Suing for Retaliation or Wrongful Termination as a Whistleblower in New York

August 10, 2012, by Kristan Peters-Hamlin

Most New York employment lawyers will tell you that, unlike in many other states, there is no cause of action for wrongful termination for whistleblowers under New york common law. However, that view ignores the elaborate quilt of federal laws that protect New York employees who are whistleblowers. Federal laws like Sarbanes Oxley ("SOX") and Dodd Frank are just two examples that come to mind, as they are particularly relevant to employees in the NYC financial industry.

Many people mistakenly believe that a whistleblower would have to prove fraud in order to have a SOX or Dodd Frank claim. That is not so. Section 806 of the Sarbanes-Oxley Act defines protected activity to include the provision of information "regarding any conduct which the employee reasonably believes constitutes a violation of 18 U.S.C. section 1341 (prohibiting mail fraud), 1343 (prohibiting wire fraud) or, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders. 18 U.S.C. § 1514A(a)(1). See Ashmore v. CGI Group, Inc., 2012 WL 2148899 (S.D.N.Y., June 12, 2012).

To establish that an employee engaged in activity protected by § 806, a plaintiff is not required, under the terms of the statute, to demonstrate that the conduct about which he blew the whistle actually violated federal law. Mahony v. Keyspan Corp., 2007 U.S. Dist. LEXIS 22042, at *5, 2007 WL 805813 (E.D.N.Y. Mar. 12, 2007). Instead, what he must show is that his belief that the conduct constituted one of the six kinds of misconduct enumerated in § 806 was both objectively and subjectively reasonable. Fraser v. Fiduciary Trust Co. Int'l, 2009 U.S. Dist. LEXIS 75565, at *1415, 2009 WL 2601389 (S.D.N.Y. Aug. 25, 2009). The employee need not prove an actual violation to be protected. S. Rep.No 107-146 at 19 (2002); Passaic Valley Sewerage Comm'r v. U.S. Dep't of Labor, 992 F.2d 474, 470 (3rd Cir. 1993); Halloum v. Intel Corp., 2003-SOX-7 at 15 (ALJ March 4, 2004), aff‟d, ARB No. 04-068 (ARB Jan. 31, 2006). He must actually believe that the employer's practice, condition, directive, or event violated a law enumerated in the SOX Act, and his belief must be objectively reasonable. Lerbs, 2004-SOX-8 at 13 (ALJ June 15, 2004)(relying on Melendez v. Exxon Chem. Am., ARB No. 96-051, ALJ No. 1993-ERA-6 (ARB July 14, 2000)). See Kalkunte v. DVI Financial Services, ARB CASE NOS. 05-139 & 05-140, ALJ CASE NO. 2004-SOX-056 (February 27, 2009)(Department of Labor's Administrative Review Board affirming Administrative Law Judge's holding that an employee's reasonable but mistaken belief that fraud occurred is also protected under SOX).

Even if a company merely has an inadequate system of internal financial controls, that can constitute a violation of Section 13 of the Securities Exchange Act of 1934. Section 13 of the Securities Exchange Act of 1934, provides in relevant part: Every issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78 o(d) of this title shall-- . . .

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that-- . . . (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets[.] 15 U.S.C. § 78m(b)(2)(B)(ii).

Section 13 further provides that "[n]o person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls . . . ." 15 U.S.C. § 78m(b)(5). (See Am. Compl. ¶¶ 243-44.)

Allegations of fraud are not the sole means for whistleblowers to secure SOX protections. Leznick v. Nektar Therapeutics, ALJ No. 2006-SOX-00093 (Nov. 16, 2007)(Judge Dorsey). Employee disclosures about efforts to circumvent internal controls are protected activities, because they address violations of SEC rules. See Klopfenstein v. PCC Flow Technologies Holdings, ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006). In Klopfenstein, the Arbitrator said: ". . .we do not believe that activity is protected only when. . . the complainant believes he is reporting fraud." SOX protection applies to the provision of information regarding not just fraud, but also violation of ... any rule or regulation of the Securities and Exchange Commission."

Complaints made by employees concerning reasonably perceived violations of SEC rules governing internal control standards can constitute protected conduct under SOX. See, e.g., Hemphill v. Celanese Corp., 2010 WL 2473845, at *5 (N.D. Tex. June 16, 2010) (finding triable issue of fact where plaintiff produced evidence that he reported conduct constituting a violation of 15 U.S.C. § 78m(b)(5) of the Exchange Act of 1934); Smith v. Corning Inc., 496 F. Supp. 2d 244, 248-49 (W.D.N.Y. 2007) (denying motion to dismiss where plaintiff alleged that employer had violated 15 U.S.C. § 78m(b)(2)(B)(ii) by implementing a financial reporting program that did not comply with General Accepted Accounting Principles, which, in turn, generated incorrect reports that could have misled investors); Collins v. Beazer Homes USA, Inc., 334 F. Supp. 2d 1365, 1378 (N.D. Ga. 2004) (finding triable issue of fact as to whether complaints about violations of the company's "internal accounting controls" constituted protected activity).

Moreover, if it is a Vendor's wrongdoing about which an employee complains, it matters not whether it was a third party or an employee of the company in question who committed the fraud; in either circumstance, a whistleblower may still have a cause of action for retaliation. Feldman and Perry v. Law Enforcement Assocs. Corp. et al., 2011 WL 891447 (E.D.N.C. March 10, 2011)(complaint of wrongdoing of third parties is sufficient under SOX where employer retaliates against employee for complaining about that wrongdoing). It is clear that the "statute by its terms does not require that the fraudulent conduct or violation of federal securities law be committed directly by the employer that takes the retaliatory action." Sharkey v. J.P. Morgan Chase & Co., 2011 WL 135026, at *5-6 (S.D.N.Y. Jan. 14, 2011) (finding that in light of the language of SOX and its legislative history, plaintiff properly pled that she engaged in protected activity when she reported her concerns regarding a third-party client's illegal activity to her company's risk and compliance team and to the individual defendants).

Even if an employee merely complains of overcharges to or by a third party vendor, that may be sufficient to make out a Sarbanes Oxley claim. Gladitsch v. Neo@Ogilvy, 2012 WL 1003513 (S.D.N.Y. March 21, 2012)(complaint of third party overcharges is sufficient to make out a SOX claim).

As the above brief review of the law makes clear, there are several ways to bring successful whistleblower claims in the state of New York. Should you believe you have a whistleblower claim, please contact us at