A-1 Capital Management LLC, a private

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1 The Investment Lawyer Covering Legal and Regulatory Issues of Asset Management VOL. 21, NO. 6 JUNE 2014 Lawson v. FMR LLC: Supreme Court Holds that the Sarbanes-Oxley Act Protects Employees of Private Investment Advisers from Retaliation By Daniel Marx and Lisa Wood A-1 Capital Management LLC, a private company registered under the Investment Advisers Act of 1940, advises a successful hedge fund, A-1 Long Short Fund LP, with more than $1 billion in assets under management. The investors in the A-1 Long Short Fund include several public companies that rely on A-1 Capital Management to provide reliable returns for their pension plans. A trader employed by A-1 Capital Management suspects that executives at Investor Co., one of the public companies that invests in the Fund, may be engaged in fraud, and he makes a call to the Securities and Exchange Commission (SEC). When A-1 Capital Management learns that the trader has blown the whistle on an important client, it promptly fires him. Can the terminated trader sue his former employer, a private investment adviser, for unlawful retaliation under Section 806 of the Sarbanes-Oxley Act, the whistleblower provision titled: Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud? According to the Supreme Court, yes. If that answer surprises you, keep reading. Introduction In 2001, Enron Corp., a public company that once employed more than 20,000 people, claimed more than $100 billion in revenues, and boasted the title of America s Most Innovative Company, 1 precipitously filed for bankruptcy. During the following year, and in response to this unprecedented corporate collapse, Congress enacted the Corporate and Criminal Fraud Accountability Act of 2002, which is better known as the Sarbanes-Oxley Act or simply SOX. 2 This sweeping legislation consists of many separate statutes and statutory schemes aimed at achieving the Act s investor-protection goals. 3 One critical component is greater protection for whistleblowers. The Sarbanes-Oxley Act broadly prohibits any retaliation against an employee who reports suspected fraud or other violations of SEC rules and regulations. Specifically, Section 806 provides as follows: No company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend,

2 2 THE INVESTMENT LAWYER threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee (1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344 or 1348 [of Title 18 of the U.S. Code], any rule or regulation of the [SEC], or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by (A) a Federal regulatory or law enforcement agency; (B) any Member of Congress or any committee of Congress; or (C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct). 4 When it provided this robust protection against retaliation, Congress did not define employee or otherwise specify whom the whistleblower provision covered an employee of whom or what? As a result, considerable controversy ensued. Only two months ago, more than 10 years after Congress enacted the Sarbanes-Oxley Act, the Supreme Court decided (at least, in part) what Section 806 means and which whistleblowers it protects from retaliation. In Lawson v. FMR LLC, 5 the Supreme Court addressed the question whether, in addition to the employees of public companies who report fraud, 1514A also protects from retaliation the employees of private companies that contract (or subcontract) with public companies. This dispute garnered substantial attention from diverse stakeholders, 6 and it sharply divided the nine Justices who produced three separate opinions. Yet in the end, six members of the Supreme Court sided with two plaintiff whistleblowers, holding that they could go forward with retaliation claims against their former employer, a private adviser that provides investment management services to public mutual funds. This article describes the winding litigation that led to the recent decision in Lawson, discusses the lingering question about the outer boundaries of whistleblower protection under Section 806, and identifies several practical implications of Lawson for investment advisers, in particular private firms that provide services to, receive services from, or otherwise contract with public companies. 7 The Litigation About six years ago, plaintiffs Jackie Hosang Lawson and Jonathan Zang sued their former employer, FMR LLC, a privately owned company that is registered as an investment adviser under the Investment Advisers Act of 1940, 8 and provides investment management services to Fidelity mutual funds (Funds), publicly owned companies that are registered as investment companies under the Investment Company Act of ,10 Lawson worked as a Senior Director of Finance, and in that capacity, she raised concerns with senior executives at FMR, including its Chief Financial Officer and General Counsel, about certain expenses charged, fees retained, and accounting methodologies employed by the Funds. 11 In her complaint, Lawson claimed that FMR improperly retaliated against her for blowing the whistle by taking various adverse employment actions, including downgrading her performance evaluation, subjecting her to unwarranted criticism and, ultimately, constructively discharging her. 12 In response, Lawson filed several complaints against FMR with the Occupational Safety & Health Administration (OSHA), which is part of the Department of Labor and adjudicates whistleblower retaliation claims under the Sarbanes-Oxley Act. 13 In March 2008,

