- District Court Denies Summary Judgment On Internal Audit/SOX Administrator’s Whistleblower Claim
- January 23, 2014 | Authors: Rachel Fischer; Steven J. Pearlman
- Law Firms: Proskauer Rose LLP - New York Office ; Proskauer Rose LLP - Chicago Office
In denying a bank’s bid for summary judgment on an Internal Audit and SOX Administrator’s SOX whistleblower claim, the U.S. District Court for the Western District of Washington highlighted the present conflict on the standard governing protected activity under Section 806 of SOX—i.e., the “definitively and specifically” standard or the more liberal “reasonable belief” standard. McEuen v. Riverview Bancorp., Case No. 12-cv-5997 (W.D. Wash. Dec. 19, 2013). However, without expressly embracing one standard over the other, the court denied the employer’s motion on protected activity and causation grounds.
The defendant bank (“Company”) hired Plaintiff Tracey McEuen as an Internal Auditor and SOX Administrator. Her responsibilities included: generating SOX reports; conducting audits of the Company’s departments and branches; documenting work; assisting in evaluating the adequacy of internal control systems and compliance with applicable state and federal regulations; identifying findings and recommendations; and preparing reports. The Company terminated Plaintiff’s employment based on its assertion that she violated a policy prohibiting the use of an external hard drive at work.
Plaintiff filed suit alleging her termination violated Section 806 because it resulted from her complaints that her supervisor: altered her audit reports to lessen the severity of audit findings, which could mislead the Company’s board as to actual risks, materially affect financial statements and deceive investors; “contaminat[ed]” audits; improperly placed audit findings on “verbal lists”; blocked her update of the SOX program; and falsified annual risk assessments and SOX attestations. In addition, she allegedly complained that a human resources professional engaged in fraud. She further alleged that she was discharged “less than two months after reporting her concerns,” and that “deficiencies in her performance were not noted until after she reported the fraudulent conduct of her supervisor ... .” Plaintiff also asserted that her termination occurred less than one month after she reported allegedly “fraudulent HR activities.”
Moving for summary judgment, the Company argued that Plaintiff did not engage in protected activity. It relied on Ninth Circuit authority for the proposition that an actionable SOX whistleblower complaint must “definitively and specifically” relate to one of the categories of fraud or securities violations listed in Section 806. The court acknowledged that the Administrative Review Board (ARB) rejected that standard and that the Third Circuit recently embraced the ARB’s position. But it did not did not expressly choose to side with the Ninth Circuit or ARB/Third Circuit. Instead, it stated:
"Regardless of whether the Ninth Circuit would adopt the rule enunciated [by the ARB], the Court finds that there are genuine issues of material fact as to whether [Plaintiff’s] communications definitively and specifically related to one of the listed categories of fraud or securities violations in [Section 806 of SOX], whether [Plaintiff] had a subjective, good faith belief that her employer violated provisions listed in SOX, and that her belief was objectively reasonable.
The court then added that “Plaintiff also raises a genuine issue of material fact demonstrating the reasonableness of her beliefs that [her manager] was committing fraud.”
The Company also sought summary judgment on causation grounds. Rejecting the Company’s motion, however, the court focused on the temporal proximity between her complaints and her discharge: Plaintiff was discharged less than two months after complaining that her supervisor engaged in fraud and less than one month after complaining of “fraudulent HR activities.” The court also noted that while the Company purported to base the termination decision on Plaintiff’s use of an external hard drive in violation of its policy, Plaintiff testified that she was granted permission by her supervisor and IT personnel to use her external hard drive.
The question of which standard governs a determination of whether a plaintiff engaged in protected activity may ultimately ascend to the U.S. Supreme Court for resolution. In the meantime, as this case illustrates, judicial opinions may expose concerns as to how to proceed on this issue. In addition, this case illustrates that more SOX whistleblower cases are being pursued by compliance personnel with access to sensitive information.