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The Anti-Retaliation Provisions Of Sox And Dodd-Frank And The Importance Of Complying With All Pleading Requirements

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  • Posted on: Jan 20 2017

Being a whistleblower is not easy. It involves personal sacrifice and professional risk. Many violations of the law go unreported, especially in the workplace, because people who know about them are afraid of being disciplined, losing their job, being demoted, or being passed over for promotion. Recognizing the financial, reputational and professional risks associated with whistleblowing, Congress included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) strong anti-retaliation provisions to protect whistleblowers who provide information to the SEC or the CFTC about violations of the securities and commodities laws, or violations of any protected activity under the Sarbanes-Oxley Act of 2002 (“SOX”).

The Dodd-Frank Act created a private right of action for employees who have suffered retaliation (e.g., threats, harassment or discrimination) “because of any lawful act done by the whistleblower – ‘(i) in providing information to the Commission in accordance with [the whistleblower incentive section]; (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or (iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002,’” the Securities Exchange Act of 1934, and “‘any other law, rule, or regulation subject to the jurisdiction of the [SEC].’” A whistleblower may file a retaliation claim in federal court and seek, among other remedies, reinstatement, double back pay (as opposed to just back pay, as under SOX) with interest, litigation costs, expert witness fees and reasonable attorneys’ fees.

Under SOX, employees of publicly traded companies are protected from retaliation by their employers for reporting certain types of fraud and other securities violations. An employee seeking relief from retaliation under SOX must file the claim with the Occupational Safety and Health Administration (“OSHA”) of the Department of Labor, which investigates the claim and issues a determination. A claim brought under SOX is adjudicated by administrative law judges or by judges in federal district court. If successful, the employee is entitled to recover back pay, front pay, compensatory damages for emotional distress, and attorneys’ fees.

In order to state a retaliation claim, both SOX and the Dodd-Frank Act require plaintiffs to demonstrate, among other things, that they engaged in protected whistleblowing activity, that their employer knew they engaged in protected activity, and that there was a causal connection between the protected activity and an adverse employment action.

With the foregoing in mind, consider Feldman-Boland vs. Morgan Stanley, No. 15-CV-6698 (S.D.N.Y. July 13, 2016), where whistleblowers notified their supervisor of their concerns about unlawful activities and were terminated from their employment for blowing the whistle.

Feldman-Boland vs. Morgan Stanley and the Importance of Complying With All Pleading Requirements:

Facts:

The plaintiffs, Jamie Feldman-Boland (“Feldman”) and James Boland (“Boland”), worked at Morgan Stanley & Co. (“Morgan Stanley”). Feldman joined Morgan Stanley as a financial advisor in 2008. At that time, she executed an agreement requiring her to split commissions from high-net-worth clients with a more senior Morgan Stanley advisor, Michael Silverstein (“Silverstein”). In 2010, Boland joined Morgan Stanley as a trainee.

In March 2011, Feldman and Boland witnessed Morgan Stanley employees violating the federal securities laws and mail and wire fraud statutes. Among other things, they observed: (1) unlicensed employees executing trades; (2) cold calling clients using deceitful practices (such as promising unrealistic annual returns to entice individuals to transfer 401(k) retirement plans into risky mutual funds); (3) retroactive alterations of clients’ risk profiles to permit riskier investments; and (4) employees working without branch office supervision.

In April 2011, Feldman met with her supervisor David Turetzky (“Turetzky”) to complain about a variety of problems with Silverstein, her senior advisor. She also raised concerns regarding the fraudulent activity she had observed. Turetzky dismissed Feldman’s concerns and instructed her to leave his office. Later, he requested a list of Feldman’s clients and prospects. Feldman claims that Turetzky sought permission to fire her on the pretext of substandard performance.

In May 2011, Feldman had an altercation with Silverstein that she reported to Turetzky. She also reiterated her complaint that Silverstein failed to supervise brokers. Rather than investigate her complaints, Morgan Stanley rejected a profitable commodities deal that she had proposed without any explanation.