3 VOL. 21, NO. 6 JUNE after notifying OSHA that she intended to sue FMR in federal court, Lawson filed her complaint against her former employer. 14 Only a few months later, Jonathan Zang filed a similar action against FMR. For over a decade, Zang worked for several Funds as an equity research analyst and portfolio manager. 15 In addition to selecting investments for the Funds that he managed, Zang also helped to prepare and review shareholder reports and disclosures. Zang claimed that FMR unlawfully fired him, without any severance pay, because he raised concerns with his supervisors about suspected inaccuracies in the draft revised registration statements for certain Funds. 16 Like Lawson, Zang initially filed a retaliation complaint with OSHA. But after adverse decisions by the administrative law judge and the Administrative Review Board (ARB), Zang opted to take his case to federal court. In May 2008, he filed his complaint against FMR. 17 The District Court Allows the Whistleblower Claims by Lawson and Zang In both cases, FMR moved to dismiss, arguing that Section 806 of the Sarbanes-Oxley Act did not protect Lawson and Zang from retaliation, and Judge Woodlock, of the federal court in Boston, jointly considered the two motions. 18 There is no dispute that the whistleblower provision of the Sarbanes-Oxley Act protects from retaliation an employee of a public company who engages in protected activity, 19 but the parties sharply disagreed about whether it also safeguards an employee of any officer, employee, contractor, subcontractor, or agent of a public company. 20 Lawson and Zang were employees of a private investment adviser, FMR, which contracted with public investment companies, the Funds, to provide investment management services. Thus, their cases squarely raised the critical question about the scope of Section 806: when it passed the Sarbanes- Oxley Act, did Congress open the courthouse doors to whistleblower retaliation claims by employees of private contractors (or subcontractors), like Lawson and Zang or not? Judge Woodlock began, as the law requires, by reading the words of 1514A, but he quickly realized that the statutory text is far from pellucid. 21 In an effort to make sense of the statute, he took a broader view, looking at the rest of the language in the subsection and considering which interpretation of the whistleblower provision makes better logical sense. 22 Even then, however, Judge Woodlock concluded that neither of the opposing interpretations can be ruled out. 23 Therefore, he found that the meaning of employee in 1514A(a) is ambiguous. 24 When confronted with an ambiguous law, a court must search for indications of what Congress intended. In certain cases, the title of a statutory section may shed light on some ambiguous word or phrase. 25 But, here, Judge Woodlock found the title of Section 806 Whistleblower Protection for Employees of Publicly Traded Companies to be inconclusive. 26 Although the title provides limited support for a restrictive reading (protection only for employees of publicly traded companies), it could also have been shorthand for a broader meaning (protection also for employees of privately held companies that contract with publicly traded companies). 27 Turning to the legislative history, which includes the various congressional materials related to the passage of the Sarbanes-Oxley Act, such as floor statements by members and committee reports, Judge Woodlock considered the purpose of Sarbanes-Oxley more generally, which was to prevent and punish corporate fraud, protect the victims of such fraud, preserve evidence of such fraud and crime, and hold wrongdoers accountable for their actions. 28 He further determined that the narrow version of Section 806, which FMR advocated, was inconsistent with that sweeping purpose. The legislative history indicates that Congress was concerned with failures to

4 4 THE INVESTMENT LAWYER report instances of fraud against shareholders, failures not only on the part of public company employees, but also employees of those institutions working with the public company. The Senate Report, discussing the collapse of Enron, observed that Enron apparently, with the approval or advice of its accountants, auditors and lawyers, used thousands of off-the-book entities to overstate corporate profits, understate corporate debts and inflate Enron s stock price. The Report goes on to state that when corporate employees at both Enron and Andersen attempted to report or blow the whistle on fraud, but they were discouraged at nearly every turn. The legislative history of SOX makes clear that Congress was concerned about the related entities of a public company becoming involved in performing or disguising fraudulent activity, and wanted to protect employees of such entities who attempt to report such activity. 29 At the same time, Judge Woodlock recognized that the broad reading of the whistleblower provision, which Lawson and Zang proposed, might give Section 806 a notably expansive scope untethered to the purpose of the statute, covering any employee of any contractor to any public company that reports any suspected fraud by his or her own employer even if that fraud is entirely unrelated to the shareholders of the public company. 30 Thus, Judge Woodlock adopted a limiting principle necessary to keep the Plaintiffs construction from expanding beyond the purpose of SOX. 31 Based on the Sarbanes-Oxley Act s reference in Section 806 to fraud against shareholders, he found: [T]o come within the scope of SOX when an employee provides information about conduct that he reasonably believes constitutes a violation of the categories of law and regulations listed in 18 U.S.C. 1514A(a)(1), this whistleblowing activity must relat[e] to fraud against shareholders. Consequently, protecting employees of a public company s related entities would not result in an overly broad application of the statute that would be counter to the statute s purpose. 32 Having interpreted Section 806 to protect from retaliation any employee who works for a private company that contracts with a public company and who blows the whistle on fraud against the shareholders of the public company, Judge Woodlock denied FMR s motions to dismiss and ruled that Lawson and Zang employees of FMR who reported suspected fraud against shareholders of the Funds could proceed with their retaliation claims. Typically, that decision would have forced FMR to litigate these cases through discovery before making motions for summary judgment and, possibly, conducting trials. Yet because his call was close and controversial, Judge Woodlock allowed FMR to take an interlocutory appeal, an immediate review by the appeals court before any further proceedings in the trial court. The Appeals Court Reverses The United States Court of Appeals for the First Circuit framed the question, which no other federal appeals court had decided, as follows: whether Congress intended the whistleblower provisions of 1514A also to apply to those who are employees of a contractor or subcontractor to a public company and who engage in protected activity. 33 Although the First Circuit started where Judge Woodlock began, with the statutory text of the Sarbanes-Oxley Act, a divided panel of appellate judges ultimately reached the opposite conclusion about the scope of Section 806. Reading the words that Congress used, Chief Judge Lynch, writing for the majority, quickly concluded: That the immediate text within 1514A(a) may be read differently as to the scope of the

