Chris Lazarini Analyzes the Sarbanes Oxley Act’s Reach to Contractors and Subcontractors

Bass, Berry & Sims attorney Chris Lazarini analyzed the case in which the court ruled that the plaintiff was not protected by the anti-retaliation provisions of the Sarbanes Oxley Act (SOXA) since the plaintiff’s employer only provided services on behalf of a company subject to SOXA, and not to the company. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.

Anthony vs. Northwestern Mut. Life Ins. Co., No. 1:14-cv-1416 (N.D. N.Y., 9/8/15)

*The Sarbanes-Oxley Act is intended to prevent shareholder fraud by public corporations and by their contractors and subcontractors.
**Contractors and subcontractors are subject to the Act if they provide services to a public company over a significant period of time and their employees are in a position to be firsthand witnesses to shareholder fraud.

Plaintiff Anthony was an at-will employee of Tronco Financial, which marketed and sold Northwestern Mutual Funds and provided compliance services to the Northwestern Defendants for their sales of Northwestern Mutual Funds. Anthony was terminated after reporting various compliance and regulatory violations by Tronco sales representatives to Tronco and the Northwestern Defendants. Anthony alleged that her termination was retaliatory under Section 1514A of the Sarbanes-Oxley Act (“SOXA”) and that Tronco breached the 30 day termination notice provision of her employment contract. Defendants moved to dismiss the SOXA claim because Defendants are not publicly traded companies. Anthony countered that she was protected by SOXA because it also prohibits retaliation by contractors of companies registered under Section 12 or required to file reports under Section 15(d) of the Exchange Act. Anthony alleged that the Northwestern Mutual Funds must file reports under Section 15(d) of the Exchange Act, that Tronco and the Northwestern Defendants were contractors of the Northwestern Mutual Funds, and, therefore, that she was covered as an employee of a contractor subject to SOXA.

The Court looks to Lawson v. FMR LLC, 134 S.Ct. 1158 (2014) for guidance on the scope of Section 1514A’s coverage of contractor employees. The Lawson Court held that SOXA applied to contractors performing services over a “significant period of time” and protected contractor employees only to the extent that they are “in a position to detect and report the types of fraud and securities violations that are included in the statute.” The Lawson Court determined that the plaintiffs, employees of investment advisory firms handling day-to-day operations of the Fidelity mutual funds, were covered by SOXA because they were positioned to be firsthand witnesses to shareholder fraud.

Analyzing Lawson, the Court concludes that a private company’s fraudulent practices do not become subject to SOXA merely because the company has an incidental contract with a public company. Rather, SOXA applies where the contractor employee is functionally acting as an employee of a public company and, in that capacity, is a witness to fraud by the public company. Under this limiting principle, the Court finds that Anthony fails to state a SOXA claim. The complaint alleged that Anthony was responsible for ensuring that Tronco sales representatives complied with their legal and regulatory obligations, and her reports related to sales violations by those representatives. Anthony did not allege that she ensured that the Mutual Funds complied with their legal obligations, nor was she reporting any wrongdoing committed either by the Mutual Funds or on their behalf. The Court concludes that Anthony was providing services on behalf of the Northwestern Mutual Funds, not to them, and, therefore, was not in a position to be a firsthand witness to shareholder fraud by the Funds. Having dismissed the SOXA claim, the Court declines to exercise supplemental jurisdiction over the state law breach of contract claim.

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Bass, Berry & Sims attorney Chris Lazarini analyzed the case in which the court ruled that the plaintiff was not protected by the anti-retaliation provisions of the Sarbanes Oxley Act (SOXA) since the plaintiff’s employer only provided services on behalf of a company subject to SOXA, and not to the company. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.

Anthony vs. Northwestern Mut. Life Ins. Co., No. 1:14-cv-1416 (N.D. N.Y., 9/8/15)

*The Sarbanes-Oxley Act is intended to prevent shareholder fraud by public corporations and by their contractors and subcontractors.
**Contractors and subcontractors are subject to the Act if they provide services to a public company over a significant period of time and their employees are in a position to be firsthand witnesses to shareholder fraud.

Plaintiff Anthony was an at-will employee of Tronco Financial, which marketed and sold Northwestern Mutual Funds and provided compliance services to the Northwestern Defendants for their sales of Northwestern Mutual Funds. Anthony was terminated after reporting various compliance and regulatory violations by Tronco sales representatives to Tronco and the Northwestern Defendants. Anthony alleged that her termination was retaliatory under Section 1514A of the Sarbanes-Oxley Act (“SOXA”) and that Tronco breached the 30 day termination notice provision of her employment contract. Defendants moved to dismiss the SOXA claim because Defendants are not publicly traded companies. Anthony countered that she was protected by SOXA because it also prohibits retaliation by contractors of companies registered under Section 12 or required to file reports under Section 15(d) of the Exchange Act. Anthony alleged that the Northwestern Mutual Funds must file reports under Section 15(d) of the Exchange Act, that Tronco and the Northwestern Defendants were contractors of the Northwestern Mutual Funds, and, therefore, that she was covered as an employee of a contractor subject to SOXA.

The Court looks to Lawson v. FMR LLC, 134 S.Ct. 1158 (2014) for guidance on the scope of Section 1514A’s coverage of contractor employees. The Lawson Court held that SOXA applied to contractors performing services over a “significant period of time” and protected contractor employees only to the extent that they are “in a position to detect and report the types of fraud and securities violations that are included in the statute.” The Lawson Court determined that the plaintiffs, employees of investment advisory firms handling day-to-day operations of the Fidelity mutual funds, were covered by SOXA because they were positioned to be firsthand witnesses to shareholder fraud.

Analyzing Lawson, the Court concludes that a private company’s fraudulent practices do not become subject to SOXA merely because the company has an incidental contract with a public company. Rather, SOXA applies where the contractor employee is functionally acting as an employee of a public company and, in that capacity, is a witness to fraud by the public company. Under this limiting principle, the Court finds that Anthony fails to state a SOXA claim. The complaint alleged that Anthony was responsible for ensuring that Tronco sales representatives complied with their legal and regulatory obligations, and her reports related to sales violations by those representatives. Anthony did not allege that she ensured that the Mutual Funds complied with their legal obligations, nor was she reporting any wrongdoing committed either by the Mutual Funds or on their behalf. The Court concludes that Anthony was providing services on behalf of the Northwestern Mutual Funds, not to them, and, therefore, was not in a position to be a firsthand witness to shareholder fraud by the Funds. Having dismissed the SOXA claim, the Court declines to exercise supplemental jurisdiction over the state law breach of contract claim.

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