In June 2011, Boland wrote to Morgan Stanley’s CEO, alerting him to “discriminatory, unethical and perhaps illegal practices” that could “escalate a very negative, public perception of the Firm.” Boland reiterated those concerns in follow-up communications with the human resources department.

In July 2011, Feldman and Boland submitted identical complaints to the SEC regarding fraudulent conduct. In response, FINRA investigators met with the plaintiffs for six hours in early August. Later that month, FINRA audited the Morgan Stanley branch where the plaintiffs worked. FINRA’s investigation focused on allegations of unsupervised employees and deceptive cold calling. Feldman and Boland overheard Morgan Stanley risk officers discussing their concerns about the specificity of FINRA’s investigation. Morgan Stanley’s Regional Risk Officer concluded that the Plaintiffs’ complaints were “unsubstantiated,” even though she never interviewed them.

In late August, Turetzky fired Feldman for substandard performance, despite the fact that she had just signed a $1.8 million account. Boland claims that, thereafter, Morgan Stanley undermined his ability to develop business. In September 2011, Boland informed Morgan Stanley risk officers that he had filed complaints with the SEC and FINRA.

In early November 2011, Boland was permitted to take medical leave to care for Feldman, who was scheduled to undergo surgery. Less than 48 hours after he returned to work, Morgan Stanley fired Boland under the pretext of substandard performance.

In February 2012, Feldman filed a complaint with OSHA against Morgan Stanley, alleging that she was fired in retaliation for her complaints to regulators. Three months later, Boland filed a complaint with OSHA mirroring his wife’s allegations. Those complaints were assigned to an investigator, but no findings had been made at the time the plaintiffs filed their complaint in federal court.

The Allegations in the Complaint and The Motion to Dismiss:

Feldman and Boland sued Morgan Stanley and their former supervisor Turetzky for $20 million on the grounds that they were fired for reporting improper and unlawful broker practices to the SEC and FINRA, in violation of the whistleblower protection provisions of SOX and the Dodd-Frank Act. These practices included, among others, cold calling employees at large companies, such as Pfizer Inc. and Verizon Communications Inc., who were near retirement and had 401(k) plans at Fidelity Investments to solicit them to roll over their account to Morgan Stanley with the enticement of a 15% annual return; and changing the client’s risk profile to allow for investments in riskier closed-end funds.

This was the second time that this Morgan Stanley branch had been sued under the anti-retaliation provisions of the Dodd-Frank Act. In 2012, Clifford Jagodzinski, a risk officer mentioned in the plaintiffs’ complaint, sued Morgan Stanley for $1 million, claiming he was told by Turetzky not to report alleged violations, including improper Treasury trades, drug use by an adviser and advisers working from home without registering their home office as an alternative work location.

The defendants moved to dismiss all claims on the grounds that: (1) the claims were barred by collateral estoppel; (2) the complaint failed to state a claim under SOX or the Dodd-FrankAct; and (3) the plaintiffs failed to exhaust their administrative remedies under SOX. The defendants also moved to strike the claim for emotional distress damages under SOX and claims for special damages under the Dodd-Frank Act.

The Court’s Decision:

Collateral Estoppel:

The defendants argued that the plaintiffs were collaterally estopped from bringing their claims because the New York City Commission on Human Rights (“NYCCHR”) had determined that they were “terminated for legitimate non-discriminatory reasons and not because of discrimination.” Prior to filing the action in federal court, Feldman filed a gender-discrimination complaint with the NYCCHR, and Boland filed a Family Medical Leave Act complaint with the same agency.

The Court rejected this argument, holding that the plaintiffs were not precluded by collateral estoppel, because there was no identity of issues – the two cases involved different sets of claims and standards of proof.