5 VOL. 21, NO. 6 JUNE protected employees as a matter of grammar needs little discussion. Each side has an argument that had Congress just added a few words, its intent would have been clearer, and none of these arguments resolve the case. 34 Chief Judge Lynch then turned to the title of Section 806, but unlike Judge Woodlock, she found these additional words to be explicit guides to the limits on the meaning of the whistleblower provision. 35 Because the title refers to Employees of Publicly Traded Companies, Chief Judge Lynch stated, it would be odd to read 1514A(a) as covering employees of private companies. 36 The caption for subsection (a) similarly refers to publicly traded companies, and in the majority s view, this double limitation sufficed to answer the question presented. The title and caption are not ambiguous and their purpose in being there was not to add to any ambiguity in the text but to clarify. We do not think there is any ambiguity left. But if there were, other rules of statutory interpretation would lead us to the same result. 37 For Chief Judge Lynch, the legislative history reinforced this reading of the law. The majority identified several explicit references in the Sarbanes-Oxley Act to employees of public companies, but none to employees of private companies. 38 What about the auditors and lawyers employed by private firms who tried to blow the whistle on the fraud at Enron? It is clear that Congress s primary concern in passing the Sarbanes-Oxley Act was the Enron debacle, and the committee report discusse[d] retaliation against employees at Arthur Andersen, a private company that contracted to provide audit services to Enron. 39 Nevertheless, Chief Judge Lynch concluded that Congress did not write a sweeping whistleblower provision to prevent retaliation against auditors (or any other employees of private contractors). Rather, she highlighted another section of SOX that establishes rules regarding auditor independence and creates the Public Company Accounting Oversight Board (PCAOB) to provide oversight. 40 According to this understanding of the statutory scheme, Congress wanted expert agencies, not private plaintiffs like Lawson and Zang, to police retaliation against private company employees who blow the whistle on fraud. Specifically, the PCAOB is responsible for overseeing auditors, and the SEC has the authority to discipline securities lawyers. Judge Thompson wrote a strongly worded dissent in which she accused her fellow judges on the First Circuit of impos[ing] an unwarranted restriction on the intentionally broad language of the Sarbanes-Oxley Act and bar[ring] a significant class of potential securities-fraud whistleblowers from any legal protection. 41 To determine whether Lawson and Zang fell within the scope of Section 806, Judge Thompson boil[ed] the statute down to its relevant syntactic elements, and she focused on the key words that no contractor may discharge an employee. 42 Read that way, the statute refers broadly to an employee. It is not limited to employees of public companies and, therefore, covered Lawson and Zang. 43 She was not persuaded that the title of Section 806 compels a more limited reading of the whistleblower provision. 44 Emphasizing that SOX s legislative history refers positively to extending whistleblower protection in order to encourage the reporting of securities fraud, Judge Thompson stated that none of the majority s sources indeed, no source at all expresses any intent to restrict 806 so narrowly. 45 The Supreme Court Reverses, Again Lawson and Zang appealed from their loss in the First Circuit, and the Supreme Court agreed to hear their case. 46 The question presented for review was, once again, whether Section 806 protects employees of private companies from retaliation for protected activity. But, at bottom, the controversy that divided

6 6 THE INVESTMENT LAWYER the Supreme Court was what had actually motivated Congress to enact the whistleblower provision of the Sarbanes-Oxley Act in the first place: was it the Enron debacle in particular or public company fraud more generally? For the majority, led by Justice Ginsburg, Congress wrote SOX to prevent the next Enron crisis, which did not result from an isolated fraud by the employees of a single public company. In the Enron scandal that prompted the Sarbanes-Oxley Act, contractors and subcontractors, including the accounting firm Arthur Andersen, participated in Enron s fraud and cover-up. When employees of those contractors attempted to bring misconduct to light, they encountered retaliation by their employers. The Sarbanes-Oxley Act contains numerous provisions aimed at controlling the conduct of accountants, auditors, and lawyers who work with public companies. Given Congress concern about the contractor conduct of the kind that contributed to Enron s collapse, we regard with suspicion construction of 1514A to protect whistleblowers only when they are employed by a public company, and not when they work for the public company s contractor. 