New Mutual-Fund IndustryNew Mutual-Fund Industry Whistle Blower Case Whistle Blower Case

A district court in New York has decided that Mary Anthony is not a “whistle blower” of the sort protected by Sarbanes-Oxley, in a case that began as a dispute over practices by representatives of Tronco Financial (such as the solicitation of sales by unqualified individuals) that, in the view of Ms. Anthony, violated rules and regulations of the Securities and Exchange Commission.

Tronco, a contractor for Northwestern Mutual Life (the first named defendant in Anthony’s lawsuit) , markets and sells Northwestern mutual funds.

On November 21, 2014, plaintiff filed a lawsuit alleging both that she was illegally fired because of her persistence in reporting non-compliant activities and that the firing breached her employment contract.

Motion to Dismiss

Defendants moved that the retaliation count be dismissed for failure to state a claim, because SOX applies specifically to publicly traded companies.

The breach of contract claim, which otherwise would have been more suitable for state than for federal court, was in this complaint at all only because it was piggy-backing on the SOX/retaliation claim.

Thus far, the dispute may seem familiar. The defendants in an action brought by Jackie Hosang Lawson against Fidelity et al. filed an analogous motion in 2007. That matter went to the U.S. Supreme Court, which held in Lawson v. FMR LLC (2014) that based on “the mischief to which Congress was responding, and earlier legislation Congress drew upon, … the provision shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.” Thus, that motion to dismiss ultimately failed, and Lawson’s case was allowed to resume on the facts.

In its reference to the “mischief to which Congress was responding,” the Court was making reference to the Enron scandal of 2001 and the role of contractors, law forms and accounting/auditing firms in particular, in facilitating wrongdoing by Enron.

So … same judgment here?

But the similar-sounding facts did not lead to the same judgment here.

The district court, via the Hon. Lawrence E. Kahn, granted the motion to dismiss in Anthony on September 8, 2015. Kahn found that there are “two main limitations” on the scope of the whistleblower act in the wake of Lawson. First, the whistle blowing by an employee of a non-public entity must relate to that company’s provision of services to the public company. Hypothetical whistle blowing by accountants for Enron would have fit this characterization nicely since such individuals, despite their status as employees of the accounting firm, would have been “firsthand witnesses to corporate fraud at a public company,” as Judge Kahn writes. The second limitation is that the whistle blowing must be at the expense of that public company’s fraud.

The effect of these to related limits is that the SOX protection of whistle blowers protects on those of public company or those of private company/contractors when the employee of the latter is “functionally acting as an employee of a public company, and in that capacity, is a witness to fraud by the public company.”

Anthony’s complaint, on the other hand, states that the plaintiff’s responsibility was ensuring that Tronco Financial representatives and associated complied with Tronco’s legal obligations. Also, the wrongdoing she says that she reported was the wrongdoing of Tronco reps. “[T]here is no allegation of wrongdoing by the Mutual Funds … because neither Plaintiff nor Tronco Financial were providing services to the Mutual Funds.”

The breach of contract claim also fails, then, because with the dismissal of the whistleblower argument there is no federal cause of action on which it can piggyback.

We will certainly hear more about this, because it isn’t at all clear whether there is majority support on the U.S. Supreme Court for the interpretation of Lawson in which the district court is engaged. SCOTUS divided into three groups in that decision, so that Judge Kahn is relying on supposed limitations to the scope of the statute to which only four Justices, a minority, signed on at that time. Those four Justices were joined in a concurrence by Scalia and Thomas, for quite different reasons (reasons that might well be invoked to support the plaintiff in Anthony.)

It is worth while keeping a weather eye on this one.

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