Labor Department Ruling Confirms Limited Scope of Sarbanes-Oxley “Whistleblowing”

November 11, 2009

The Department of Labor’s Administrative Review Board ("ARB")–which hears cases under the Sarbanes-Oxley Act ("SOX") and other "whistleblower" laws–has affirmed dismissal of a SOX whistleblower complaint because even supposing the complainant had alleged conduct that violated company policies and harmed the company, it did not relate "definitively and specifically" to securities fraud.  Lewandowski v. Viacom Inc., ARB No. 08-026 (Oct. 30, 2009), released November 4, 2009. 

Complainant Kristin Lewandowski was responsible for preparing memos to the company’s executives regarding the desirability of developing books and plays into movies.  Lewandowski became concerned that her direct supervisor was leaking the content of her memos to other production companies and the media.  In response, she began providing a full version of the memos to company executives in Los Angeles, while providing her supervisor shorter versions that omitted her comments and analysis and were delivered after a one-week delay.  When her supervisor learned of this, she directed Lewandowski to send her the same memos at the same time they were sent to the executives in Los Angeles. 

The next day, Lewandowski sent an email to certain company executives documenting her concerns that the supervisor was leaking confidential information.  In a follow-up meeting with an in-house attorney, Lewandowski claimed that her supervisor’s activities were a breach of the requirement of the company’s Business Conduct Statement that all communications with the media go through corporate communications.  A few weeks later, the company terminated Lewandowski’s employment for insubordination and attempts to cover it up.

The Sarbanes-Oxley Act prohibits retaliation against an employee who reports what she reasonably believes to be a violation of federal mail, wire, bank, or securities fraud statutes, or of "any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders."  18 U.S.C. § 1514A.  The ARB explained that "to come under the protection of the SOX, the whistleblower must ordinarily complain about a material misstatement of fact (or omission) about a corporation’s financial condition on which an investor would reasonably rely."  "A mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld form investors, is not enough." 

Lewandowski claimed that her supervisor’s alleged disclosure of confidential information constituted both wire fraud and fraud against shareholders, but the ARB found that her complaint did not "definitively and specifically" relate to either.  Conveying only that her supervisor’s alleged disclosure of confidential information "was a breach of [the company’s] Business Conduct Statement and showed disloyalty to [the company]" did not amount to a report of wire fraud.  Moreover, the ARB made clear that "the mere possibility that [her supervisor’s] alleged disclosure of confidential information to competitors could affect the value of [the company’s] stock to investors is too attenuated to state a claim for relief under the SOX whistleblower protective provisions." 

The decision is the latest in a series of Labor Department decisions establishing that Sarbanes-Oxley protected activity requires more than complaining about corporate misconduct that could adversely affect the company stock price.  Rather, the complaint must "definitely and specifically" relate to violations of the particular laws listed in the statute. 

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher’s Labor and Employment Practice Group lawyers have handled many Sarbanes-Oxley "whistleblower" cases, including the case in which the Department of Labor first articulated its requirement that protected activity relate "definitively and specifically" to securities fraud (Platone v. Flyi, Inc., ARB No. 04-154 (Sept. 29, 2006)).  For more information, please contact the Gibson Dunn attorney with whom you work or any of the following: 

Eugene Scalia – Practice Co-Chair, Washington, D.C. (202-955-8206, [email protected])
William D. Claster – Practice Co-Chair, Orange County (949-451-3804, [email protected])
William J. Kilberg P.C. – Washington, D.C. (202-955-8573, [email protected])
Christopher J. Martin – Palo Alto (650-849-5305, [email protected])
Michele L. Maryott – Orange County (949-451-3945, [email protected])
Karl G. Nelson – Dallas (214-698-3203, [email protected])
Jennifer J. Schulp – Washington, D.C. (202-955-8244, [email protected])

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