47 Mindful of the retaliation against accountants and lawyers who worked with Enron, the majority criticized the narrow interpretation of Section 806 as leaving a huge hole in the whistleblower protections that Congress sought to provide. Contractors employees would be disarmed: they would be vulnerable to retaliation by their employers for blowing the whistle on a scheme to defraud the public company s investors, even a scheme engineered entirely by the contractor. Not only would mutual fund advisers and managers escape 1514A s control. Legions of accountants and lawyers would be denied 1514A s protections. Instead of indulging in fanciful visions of whistleblowing babysitters and the like, the dissent might pause to consider whether a Congress, prompted by the Enron debacle, would exclude from whistleblower protection countless professionals equipped to bring fraud on investors to a halt. 48 The prospect that retaliation might go entirely unpunished was particularly apparent in the cases of Lawson and Zang, which arose in the context of suspected fraud against the shareholders of public mutual funds. The Fidelity Funds, like most mutual funds, had no employees of their own. Rather, the Funds, which reported to their Board of Trustees, contracted with FMR to provide investment management services, and FMR employed Lawson and Zang. Thus, as Justice Ginsburg noted, if the whistle is to be blown on fraud detrimental to mutual fund investors, the whistleblowing employee must be on another company s payroll, most likely, the payroll of the mutual fund s investment adviser or manager. 49 Without minimizing the magnitude of the Enron meltdown, the minority, led by Justice Sotomayor, took a different view of what SOX is all about: that is, fraud against the shareholders of public companies. To start, the Sarbanes-Oxley Act as a whole evinces a clear focus on public companies. Congress stated in the Act s preamble that its objective was to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, disclosures that public companies alone must file. The Act thus created enhanced disclosure obligations for public companies [citing provisions] The common denominator among all of these provisions is their singular focus on the activities of public companies. 50

7 VOL. 21, NO. 6 JUNE Other statutory provisions, some of which explicitly address private companies or their employees, reinforced the minority s view. When Congress wanted to depart from the Act s public company focus to regulate private firms and their employees, it spoke clearly. [A]s the rest of the Sarbanes- Oxley Act demonstrates, if Congress had really wanted 1514A to impose liability upon broad swaths of the private sector, it would have said so more clearly. 51 While the majority focused on the need to protect private company whistleblowers based on the Enron experience, the minority emphasized the danger of establishing a sweeping source for private litigation against millions of private companies. 52 Their list of hypothetical plaintiffs who might bring retaliation claims included babysitters, housekeepers, gardeners, day laborers, check-out clerks, and cleaners who work for the employees of public companies or private companies that contract with public companies. At oral argument, even Ken Lay s butler joined this parade of horribles. 53 All of these employees, if fired or otherwise subjected to retaliation for reporting fraud, might sue their private employers under 1514A. It is not plausible, the dissent insisted, that Congress intended the Act to impose costly litigation burdens on any private business that happens to have an ongoing contract with a public company. 54 If Congress intended to limit the scope of Section 806 to employees of public companies, why did it include contractors and subcontractors in the statutory text? The dissenting Justices and FMR answered that question by invoking the ax- wielding specialist, a private contractor hired by a public company to terminate its employees. 55 George Clooney, as the Supreme Court noted, played this very character in the Oscar-nominated movie Up in the Air : As portrayed by Clooney, an ax-wielding specialist is a contractor engaged only as a bearer of the bad news that the employee has been fired; he plays no role in deciding who to terminate. 56 Justice Sotomayor chided the majority for too quickly dismiss[ing] the prominence of outplacement firms, or consultants that help companies determine whom to fire. 57 This practice is apparently commonplace in large-scale layoffs or reductions-in-force. But Justice Ginsburg was not convinced. A company cannot insulate itself from liability by contracting out illegal retaliation against its own employee. 58 More to the point, there is no indication that retaliatory ax-wielding specialists are the real-world problem that prompted Congress to add contractors to 1514A. 59 For the majority, the appropriate cinematic frame for SOX is The Smartest Guys in the Room, the documentary about the collapse of Enron, not Up in the Air, the fictional drama about an ax-wielding specialist. Rejected Limitations on Whistleblower Protection The broad reading of Section 806 that the Supreme Court adopted in Lawson greatly expands the reach of the whistleblower provision, pulling within its purview the employees who work for the millions of private companies that contract with public companies. Recognizing that result, the Supreme Court (and the parties) debated the merits of various limiting principles, rules that might restrict who could sue, and whom could be sued, for retaliation under the Sarbanes-Oxley Act. 60 In the end, however, the majority adopted none of these principles, instead choosing to defer for another day the decision about the bounds of 1514A. 61 It is worth noting, however, some of the proposed principles were considered but rejected, at least for now. Only Fraud Against Shareholders When first ruling on the motions to dismiss by FMR, Judge Woodlock wrestled with this

8 8 THE INVESTMENT LAWYER issue how to interpret Section 806 in a manner that was faithful to congressional intent concerning the Enron crisis but, at the same time, did not invite millions of potential plaintiffs to bring whistleblower claims unrelated to the core congressional concern about corporate fraud. Judge Woodlock observed: Plaintiffs reading might permit the SOX whistleblower provision to have a notably expansive scope untethered to the purpose of the statute. 62 He, like FMR, worried that reports about any fraud whatsoever might be deemed protected activity. To address this potential problem, Judge Woodlock found only one plausible limitation in the text of the Sarbanes-Oxley Act. Noting that 1514A protects employees who report activities that may constitute a violation of section 1341, 1343, 1344, or 1348 [of Title 18 of the U.S. Code], or any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, Judge Woodlock found: To come within the scope of SOX when an employee provides information about conduct that he reasonably believes constitutes a violation of the categories of law and regulations in 18 U.S.C. 1514A(a)(1), this whistleblowing activity must relat[e] to fraud against shareholders. 