Feb 3 A U.S. law protecting whistleblowers
at publicly traded companies does not cover employees of mutual
funds, a federal appeals court ruled on Friday in a case
involving two former Fidelity Investments employees.
The U.S. Court of Appeals for the 1st Circuit overturned a
Boston federal judge's decision to apply the provisions of the
Sarbanes-Oxley Act to private companies serving under contract
as advisers to public companies. The ruling marks the first time
an appeals court has weighed in on the issue.
Applying the act to employees of private contractors would
be an "impermissible end run" around Congress's choice to limit
whistleblower protection to employees of publicly traded
companies, Chief Judge Sandra Lynch wrote for the majority.
Congress adopted Sarbanes-Oxley in 2002 after accounting
problems brought down energy company Enron Corp and
communications provider WorldCom Inc. Mutual fund companies have
argued they should be exempt from the law because the funds
themselves technically have no workers apart from their boards
of directors and instead hire private management companies to
invest their money.
In the Boston case, plaintiff Jackie Hosang Lawson, who
worked at Fidelity from 1993 until 2007, complained she alerted
supervisors to problems, including the alleged improper
retention of $10 million of fees, only to be passed over for a
promotion and threatened with punishment for insubordination.
The other plaintiff, Jonathan Zang, who ran several mutual
funds from 1998 to 2005, alleged Fidelity gave him poor reviews
and fired him in retaliation for his complaint that a new pay
plan for Fidelity portfolio managers inaccurately and illegally
described how pay was calculated.
Fidelity argued that Lawson and Zang worked for affiliates
such as its Fidelity Management & Research arm, rather than a
public company that Sarbanes-Oxley was meant to cover.
The 1st Circuit sided with Fidelity, after analyzing the
text of the statute and its legislative history. The court also
noted that other whistleblower statutes in the Energy
Reorganization Act and the Pipeline Safety Improvement Act
specifically extend coverage to contractors, unlike
"We are bound by what Congress has written," the court said,
adding that if Congress intended the term "employee" to have
broader meaning, it could amend the statute.
Both the Securities and Exchange Commission and the
Department of Labor rallied behind Lawson and Zang, submitting
briefs on appeal that supported the extension of whistleblower
protections to mutual fund employees. But the 1st Circuit
refused to defer to the agencies' interpretation.
Indira Talwani, a lawyer for Lawson, did not immediately
respond to a request for comment. Zang, who represented himself
in the case, was not immediately available for comment.
Judge O. Rogeriee Thompson dissented from the opinion,
criticizing her colleagues for depriving a significant class of
potential securities-fraud whistleblowers any legal protection.
Paul Nemser, a lawyer for Fidelity, praised the opinion as
"very thoughtful and definitive." Fidelity was not immediately
available for comment.
The appeal is Lawson et al v. FMR et al, U.S. Court of
Appeals for the 1st Circuit, No. 10-2240.