To establish a prima facie case under SOX, Plaintiffs need only establish that whistleblower retaliation was a contributing factor to their termination. Likewise, under Dodd-Frank, Plaintiffs need only establish that their termination was causally connected to protected whistleblower activity. Defendants would then need to demonstrate by clear and convincing evidence that Plaintiffs’ employment would have been terminated in the absence of any protected activity. The issue of whether it was more likely than not that Plaintiffs were fired for reasons other than gender discrimination, or retaliation for taking family leave, is plainly not identical to the issue of whether Defendants can demonstrate by clear and convincing evidence that Plaintiffs would have been fired without engaging in activities under the whistleblower protections of SOX and Dodd-Frank. [Internal quotations, bracketed insertions and citations omitted.]

In dicta, the Court found that “[e]ven if there were an identity of issues, Plaintiffs did not have a full and fair opportunity to litigate the issue before the NYCCHR.” The Court explained that the plaintiffs “were not afforded an evidentiary hearing where they could confront witnesses against them, nor did they have the benefit of discovery. Moreover, … [they] had no opportunity, and certainly no apparent reason, to introduce issues of retaliation under SOX or Dodd-Frank before the NYCCHR.” Accordingly, the Court concluded that the plaintiffs were not collaterally estopped from asserting their claims.

Failure to State a Claim:

As noted above, to state a claim for retaliation under both SOX and the Dodd-Frank Act, a plaintiff must demonstrate, among other things, that s/he engaged in protected whistleblowing activity, that his/her employer knew s/he engaged in protected activity, and that there was a causal connection between the protected activity and the adverse employment action. The defendants sought dismissal on the grounds that Morgan Stanley and Turetzsky were not aware that Feldman and Boland had engaged in whistleblowing activities – that is, they filed complaints with the SEC about violations of the securities laws. The Court rejected this argument.

According to the Court, the facts alleged by the plaintiffs were sufficient to infer “that Morgan Stanley knew, or had sufficient reason to know, that Plaintiffs had filed a complaint with regulators precipitating the audit.” These facts included, among others: (a) Feldman and Boland each raised concerns about violations of the securities laws with Turetzky in April 2011 and June 2011, respectively; (b) the August 2011 FINRA audit addressed some of the same issues raised by the plaintiffs in their complaints to the SEC; (c) Morgan Stanley co-workers observed the FINRA audit team documenting regulatory violations; and (d) Boland alleged that he informed Morgan Stanley risk officers, prior to his termination, that he filed complaints with the SEC and FINRA.

Exhaustion of Administrative Remedies Under SOX:

As noted, SOX requires an employee to file a complaint with OSHA when complaining about violations of the anti-retaliation provision of the act. The failure to comply with this requirement deprives the court of subject matter jurisdiction. The defendants sought dismissal, arguing that the plaintiffs failed to exhaust their administrative remedies as to both Morgan Stanley and Turetzky. The Court rejected the argument as to Morgan Stanley, but not Turetzky.

As to Morgan Stanley, the Court held that the plaintiffs exhausted their administrative remedies by filing their complaints with OSHA, “given [the fact] that the OHSA complaints pled allegations concerning Defendants’ “improper and unlawful broker practices.” (Internal quotation and citations omitted.) This finding was reinforced by the fact that the law does not require a “particular form of complaint” “to trigger a claim before OSHA.” (Internal quotation and citations omitted.)

As to Tureztky, the Court found that the plaintiffs had not exhausted their administrative remedies. In that regard, the Court noted that although their OSHA complaints mentioned Turetzky, simply mentioning someone is insufficient to put that person on notice that they are the subject of a complaint:

[I]t is not sufficient to merely mention an individual in the body of an administrative complaint without specifically listing as a defendant . . . the particular named person. Plaintiffs therefore failed to exhaust . . . administrative remedies as against Turetzky, by failing to include Turetzky as a named person in the administrative complaint. Accordingly, the SOX claim against Turetzky is dismissed. [Internal quotations, bracketed insertions, and citations omitted.]

The Motion to Strike:

The Court denied the defendants’ motion to strike the emotional distress damages and special damages, finding that such damages are recoverable under SOX and the Dodd-Frank Act.

 

The court’s decision can be found here.

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