63 But during oral argument before the Supreme Court, Lawson and Zang did not embrace that limiting principle. When asked by Justice Sotomayor whether Plaintiffs were rejecting the district court s limitation, counsel responded, yes, we are. that s not our view. 64 In its opinion, the Supreme Court did not even discuss whether one might plausibly read Section 806 to cover only protected activity that relates to fraud against shareholders, as Judge Woodlock found. Only Employees of Contractors The next limiting principle to land in the legal dustbin was one that the plaintiffs and the SEC put forth: interpret the word contractor (and presumably subcontractor, as well) to refer only to a subset of those private companies that contract with public companies. In other words, for the purpose of 1514A, contractors may be interpreted narrowly to include only private companies with contracts to provide on-going services, such as auditors or law firms, but to exclude those with contracts for onetime services or the sale of goods. At oral argument, when Justice Breyer asked whether Lawson and Zang were arguing for no limitation, counsel responded by focusing on the word contractor in the statute: [W]e think contractor is not anyone who has ever had a contract with a public company. Contractor in the ordinary parlance refers to an ongoing relationship. The paradigm is someone providing services on an ongoing basis, which of course fits lawyers and accountants perfectly. And so if someone from a private firm goes down to Walmart, buys a box of rubber bands, that in ordinary parlance wouldn t be referred to as a contractor. So we think that as a practical matter that rules out most mom and pop stores. They don t have that kind of relationship. 65 In the majority opinion, Justice Ginsburg summarized this proposal as follows: [Plaintiffs and the SEC] point specifically to the words contractor. and note that in common parlance, contractor does not extend to every fleeting business relationship. Instead, the word refers to a party whose performance of a contract will take place over a significant period of time. 66 But the majority did not adopt that approach, which entails difficult line-drawing problems. Justice Scalia demonstrated these problems at argument, asking counsel whether, under this principle, the

9 VOL. 21, NO. 6 JUNE accounting firm that is only used once is a contractor or not. 67 The same question could be asked about the private landscaping or cleaning company that contracts to provide regular services to a public company over a period of years. Is that the type of contractor that Congress had in mind? Only Fraud Concerning Contracts with Contractors In addition to the proposed limitation based on the word contractor, the SEC (but not the plaintiffs) also suggested another restriction based on the phrase the contractor of such company. 68 Read as a whole, the phrase arguably refers only to a private contractor in relation to its public counterparty. The Solicitor General, who appeared for the United States in support of Lawson and Zang, argued that the contractor of such company refers to the contractor in that role, working for the public company. 69 Picking up on this possible limitation, Justice Kagan had the following exchange: Justice Kagan: Contractor of such company, you re saying we can read that to impose a limitation, it s not anything that the contractor does in any capacity for anybody, whether relating to the contract or not. We could instead read it as the contractor means the entity doing a particular contract or a particular public company, is that correct? Counsel: Yes. Justice Kagan: In other words, inherent in the word contractor or in the phrase contractor of such company is a sort of status of a company, and that one should not read this statute as applying outside that particular status. Counsel: I think that s right. And the only thing that I would add to that is that it could be fraud that s being reported that the contractor is engaging in fraud in that contract or that the public company is engaging in fraud. But Congress would have wanted both of those covered. It was Arthur Andersen and Enron that were involved in the fraud. 70 But as they did with Judge Woodlock s limitation, Lawson and Zang rejected the Solicitor General s approach. 71 And the majority also declined to adopt it. Only Fraud Involving Public Companies The most drastic limitation reading the whistleblower provision of SOX to protect only employees of public companies, not employees of private contractors or subcontractors was advocated by FMR and adopted by the First Circuit but, in the end, rejected by the Supreme Court. Joining this discussion of limitations, counsel for FMR argued that Congress had not established any limiting principle for the scope of Section 806 because, to begin with, Congress never contemplated covering private companies. 72 Put another way, there was no need for a limiting principle, because the law that Congress enacted was already limited to the employees of public companies. Thus, according to FMR, Lawson and Zang had sent the courts on a wild goose chase for a solution to a problem that Congress never created. The Supreme Court was not convinced, however. Quickly dispatching the narrow reading of the law, Justice Scalia stated: It s a very sensible limitation. Unfortunately, it s not there. 73 No Limitations At Least for Now So where did all this discussion of limitations leave the Supreme Court? Lawson provides no clear restriction on the scope of Section 806. It leaves that difficult decision for another day. This decide later approach was first proposed by the Solicitor General. When pressed to address the fear, expressed by the First Circuit, FMR and others, that any fraud by any gardener, any cook, anybody that had one employee in the entire United States and engaged in

