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.
The Court Appeals’ Nesmith Decision: Reduced Coverage Implications for Insurance Companies and the Public
By: Christopher Guetti
This article focuses on a policy provision, known as the non-cumulation clause, which is present in most policies, but may not be well known to the insureds that buy those polices, and the impact of the recent Nesmith decision by the Court of Appeals in reviewing Allstate’s provision.
A non-cumulation clause, also sometimes known as an anti-stacking clause, acts as a potential limit on the amount of available coverage. Claimants and insureds seek to trigger, in some fashion and to the extent available, coverage in consecutive insurance policies issued by the same insurer. Insurers want to limit attempts to trigger consecutive policies, or stack coverage, and confine the insurers’ liability to the limits of a single insurance policy.
The non-cumulation condition is most likely to apply in a claim where (1) The claimant’s alleged injury existed in more than one policy period and (2) The claim’s value is more than the limits of liability of any one of the liability policies the policyholder bought.
The Nesmith decision represents the second major decision in this area in recent years, and both it and its predecessor involved toxic tort claims that arose out of exposure to lead based paint. In the predecessor decision of Hiraldo v. Allstate Insurance, 5 NY3d 508 (2005), the Court of Appeals interpreted a non-cumulation clause found in a series of successively issued liability insurance policies, holding that a person suing for exposure to lead paint during the terms of all of the policies could not recover more than one policy limit.
Hiraldo, involved a single child who lived in a building for three years under three successive Allstate policies with $300,000 limits. In an action to recover for injuries based upon exposure to lead based paint, the plaintiff claimed that the child had been exposed to lead paint continuously during the terms of all three policies, and therefore $900,000 in coverage should have been available. The Court rejected the argument by relying on the plain language of the non-cumulation clause in the Allstate policy, and limited its liability to the amount shown on the declaration page, $500,000, “regardless of the number of… policies involved.”
The non-cumulation clause at issue in Nesmith v. Allstate, 2014 N.Y. Slip Op. 08217 (2014) was very similar to the Hiraldo clause, and stated as follows:
Regardless of the number of the insured persons, injured persons, claims, claimants or policies involved, our total liability under the family liability protection coverage for the damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss.
The fact pattern in Nesmith, however, was a bit different, although it did involve claims based upon exposure to lead based paint. Allstate Insurance Company issued a liability policy to the landlord of a two family house, which was renewed annually for the years beginning September 1992 in September 1993 in the amount of $500,000.
This case, however, did not involve a single family’s tenancy. Felicia Young and her children lived in one of the two apartments at the premise from November 1992 until September 1993. In July 1993, the Department of Health notified the landlord that one of the children had an elevated blood lead level and that several areas in the apartment were in violation of State regulations governing lead paint. The Department listed the violations and directed the landlord to correct them, which he did and in August 1993, the Department indicated that the violations have been corrected.
The Young family moved out in September 1993, and Lorenzo Patterson, Sr., and Qyashite Davis moved in with their two children. One of those children then tested positive for elevated blood lead level, and the Department of Health sent another letter to the landlord concerning violations and requiring him to correct them.
In 2004, both Young and Nesmith (grandmother of the Patterson/Davis children) brought lead paint actions. In 2006, the Young action was settled for $350,000. In 2008, Nesmith settled that claim, but reserved the issue of the applicable policy limit for future litigation. Allstate also paid the Nesmith children $150,000, which it claimed was the remaining coverage. Nesmith then brought an action against Allstate for a declaratory judgment, asserting that a separate $500,000 limit applied to the Nesmith children.
Nesmith argued that the injuries to Young’s children and Nesmith’s grandchildren were separate losses, as the loss did not arise from continuous or repeated exposure to the same general conditions. The Court of Appeals rejected the argument, stating that even though they may not have been exposed to the exact same conditions, they were exposed to the same “general conditions” as identified in the cumulation clause. That general condition was the presence of lead paint that endangered the children’s health. This, said the Court, was a single accidental loss, and only one policy limit was available to the two families. A copy of the complete decision can be found here.
This decision presents a very real practical danger to an insured, which was raised in the dissenting opinion, pointing out that the majority improperly expanded the Hiraldo decision to a situation that would have been unknown to the insured at the time he procured his insurance, and the coverage for liability of any kind diminished considerably.
The Nesmith decision implies that the failure of the property owner to do anything short of completely removing lead paint from the building during the Young tenancy and before the Nesmith tenancy amounted to nothing at all, even though the owner received confirmation from the Department of Health during the Young tenancy that he had in fact fixed the dangerous conditions at the property, and it was in a safe condition.
Nesmith essentially holds that if there was a nexus between the cause of the injuries during policy year one and the cause of injuries in any later policy year, even when suffered by different children from different families and from different times, coverage is only available under the first policy year.
As a result, even though a property owner continued to renew his policy and pay the premium, he was actually getting less coverage for any later lead paint claims. The property owner would not have known this, and the only way to avoid the reduction in coverage, would have been to seek insurance from a different insurer.
As the dissent points out, this is a real dilemma that has practical implications even for property owners today, as well as their insurers. It is not known whether Nesmith will be applicable in claims that arise from conditions other than lead paint, but there is nothing in the decision specifically limiting the decision to such claims. Balance that against the business of insuring real property, and rental properties in particular. Property owners want to keep their insurance coverage with an insurer that they like, and will generally not seek out new insurers every policy year. Likewise, insurers want to keep good paying customers that pay premiums not only to start new policies, but to renew them year after year. The only way for a property owner to avoid a potential Nesmith decision when there are successive claims that arise on successive policies, would be for the property owner to purchase insurance from a different insurer each time their insurance is up for renewal. Both the insurance industry as well as the property owner will have to look at this issue very carefully, and determine what is best for their respective businesses.
Only time will tell what effect, if any, the Nesmith decision will have on property owners procurement and maintenance of successive or renewal insurance policies. Although not limited to lead paint claims, the holding may be limited to Allstate insurance policies, as the case does not address, nor should have considered, the non-cumulation clauses from other insurance companies. It may be that the clauses in those policies differ substantially from the clause in the Allstate policy.