Giving boss advice about disclosures does not a SOX whistleblower make
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Wednesday, January 17, 2018

Giving boss advice about disclosures does not a SOX whistleblower make

By Rodney F. Tonkovic, J.D.

A Seventh Circuit panel has affirmed a district court’s ruling that a former CEO who complained to his own company’s board was not a whistleblower entitled to protection from retaliation. The CEO argued that the Dodd-Frank Act protects those who make disclosures protected by the Sarbanes-Oxley Act, even if they are not reported to the SEC. The appeals court did not need to weigh in on the interplay of Dodd-Frank and SOX, however, because, among many other problems with the CEO’s theory of liability, the complained-of conduct was not fraud in the first place (Verfuerth v. Orion Energy Systems, Inc., January 11, 2018, Wood, D.).

Neal Verfuerth is the former CEO of Orion Energy Systems. Following a series of disputes between Verfuerth and Orion’s board of directors, he was fired in November 2012. The disputes involved issues such as the conduct of the board of directors, conflicts of interest, the handling of a defamation suit filed by a former employee, and miscellaneous violations of company policy. The board ignored Verfuerth’s advice to disclose these issues to shareholders, and he never mentioned them in any reports filed with the SEC. Later, Verfuerth brought this lawsuit, arguing that his complaints to the board constituted whistleblowing and that his firing violated the federal whistleblower protection laws.

No subjective belief. The district court granted summary judgment in favor of Orion, finding that the conduct Verfuerth complained about did not fall under the Sarbanes-Oxley Act’s umbrella of protected reporting. Verfuerth’s complaints to his own company’s board did not constitute whistleblowing, the court said, because whistleblowing requires disclosure to some other party. There is also no indication that SOX is intended to protect a CEO’s opinions about a company’s reporting obligations. Finally, Verfuerth’s own certifications of the company’s annual and quarterly reports meant that he could not establish his subjective belief that fraud was occurring.

Amicus. In May 2017, the Commission submitted an amicus brief in support of Verfuerth. The agency argued that the Seventh Circuit should defer to its view under the Chevron doctrine regarding the interplay of the Dodd-Frank Act and Sarbanes-Oxley Act whistleblower provisions. The SEC offered its views in the case in an effort, among other things, to persuade the Seventh Circuit not to follow the Fifth Circuit’s Asadi decision limiting the Dodd-Frank Act whistleblower provision to its plain meaning, and by extension, imposing a narrower interpretation than the agency had given the same provision. The Commission said that its interpretation extending broader protections to whistleblowers than some courts have allowed is entitled to Chevron deference.

Affirmed. The appeals court here noted the interplay between the Dodd-Frank and SOX whistleblower provisions. SOX, the court said, defines a whistleblower as someone who provides information to a supervisor of to a federal regulatory or law enforcement agency, while the Dodd-Frank Act defines a whistleblower more narrowly as an individual who provides information about a securities law violation to the SEC.

Verfuerth maintained that Dodd-Frank also protects those who make disclosures protected by SOX, even if they are not reported to the Commission. The court noted that this argument is at the root of a circuit split and the subject of a case before the Supreme Court (Somers v. Digital Realty Trust ). The court remarked, however, that it did not need to await the decision in Somers, because Verfuerth’s Dodd-Frank theory was derivative of his SOX theory, and SOX did not protect his conduct.

The problem for Verfuerth, the court explained, was that the practices about which he complained were not “fraud” within the meaning of the statute. Verfuerth countered that he was implicitly notifying the board that the failure to disclose his grievances to the shareholders amounted to fraud, but the court said that this was a stretch. An executive that advises that the board disclose something that it already knows about has not provided information, but rather an opinion, and nothing prevents a company from firing executives over differences of opinion.

Verfuerth’s theory of liability suffered from many other flaws. Most importantly, as Orion’s CEO, Verfuerth was ultimately responsible for disclosing material information to the Commission, but knowingly made no mention of any fraudulent conduct in the reports he filed. It was also “far from obvious” that the complained-of conduct was at all near the level of materiality required to support a plausible fraud claim, the court said.

If Verfuerth’s interpretation of SOX were adopted, the court concluded, any at-will employee who gives a supervisor advice about a security disclosure would be a “whistleblower” and entitled to the protection of federal law. This “extraordinary result” has no support in either SOX or Dodd-Frank, and the court accordingly affirmed the district court’s judgment.

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