10 10 THE INVESTMENT LAWYER any alleged fraud would be covered by Section 806, the Solicitor General recognized that completely understandable concern but told the Supreme Court that you don t need to decide it in this case, because this is a fairly mainstream application. 74 The whistleblowing by Lawson and Zang and the alleged retaliation against them by FMR closely resembled the situations that Congress had seen in the Enron debacle. Rather than try to resolve all the far-fetched applications of the statute, the Supreme Court could let expert agencies (such as the SEC or OSHA and its ARB) work that out, or let lower courts deal with unusual situations as they arise in future cases. 75 Ultimately, that is precisely what the Supreme Court did. Crediting the Solicitor General for suggest[ing] that we need not determine the bounds of 1514A today, because plaintiffs seek only a mainstream application of the provisions protections, the majority agree[d] : Plaintiffs allegations fall squarely within Congress s aim in enacting 1514A. Lawson alleges that she was constructively discharged for reporting accounting practices that overstated expenses associated with managing certain Fidelity mutual funds. This alleged fraud directly implicates the funds shareholders. Zang alleges that he was fired for expressing concerns about inaccuracies in a draft registration statement FMR prepared for the SEC on behalf of certain Fidelity funds. The potential impact on shareholders of false or misleading registration statements needs no elaboration. If Lawson and Zang s allegations prove true, these plaintiffs would indeed be firsthand witnesses to [the shareholder] fraud Congress anticipated 1514A would protect. 76 The decision in Lawson does not say what might happen in another retaliation case where the alleged fraud that the employee reports does not directly implicate[ ] any shareholders. By reading the Sarbanes-Oxley Act to protect attorneys and auditors who act as whistleblowers against their own public company clients, the Supreme Court begged important questions about the line between the law-enforcement interest in encouraging individuals to report suspected fraud and the ethical rules for attorneys and accountants regarding the disclosure of client confidences. Yet like the boundaries for Section 806 itself, the line between reporting wrongdoing and keeping secrets has not yet been clearly drawn. At least one federal appeals court has already rejected a per se bar on the use of privileged information by attorneys who blow the whistle on their own clients. Section 1514A(b) expressly authorizes any person alleging discrimination based on protected conduct to file a complaint with the Secretary of Labor and, therefore, to bring suit in an appropriate district court. Nothing in this section indicates that inhouse attorneys are not also protected from retaliation under this section, even though Congress plainly considered the role attorneys might play in reporting possible securities fraud. 77 Similarly, in promulgating its final whistleblower rules, the SEC refused to exclude from its definition of independent knowledge of suspected fraud information that is received in breach of state-law confidentiality requirements, such as those imposed on auditors, because to do so could inhibit important federal-law enforcement interests. 78 In Lawson, the Supreme Court repeatedly referred to retaliation against attorneys and accountants who tried to blow the whistle against Enron, but none of the three opinions addressed in what circumstances, and consistent with confidentiality obligations, it may be appropriate for these professionals to report suspected fraud, even by their own clients. Much

11 VOL. 21, NO. 6 JUNE litigation will likely follow as these difficult issues are resolved in later cases, and in fact, there is already some disagreement among courts regarding whether (and to what extent) an attorney may violate his or her professional confidentiality responsibilities to blow the whistle on a client. 79 Practical Implications for Investment Advisers The first step in dealing with Lawson is knowing that the Supreme Court has finally decided it and knowing that until further action by Congress, future decisions by the courts, or additional guidance from OSHA, any private company that contracts with a public company can be sued under 1514A if it retaliates against its own employee (or an employee of the public company) for reporting any fraud or violation of SEC rules and regulations, regardless of whether the suspected misconduct affects the shareholders of the public company. In the meantime, what should investment advisers do? Train Personnel About Potential Liability for Retaliation Private investment firms cannot dismiss 1514A as a concern for public companies only. Some advisers are actually public companies (for example, Fortress Investment Group LLC). Moreover, private advisers interact with public companies in many different ways, and these contractor (or subcontractor ) relationships can implicate whistleblower protections under the Sarbanes-Oxley Act. Private advisers often contract with prime brokers that are public companies (for example, Goldman Sachs & Co.). As in the hypothetical at the outset of this article, many private advisers also contract to manage assets, such as pension funds, for public companies. And, most funds invest in public companies pursuant to shareholder agreements. Although the Supreme Court has hinted that there are outer boundaries to the whistleblower provision of the Sarbanes-Oxley Act, it has not said where those limits lie, and it will be some time before the lower courts flesh out those boundaries. In the meantime, private firms must proceed with caution. Perhaps most importantly, it is critical for private investment advisers to train their own employees about potential liability under the Sarbanes-Oxley Act for retaliation against any whistleblower who reports suspected fraud. Effective, yet challenging, ways to avoid unlawful retaliation and related claims include fostering an internal culture that values compliance, giving employees meaningful opportunities to raise their concerns to senior management, and taking steps to promptly and satisfactorily address those concerns. If would-be-whistleblowers are confident that their employers will take complaints seriously, and quickly fix problems, they may be less inclined to engage in external reporting. That being said, the offer of whistleblower bounties creates powerful incentives to go to the SEC or other law enforcement agencies. In this regard, investment advisers must keep in mind that protected activity by an employee for the purpose of Section 806 is broadly defined: an employee undertakes such activity when he or she provide[s] information, cause[s] information to be provided, or otherwise assist[s] in an investigation concerning mail fraud, wire fraud, bank fraud or securities fraud as well as violations of any SEC rule or regulation or any other provision of Federal law relating to fraud against shareholders. 