Flink Smith Successfully Gets SOX Claim in Federal District Court Dismissed

By Christopher A. Guetti

Attorneys Christopher Guetti and Edward Flink of Flink Smith were recently victorious on a pre-answer motion seeking to dismiss the plaintiff’s action in Federal District Court, Northern District of New York which implicated the application of Sarbanes-Oxley Act of 2002 (“SOX”).

 By way of background, the plaintiff was an employee of Tronco Financial for a period of twenty-five years. Defendant Tronco was the managing partner of the Latham office, while Tronco Financial acted as a contractor for several named Northwestern Defendants, who “provide investment advisory services and the marketing, offer and sale of publically traded securities and mutual funds.” The Northwestern Defendants market and sell at least twenty-seven different publicly traded mutual funds (the “Northwestern Mutual Funds”). The Northwestern Mutual Funds are required to file reports under § 15(d) of the Securities and Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78o(d). The Northwestern Mutual Funds are sold and marketed through various agents and contractors, including Tronco Financial.

 Plaintiff alleged in her complaint that her responsibilities with Tronco Financial was “Director of Network Office Supervision,” which required her “to ensure that all financial representatives, associates and staff maintained compliance with ethical business practices, and the rules, regulations, policies, and procedures of the Defendants’ regulatory bodies and governmental agencies, including the Securities and Exchange Commission [(“SEC”)] and FINRA, and State and Federal Securities Laws.” Further, she claimed that beginning in the summer of 2012, Plaintiff brought numerous compliance issues regarding the conduct of Tronco Financial representatives to the attention of Tronco, believing these issues represented violations of SEC rules and regulations. She claimed she reported these issues to Tronco and to Northwestern, and on February 6, 2013, Plaintiff was verbally terminated by Tronco due to Plaintiff’s persistence in reporting non-compliant practices.

 The plaintiff commenced an action on November 21, 2014, asserting claims of retaliation pursuant to section 806 of SOX, and breach of contract. Flink Smith Law LLC represented the plaintiff’s direct employer, Tronco Financial Group, and Alexander Tronco, individually.

 Defendants moved to dismiss the Sarbanes Oxley Act of 2002 cause of action on the grounds that the whistleblower protection for employees did not apply to the plaintiff. Defendants also sought to deny the plaintiff’s attempt to amend the complaint that the plaintiff claimed remedied any pleading issues raised by the defendants.

 To survive a motion to dismiss pursuant to Rule 12(b)(6), a “complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” A court must accept as true the factual allegations contained in a complaint and draw all inferences in the plaintiff’s favor.

 Plaintiff alleged that her termination was retaliatory under 18 U.S.C. § 1514A of SOX for reporting violations of SEC rules and regulations, and federal and state securities law. That statute created “whistleblower protections” for employees of publicly traded companies. Employees are protected from any retaliation by their employers if the employee is engaged in conduct she/he reasonably believes constitutes a violation of . . . any rule or regulation of the Securities and Exchange Commission. The Supreme Court extended that protection from not only direct employees of the publicly held companies, in Lawson v. FMR LLC, 134 S. Ct. 1158 (2014), finding that the language of § 1514A “shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.”

 Defendants took the position that Plaintiff was not covered by § 1514A, as interpreted by Lawson, because she did not allege that she provided services to the Northwestern Mutual Funds (publicly traded), or that she reported wrongdoing committed either by the Funds or on their behalf.

 The Federal District Court, Northern District of new York, agreed that the plaintiff failure to state a cause of action under SOX. In interpreting SOX and recent case law, it determined that in order for the plaintiff to be entitled to the whistleblowing protections, she must allege that the whistleblowing related to the contractor’s provision of services to the public company. It does not cover contractor employees who experience retaliation that is unrelated to the provision of services to a public company. Second, there must be public company fraud, whether committed by the public company itself or through its contractors. A private company’s fraudulent practices do not become subject to § 1514A merely because that company incidentally has a contract with a public company. Under these limiting principles, the Court held that Plaintiff’s allegations failed to state a claim under § 1514A because she has neither alleged that she was providing services to the publicly traded Northwestern Mutual Funds, nor that she reported any wrongdoing committed either by the Mutual Funds or on their behalf.

 Having dismissed the SOX claim, the Court then went further, and declined to retain its supplemental jurisdiction over the remaining breach of contract claim and dismissing the action, allowing the plaintiff the right to recommence the action in New York State Supreme Court.

This currently developing area of the law has had few cases interpreting the Lawson, and the potential implications and limitations on its applicability.  This was a very important decision, as it provided a limitation on employment situations to which SOX would apply, as well as what employees and what behaviors by that employee should be covered.

 The complete decision can be found here: Mary Anthony v. Northwestern Mutual Life Insurance Company at al.