

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The latest step in the development of a whistleblower format for companies operating in the E.U. has come from Germany.  German authorities have issued new whistleblower guidelines, which allow U.S. companies to implement Sarbanes-Oxley hotline compliance for U.S. public companies, and for privately held companies with branches in Germany.

The regional German data protection authorities’ working group, referred to as Düsseldorfer Kreis (or “Düsseldorf Circle”) met in late April 2007 and issued the guidelines, which are now translated into English.

The new guidelines note that the German Data Protection Act does impose certain obligations on the company, which include

• confidential reporting, but allowance for anonymous reporting;
• notice to employees of the program;
• notice to the accused person of facts alleged, with delays in same if evidence needs to be preserved;
• permitted use of third parties as data processors for the program;
• limitations on unnecessary internal data transfer or to third parties unless criminal proceedings;
• security processes and procedures to protect unauthorized access to the data;
• data storage limitations, including deletion/archiving (generally two mos. after close of investigation unless discipline, litigation or criminal proceedings).

These obligations are generally consistent with previous whistleblower guidance issued by the E.C. Art. 29 Working Party on Data Protection (W.P. 117) last year.

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PROTECTED ACTIVITY; CHEMIST’S DISCLOSURE OF PURPORTED VIOLATION OF FDA CONSENT DECREE, FDA AND EU REGULATIONS, AND OTHER DRUG MANUFACTURING GUIDELINES FOUND NOT PROTECTED ACTIVITY UNDER SOX

In Portes v. Wyeth Pharmaceuticals, Inc., No. 06-CV-2689 (S.D.N.Y. Aug. 20, 2007), the court accepted as true (for purposes of the motion) that the terminated employee was a chemist, and the principle project manager for a “Sustainable Compliance Initiative” that was established as the result of a consent decree entered into with the FDA after the Defendant had failed to comply with certain FDA regulations, including good manufacturing practices for the production of pharmaceutical and biological products. The Plaintiff uncovered problems with his direct supervisor’s work, leading him to believe that the Defendant was in violation of the consent decree, and certain federal and EU regulations. He communicated his findings to a higher level supervisor, who allegedly retaliated against him. After being placed on a PIP, the Complainant filed additional complaints through various channels at the Defendant alleging violations of regulations relating to the manufacture of pharmaceuticals and complaining of “whistleblower” retaliation. The Plaintiff was eventually terminated as a result of those disclosures and complaints.

The Defendant moved for summary judgment based on a contention that the Plaintiff did not engage in protected activity under the SOX because none of his reports were sufficiently related to securities fraud or any violation enumerated in section 1514A(a)(1). The court agreed.

The court closely followed the analysis from Fraser v. Fiduciary Trust Co. Int’l, 417 F.Supp.2d 310 (S.D.N.Y.2006), which protected disclosures under SOX only when they “implicate the substantive law protected in Sarbanes-Oxley ‘definitively and specifically.’” Slip op. at 7 (citations omitted). The Plaintiff argued that if the Defendant had violated regulations, it faced fines and other penalties that might have significantly affected share prices. He also asserted that, in light of prior references to the consent decree in financial reports, he had a reasonable belief that the company was obligated to report the violations to the FDA, SEC, and shareholders. He did not, however, allege that he explicitly referred to fraud, shareholders, securities, statements to the SEC, or SOX in his disclosures to his superiors at the Defendant. The court stated that the purported violations involved the consent decree, FDA and EU regulations, and other drug manufacturing guidelines, and not federal law related to fraud against shareholders. Thus, the court found that the disclosures were not sufficiently related to shareholder fraud to constitute protected activity.

The Court found that the circumstances did not suggest a concern that the Defendant was being unfair to its investors, that its lack of compliance with FDA regulations might have implications for its reports to investors and the SEC, or that it was otherwise engaged in conduct that would have alerted it that the Plaintiff believed that the Defendant was violating a federal rule or law related to fraud against shareholders.

The court observed that the Plaintiff was employed as a chemist and project manager implementing standards for drug manufacturing, and not as an investment analyst. Thus, the court would not infer that the Plaintiff was concerned with shareholder fraud based on the nature of his job responsibilities or his work.

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PROTECTED ACTIVITY; CASE INVOLVING IN-HOUSE PATENT COUNSEL.

In Van Asdale v. International Game, Technology, No. 3:04-CV-00703-RAM (D.Nev. June 13, 2007), the Magistrate  concluded that under SOX, an employee’s act must implicate securities fraud definitively and specifically. The court found that “implicate” in this context does not mean merely to “imply,” but “‘to bring into intimate or incriminating connection’ See Webster’s Third New International Dictionary, Unabridged, 1135 (entry for ‘implicate’).” Slip op. at 10. The Magistrate Judge stated that a better synonym for “implicate” in this context would be “incriminate” or “accuse.”

The Magistrate found that:

• the whistleblower must “reasonably believe” that there has been a SOX violation,
• the reasonableness threshold is intended to include all good faith and reasonable reporting of fraud, and there should be no presumption that reporting is otherwise, absent specific evidence,”

• the “reasonable person” standard should be applied,

• in order for an employee to reasonably believe that a violation occurred, he or she must have a subjective and objectively reasonable belief that fraud occurred,

• under the subjective portion of the reasonableness requirement the employee must actually believe that the employer was in violation of the relevant law or regulations,

• under the objective portion of the reasonableness requirement the employee’s belief must be objectively reasonable,

• reasonableness is “determined on the basis of the knowledge available to a reasonable person in the circumstances with the employee’s training and experience.”

Slip op. at 14-15. In Van Asdale, the Plaintiffs, who were in-house intellectual property attorneys for the Respondent, alleged that they met with the Defendant’s General Counsel to express their views on the invalidity of a patent held by a company which the Defendant was considering acquiring by merger, and to express concern that fraud had occurred. In regard to the objectively-reasonable belief element, the Magistrate rejected the Defendant’s argument that fraud would have only occurred if the target company had intentionally failed to disclose documents bearing on the invalidity of the patent, and that the Plaintiffs therefore could have only had an objectively reasonable belief if they ruled out other non-fraudulent explanations for the non-disclosure. The Magistrate found that SOX does not require an attorney whistleblower “to investigate and rule out other possible explanations for what appears to be fraud before ever reporting the apparent fraud to any one at the company.” Slip. at 16.

SOX whistleblowers

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whistleblowers protection

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