80 Moreover, regardless of the internal reporting policies and procedures that a company may set up, an employee engages in protected activity when he or she reports suspected fraud internally to a supervisor (or other senior employee with authority to investigate, discover or terminate fraud) or externally to a federal regulatory agency (like the SEC), a federal law enforcement agency (like the DOJ, a United States Attorney s Office or the FBI) or a member or committee of Congress. Put simply, even though an employer may have a strong substantive defense against a retaliation claim that the employee was not engaged in protected activity, it would be wise, when first dealing with a whistleblower situation, to err on the side of

12 12 THE INVESTMENT LAWYER avoiding any adverse employment actions that might later be construed as unlawful retaliation. Investment advisers must also recognize that, in order to trigger potential liability under 1514A, there need not have been any actual fraud. The law only requires that the whistleblower reasonably believe fraud has occurred or is occurring. Therefore, as the saying goes, the cover-up can be worse than the crime. A company that did not commit any fraud, but nevertheless, retaliated against a whistleblower who raised a concern about suspected fraud, can still be sued under SOX. Don t Retaliate Against Whistleblowers Retaliation can take many forms, and the language of 1514A is intentionally broad. In addition to terminating a whistleblower, which is the most obvious form of retaliation, the statute specifically refers to demot[ing], suspend[ing], threaten[ing], harass[ing], or in any other manner discriminat[ing] against the employee. The OSHA Fact Sheet defines unfavorable employment actions to include those common forms of retaliation as well as blacklisting, denying overtime or promotion, disciplining, denying benefits, failing to hire or rehire, reassignment affecting prospects for promotion, and reducing pay or hours. 81 The allegations brought by Lawson against FMR involved a series of events, leading up to what she claimed was her constructive discharge from her senior position. The events included the following: Reduction of her performance rating from exceeds expectation to proficient ; selection of another person instead of Lawson for the position of Director of the Board Support Group; charges that Lawson had failed to prepare business partners properly for a meeting with Pricewaterhouse Coopers; reduction in bonus compensation; exclusion from committee meetings regarding her OSHA complaints; denial of approval of an expense report; implication that she was involved in the improper 12b-1 fee retention [an issue that Lawson reported]; an oral warning for violating Fidelity Investment rules on insubordination; a statement by a supervisor that it was impossible for Lawson to continue working at Fidelity Investments; and harassing behavior by [her] supervisor, including verbal abuse, sabotage of her work, and the imposition of an unrealistic workload. 82 For the purpose of FMR s motion to dismiss, Judge Woodlock assumed that the allegations by Lawson were, in fact, true. He did not, however, indicate whether these discrete claims, if true, would constitute improper retaliation, either individually or collectively, under Section 806. That will now be addressed by the trial court on remand. Zang claimed that he, too, suffered various forms of retaliation, preceding his ultimate termination. For example, according to Zang s complaint, a Fidelity Management supervisor withdrew direction that Zang attend a Board of Trustees meeting for a particular Fund. 83 In addition, his supervisor made unfounded complaints of poor job performance. 84 Although Zang s performance exceeded that of other fund managers that FMR employed, a supervisor told Zang that the company was unsure whether it wanted Zang to be a member of the team. 85 Again, it is not clear, and in this litigation, no court has yet decided, whether such claims, if true, would establish improper retaliation against FMR. But they would raise red flags if they occurred shortly after an employee engaged in protected activity by reporting suspected fraud. Don t Pre-taliate Against Potential Whistleblowers In March 2014, Director of the SEC Whistleblower Office Sean McKessy addressed an audience at the Georgetown University Law Center as part of a panel discussion concerning whistleblowers at the annual conference of the Corporate

13 VOL. 21, NO. 6 JUNE Counsel Institute. According to press reports from the event, McKessy warned companies, and their in-house counsel, not to use employment contracts, such as confidentiality, non-disparagement and separation agreements, in an effort to silence would-be whistleblowers. McKessy stated that the SEC will pursue companies that insist on, and enforce, those agreements, and it may also seek sanctions against the attorneys who draft them. A company may encourage internal reporting by employees about suspected fraud, but it cannot take any steps to discourage or otherwise prevent external reporting to the SEC or any other law enforcement agency. Where is that line drawn, however? In-house counsel have criticized the SEC for failing to provide adequately detailed guidance on this issue. The Association of Corporate Counsel has asked whether confidentiality provisions, which are standard features of most separation agreements, must be amended to insert an exception for protected activity. 86 It would be nice to know that and, even better, for the voice of the in-house bar to be heard on that front before the SEC files creative lawsuits. 87 At a minimum, the Association has argued, it is incumbent on the SEC to offer particular examples of good, and bad, language. 88 These discussions are instructive to counsel for investment advisers, who also understand that confidentiality provisions are standard in agreements with employees, investors, and service providers. In fact, confidentiality may be legally required either because of the fiduciary responsibilities of the adviser or to protect intellectual property rights. How these conflicting legal requirements are to be harmonized remains to be seen, and this tension will no doubt be the subject of case law and regulatory attention in the next few years. Nevertheless, in the short term, it behooves all investment advisers to review their standard agreements and to evaluate whether any confidentiality or other restrictive clauses could be interpreted as inappropriately discouraging protected whistleblower activity. Conclusion In Lawson v. FMR LLC, the Supreme Court ruled that employees of private companies, including investment advisers, that contract or subcontract with public companies can sue their employers if they suffer unlawful retaliation for engaging in protected activity. Thus, the Supreme Court sided with Lawson and Zang, ruling that they could pursue their retaliation claims against FMR, their former private employer. The Enron debacle cast a long, dark shadow over the entire litigation, leading the majority to conclude that Congress intended to break the corporate code of silence, which in the case of Enron, included the auditors and attorneys who helped executives perpetrate the massive fraud against shareholders. While the decision in Lawson answered the central question Section 806 protects employees of both public and private companies from retaliation it raised several other questions, which it did not answer. The Supreme Court suggested that there may be outer limits to potential civil liability for retaliation under the Sarbanes-Oxley Act, but it did not draw that line in the sand. After considering various proposals for how courts might cabin the whistleblower provision, the majority concluded that none were necessary in this particular case, because Lawson and Zang were much like the prototypical whistleblowers at Enron whom Congress clearly intended to protect from retaliation. The Supreme Court also repeatedly emphasized the important role that auditors and attorneys can play in raising the alarm about fraud, but it did not begin to untangle the knot of related (and perhaps conflicting) statutory provisions, such as mandatory reporting requirements for auditors under Section 10A of the Securities Exchange Act of 1934, and professional ethics rules, such as the American Bar Association s Model Rule of Professional Conduct 1.6, which prohibit the disclosure of client confidences except in special circumstances. Future court cases, or congressional action to clarify the Sarbanes-Oxley Act, will be needed to answer these outstanding questions.

14 14 THE INVESTMENT LAWYER It remains to be seen whether the floodgates of retaliation litigation against private companies will open, as the dissent predicted in Lawson. But investment advisers cannot afford to wait until they are named as defendants in such suits. Nor can they simply stay the course pending further guidance from the courts, Congress, the SEC or elsewhere. Advisers must immediately take steps to ensure that they (and their employees) do not retaliate against whistleblowers who engage in protected activity. Advisers must also review their policies and procedures, including their standard confidentiality agreements and provisions, to confirm that they do not prevent, even inadvertently, would-be-whistleblowers from raising their concerns about suspected fraud. If they have not done so already, advisers should promptly establish robust and effective compliance programs to encourage internal reporting and address issues that arise. But at the same time, advisers cannot stop employees who decide to go directly to the SEC or another law enforcement agency. In light of the Enron experience, it is the view of Congress and the Supreme Court that whistleblowing is critical to preventing fraud, that retaliation against whistleblowers is inimical to the goal of shareholder protection, and that all companies, including private investment advisers, must work within that legal framework going forward. Mr. Marx and Ms. Wood are partners in the Boston office of Foley Hoag LLP. Mr. Marx works in the Business Crimes & Government Investigations Practice Group and handles a wide range of litigation and enforcement matters, including SEC actions. Ms. Wood chairs the Litigation Department and handles complex civil litigation, primarily in the area of securities. Mr. Marx and Ms. Wood have represented clients of Foley Hoag s Investment Advisors and Private Investment Funds Practice Group in many litigation and enforcement matters, and both enjoy speaking and writing about such issues to trade groups and clients. They gratefully acknowledge the assistance of Stephany Collamore, an associate at Foley Hoag, with this article. NOTES 1 See Enron Named Most Innovative for Sixth Year, PR Newswire (Feb. 6, 2001), available at ProQuest, Document ID No Pub. L. No , 116 Stat. 745 (2002). 3 Carnero v. Boston Sci. Corp., 433 F.3d 1, 5 (1st Cir. 2006) U.S.C. 1514A(a) (emphasis added) U.S., 134 S. Ct (2014). 6 Amicus briefs were filed in the Supreme Court by the National Whistleblower Center, the Society for Human Resource Management, the Chamber of Commerce, the New England Foundation, the Securities Industry and Financial Markets Association, the Investment Company Institute, the National Federation of Independent Businesses, and the Equal Employment Advisory Council as well as a group of former SEC Commissioners and officials and the Solicitor General. 7 Neither the authors of this article nor any other attorneys at Foley Hoag LLP were involved in the litigation between Lawson, Zang and FMR U.S.C. 80b-2(a)(11) U.S.C. 80a-3(a)(1). 10 See Lawson v. FMR LLC, 724 F. Supp. 2d 141 (D. Mass. 2010). 11 See id. at at See id. at See id. 15 See id. at See id. 17 See id. at See id. at See 18 U.S.C. 1514A(a). 20 See Lawson, 724 F. Supp. 2d at at at